Lynn Blewett: When is an "Exchange" an "Exchange"?

June 07, 2011

June 7, 2011: From the desk of SHADAC Director Lynn Blewett

When is an “exchange” an “exchange?”

Medica, a Minnesota-based health insurer, is offering a new product to employers with 51 or more employees. The product is an online web portal system through which employees can select from 20 Medica plan offerings to find the plan that best meets their needs. Employers are able to pay a “defined contribution” to whichever plan an employee chooses.

While there are some apparent similarities between this product and the Health Benefit Exchanges required under the the federal Affordable Care Act (ACA), the Medica portal is not an exchange. The Medica portal is a case of a single insurer selling its own products, not of a marketplace where different health insurers offer competing products.

The Medica product also differs from the ACA exchanges in allowing employers to move to a “defined contribution” approach for financing health care coverage. Under this approach, employers determine their own premium contributions from year to year. The problem is that as employers seek to stabilize health care costs, defined contribution financing allows employers to pass on an ever-increasing share of the annual insurance premium increase to the employee. (See text box below for more information on defined contributions.)

What will the ACA Health Benefit Exchanges look like?

Health Benefit Exchanges will offer different plans from competing health insurers. Four basic plan options with similar benefit structures will be offered, with the goal to compete on price and quality, allowing consumers to compare apples to apples (or BCBS Bronze plan to an Aetna Bronze plan). The Health Benefit Exchange also provides for standard limits on out-of-pocket expenses (e.g., $5,950 for an individual or $11,900 for a family), and the ACA seeks to keep individual and family premium contributions below a certain percentage of household income.

A true exchange, like the ACA exchanges, offers consumers a choice of plans offered by different health insurance carriers. It is more than a way to organize one plan’s products and it is more than a vehicle for an employer defined contribution.

How Defined Contribution Works

The current average family premium in the US for employer-sponsored insurance is approximately $12,000. The current average employer contribution is approximately 75 percent of the premium cost ($9,000), and the current average employee contribution is 25 percent of the premium cost ($3,000). In general, the average employer contribution over the last 10 years has been relatively stable; even with increases in premiums, the employer contribution has continued to be around 75 percent.

Now let’s say that the employer moves to a defined benefit of $9,000 for an annual employer family premium with an annual increase of three percent per year. Health premiums increase the following year by 15 percent to $13,800. The employer defined contribution was set to increase at 3%, so the employer contribution is now $9,279, and the employee contribution makes up the difference of $4,521 –- a 50 percent year-over-year increase. Now the employer is contributing 67% of the cost of health insurance coverage and the employee 33%. You can see how this could play out over a period of time.

See this SHADAC issue brief for more information on current health exchange models.