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How do health insurance exchanges make money?

June 16th, 2014

Health Insurance Reform Postcard

Credit: Mike Licht via Flickr under Creative Commons

States are spending millions of dollars establishing and running their own public health insurance exchanges, in accord with the provisions of the Affordable Care Act (ACA). Take for example the state of Massachusetts.

Originally the state signed a $68 million contract with municipal technology company CGI to create and run its exchange in time for the 2014 open enrollment season. That contract was terminated earlier this year because of the colossal failure of CGI to have the exchange up and running properly, which led to massive headaches for lawmakers and consumers alike. Luckily for Massachusetts they were able to get out of their contract with CGI and hire an alternative firm to fix their exchange problems. For another few million dollars of course.

Sadly this is just one example. Massachusetts is no the exception when it comes to sinking millions of taxpayer dollars into their public health insurance exchange.

With so much money on the line and with state budgets as tight as they are, why are states still trying to run their own exchanges when they can easily shift that responsibility over to the federal health insurance exchange at HealthCare.gov? It’s because if done correctly, these health insurance exchanges can actually be profitable in the long term.

A for profit endeavor

Likely it’s not a surprise to see the terms “for profit,” and “health insurance” in the same sentence these days. Despite the claims from some that the implementation of the ACA is tantamount to socialism or nationalizing the American health care system. Quite to contrary the ACA left the overwhelming majority of the existing American private health insurance system in place.

Meaning that private health insurance companies are still the biggest players selling health insurance under the reforms of the ACA. The difference is now states running their own exchanges have the opportunity to share in some of that private sector health insurance revenue, whereas prior to the ACA they did not. The hope is that by allowing states to gain a profit by running their own exchange that the exchange itself would become self sustaining and ultimately budget positive .

Pay to play

The primary way that exchanges make money is through charging health insurance companies a fee in order to sell their policies on the exchange. The actual amount of the fee varies from state to state. The fee also can change depending on which particular region of a state the health insurance company plans to sell in.

This pay to play mentality for health insurance companies in this instance is arguably a good thing. If a hefty up front fee is required not just anyone can apply to sell at the exchange and start offering low quality or scam health insurance plans. Of course any company applying to sell at any of the exchange is vetted thoroughly, but they also must be able to fund their ability to sell at the exchange. The flip side of this is that smaller, regional health insurance providers may not be able to meet the financials requirement needed to sell on the exchange and then are thus blocked out of the market.

Another way the exchanges make money is through the imposition of new taxes on health insurance providers and  in some cases even on those purchasing health insurance. For example back in May the District of Columbia council passed a resolution that imposes a one percent tax on all insurance products sold in the District.

Profits or more deficits?

While some state governments debate dropping their health insurance exchanges completely, one of the major factors in the debate will no doubt be whether their health insurance exchanges can ultimately become profitable. With so much money sunk into the creation of these exchanges already, and the huge technical problems many of them have faced it’s likely the majority of state exchanges will not be profitable in the very near future.

In fact we are already seeing municipalities, like the District of Columbia, looking to impose more taxes on health insurance exchanges. These taxes are for the single goal of raising revenues lost because of the sideways implementation of many of these state health insurance exchanges.

It’s gotten to the point in some states where they are ready to throw in the towel completely. Going back to the example of Massachusetts, the state has already announced that if its new contractor cannot get the health insurance exchange ready in time for the 2015 open enrollment season, that it will scrap the exchange altogether and defer to the federal health insurance exchange at HealthCare.gov instead.

Massachusetts is not alone in this either. Oregon announced back in April that it would be deferring to the federal system next year. Experts are also pointing to  Nevada, Hawaii, and possibly Minnesota as new candidates for HealthCare.gov.

Despite the promises of problem free, new revenue, state health insurance exchanges are not living up to their expectations.

