So, What's Your Exchange Policy? [Updated]

[UPDATE: For continuity purposes, I've consolidated both parts into this post. HGS]

Bob and I recently participated in a conference call, brainstorming about the potential for "defined contribution" health insurance plans. So, what's a "defined contribution" (DC) plan? It's pretty simple, really: instead of your employer choosing your health insurance plan, he gives you a "voucher" to buy whatever policy suits your particular needs.

I know, makes way too much sense; why is this "new?"

Some companies offer "cafeteria" plans which are, in essence, DC plans: the employer says "here are 6 plans from which to choose, I'll kick in $100, you pay the rest." The problem is that not every employer can afford to offer such plans (there are admin and other costs associated with them, in addition to the premiums), and some carriers don't offer multiple plan designs within a given group, or allow employers to offer plans from multiple companies.

So along come "Exchanges;" most notably, that which is part of RomneyCare and, of course, those planned for '14 under ObamaCare©. We've seen how "well" they work in the former, but one wonders if there isn't a better model.

The Beehive State thinks there is.

After the aforementioned conference call, I contacted the folks at the Utah Health Insurance Exchange; Patty Conner (the Director) and Sue Watson (the Project Manager) both graciously agreed to an interview to help explain the program to our readers. We'll focus here primarily on the small group (2-50 lives) market:

InsureBlog: How many businesses have registered, and then how many of those actually signed up for a quote? (And of those who did, how many indicated they had a broker?)

Patty/Sue: For the plan year beginning 2010, we had 11 groups in the program. For 2011, about 220 or so businesses “tested the waters.” All 11 of the class of ’10 re-upped, and 31 additional groups came on board, bringing the total participating to 42 groups as of January, 2011.

But: last year businesses could only sign up for January; this year it’s “rolling,” and we’ll have 69 groups “live” as of March 1rst.

We’re seeing continuously growing interest as more employers become aware of the existence and benefits of the program.

Almost all of these groups, by the way, have and use brokers/agents throughout the process.

IB: How do you get around the adverse risk of carriers saying "hey, we may lose some money with sloppy underwriting, but we'll just nick Humana and UHC for the diff?" Also, can an employer offer more than one carrier? If so, what about participation issues?

P/S: “Uncommon Knowledge:” Utah first started working on this in 2005, looking to add economic value for small businesses in the state. We collaborated with business, insurers and agents in developing the program.

Unfortunately, the information on the website really doesn’t accurately reflect how the program works [ed: more on this in a bit]. The process isn’t complicated, but it does take some time.

There are (currently) four participating carriers. When an employer chooses to “try out” the program, he submits standard group information (name, address, EIN, number of employees, number of eligible employees, etc). Assuming the group meets participation requirements (e.g. a group with 20 employees but only 5 covered employees wouldn’t fly – just as in the “open market”) then the case is randomly assigned to two of the carriers.

At that point, employees go online and complete industry-standard enrollment forms (names, socials, medical history, etc) and these are forwarded to the two assigned carriers. The carriers pore over the information, and assign a rating class (aka rate factor) to the group. The two carriers’ rate factors are then averaged (there’s a dispute resolution system in place if there are problems at this point). The averaged factors are then sent to all four participating carriers, which apply them to their standard (“street”) rates.

This is an “all-in” deal: a participating carrier can’t take a “pass” on a given group. So all four submit their rates for the plans they’ll offer and this is sent to the employer. It’s possible that in a given group of, say, 10 people you could have 10 different products chosen, and 3 or even all 4 carriers in that group. And remember, this is “all-in” so they have to live with that.

The key is that the carriers know this going in – remember, they helped design the program. It’s the free market at work. We like to say that our role is to “facilitate, not mandate.” [ed: I am so stealing that!]

IB: How do you get around the problem that the biz owner can't fully participate in the 125/HRA?

P/S: First, your readers need to understand that the whole program is based on the concept of “defined contribution.” So the employer agrees to set up (for example) a health reimbursement arrangement (HRA) or other similar plan, and to fund it at a previously agreed upon level. Once each employee has chosen a plan, premiums are forwarded to the appropriate carrier.

It’s true that the business owner doesn’t really get the same tax benefits of the HRA (or 125, etc) as the employee, but so far no one seems to mind [ed: or at least no one’s piped up about it]. Our take is that the employers are willing to trade a tax break for certainty and simplicity in the budgeting process.

IB: Are groups in the Exchange still subject to other rules, such as portability, COBRA, etc?

P/S: Yes, all the relevant rules and regs apply. We don’t provide the COBRA admin; our operating principle is to basically just stay out of the way.

IB: I have to ask this: what happens to the Exchange if ObamaCare© is, in fact, fully implemented? In other words, what about 2014?

P/S: Utah will continue the approach it’s taken since 2005, which is to provide a cost effective solution for small businesses. We are prepared to do whatever is necessary to meet whatever guidelines that ultimately go into effect.

And by the way, we’re not selfish: we’d be delighted to share our experience and expertise with other states that want to “facilitate, not mandate.”

IB: Our last question is about the large group pilot program. I understand that it’s new, so there’s not a lot to talk about, but I have to question the value of the Exchange to, say, a 500 person group. After all, an ERISA plan lets you do pretty much the same thing, you don’t really need Utah (for example).

P/S: That’s true, and we don’t really anticipate “jumbo” groups. The industry defines small group as 2-50 lives; we're also looking at programs for mid-size groups (51-99 lives).

IB: Okay, that’s all the questions I had prepared for you. Is there anything you’d like to add in conclusion?

P/S: Yes: our goal has always been to create a free market approach, cooperating with our stakeholders all through the process. We welcome broker feedback, for example, because they are stakeholders, as well. In fact, they’re our best marketers – as we noted before, they bring in the bulk of our business. And agent compensation through the exchange is the same as the traditional pipeline, so there’s no financial downside to the agent.

Thanks Patty and Sue!

Well, now you’ve seen under the hood of the Beehive State’s Exchange program. Is it perfect? Of course not, but it’s much more business-friendly (and ultimately consumer-helpful) than the Massachusetts or ObamaCare© versions. Bob and I do have some reservations, though:

First, it's still employer-based, so the plans aren't "portable;" that is, if an employee leaves the group, he can't just take the plan with him (aside from COBRA continuation, which is a short-term solution). That's not necessarily a fatal flaw, but it is something to consider.

Second, the website needs some tweaking:

The “Individual” portion is simply a conglomeration of eHealthInsurance-type links and product placement opportunities. Thankfully, it’s not a part of the Small Group program. Still, it’s kind of embarrassing.

And the site does “Small Group” a disservice with confusing and inaccurate descriptions of how that program really works.

Finally, since it’s such a new effort, with a very small population of covered lives, we really don’t know how rate renewals will go. I did ask about them, but decided not to include that in the post; as Bob pointed out to me, this metric is relatively meaningless because, by definition, we're only talking about a maximum of 550 covered employees (11 groups times 50 lives).

We certainly appreciate all the time and cooperation we received from Patty and Sue. They came across as professional, competent and very eager to make this program self-sustaining. It probably helps that they both come from the corporate world, so there’s actual real-world experience involved.