Employee health insurance new ruling

June 9th, 2014

IRS

Credit: Simon Cunningham via Flickr under Creative Commons

Last month the Internal Revenue Service (IRS) issued a new set of rules governing how small businesses are allowed to contribute to their employee health insurance plans under the Affordable Care Act’s (ACA) employer mandate taking effect in 2015. These new rules appear primed to keep small businesses in the health insurance game for the long term.

The Employer Mandate

Among the controversial elements on the ACA, few solicit stronger opinions than the employer mandate. That is, the requirement of the ACA that all businesses with 50 or more full-time employees provide them with a comprehensive, and affordable health insurance option. In this instance full-time is defined as working at least 30 hours per week.

Originally the employer mandate was set to take effect on Jan.1 2014 along with the rest of the ACA. However its implementation was delayed a year by the Obama administration. Now the mandate becomes law starting next year in 2015. This means that now is the time for small businesses to figure out their health insurance situations for the following year.

Employer payment plans

The rules issued by the IRS last month concern what are known as employer payment plans.

Traditionally employers offering their workers health insurance also contributed a certain amount to the cost of that health insurance. This is known as an employer contribution or an employer payment plan. The money in that employer health insurance contribution has usually always been pre-tax money, and thus not counted as income for employees.

Now though with these new rules, employers can still contribute money towards their workers’ health insurance, but that money is now considered to be employee income and taxable.

The reason for employee health insurance  new rule being issued is the fear that employers would choose to drop traditional health insurance coverage for their workers and simply give them extra money, still defined as an employer contribution (pre-tax money), and send them off to buy health insurance at the individual exchange.

For many small businesses who will be subject to the  mandate next year, this course of action seemed like the most cost effective. Especially when faced with the prospect of being forced to purchase an expensive small group health insurance plan. However now that option, which was always officially murky to begin with, is off the table.

Of course businesses can still choose to contribute to their workers’ health insurance costs even after the employer mandate takes effect. Many likely will, as the practice is quite traditional in many fields. However as stated above, that money contributed will now be counted as income, which means more taxes for both the company and the employee.

As an extra incentive for small businesses to follow the new rules those  that continue pre-tax employer payment plans will be slapped with a hefty fine of $100 per day per employee as long as the practice continues. The annual cap on the penalty per employee per year is $36,500.

Small group plans = big money

The situation right now for American small businesses subject to the employer mandate is an awkward one. These new rules about employer payment plans are putting more pressure on  small businesses to get their health insurance situations in order. However these employer payment plan rules and others like it have done little to the address the real fears small businesses have about health insurance.

For health insurance companies a small group health insurance plan can be big money if the enrollment numbers and mix of participants are just right. Sadly though that is rarely the case, especially for the majority of small businesses who will be newly subject to the employer mandate in 2015.

Most of the businesses falling under the employer mandate next year are companies operating in the service sector. Typically that means lower wages, and a high rate of turnover. While some might view those as advantageous from a business standpoint, they make it very difficult to purchase a small group health insurance plan at a reasonable price.

Without being able to guarantee a certain level of participation and certain mix of participants (young/old, healthy/sick) a business searching for a small group plan will consistently run up against a price wall. That high cost of a small group plan is one of the reasons why we have seen businesses cutting employee hours and laying people off to get under the mandate number, rather than emphatically embracing it.

The exchange vs. employer plans

Next year employers will have to comply with the ACA’s mandate or face some very expensive penalties, starting at $40,000 annually. But the thing is that just because a business offers its employees a health insurance plan, does not mean that the employees actually have to enroll in it. They simply have to give workers the option to enroll.

For a cash strapped small business just trying to keep the doors open this might sound incredibly frustrating. Because even if none of your employees enroll in your offered plan you still need to pay a monthly premium to simply offer it and stay in compliance with the mandate. This begs the question, why can’t employers simply discontinue their coverage and have  workers buy health insurance on their own at the exchange? The Obama administration talked up the individual exchanges so much during the last year, and touted them as a success, but now they are in a sense limiting access to them.

Unfortunately, like most things related to health care reform, there is no easy answer or solution and we will have to wait until 2015 to see how the employer mandate plays out.