Private Health Insurance Exchanges for Business Owners
The public health insurance exchanges created under the Affordable Care Act have been well publicized. Another, not so well known option exists: private health insurance exchanges. The private entries are still relatively small; in late 2014, the Kaiser Family Foundation put total enrollment at 2.5 million people, including 700,000 retirees in Medicare plans.
Yet, some observers see the private market expanding to as many as 40 million people by 2018. While public health insurance exchanges focus largely on individual and family plans, some of the private exchanges appeal mainly to employers. Owners of small companies as well as decision makers at medium-sized and large ﬁrms may evaluate the beneﬁts of providing employee health insurance coverage through private exchanges.
Unlike public exchanges, which are offered by the federal and state governments, private exchanges are run by a variety of companies. Sponsors include consultants, brokerage ﬁrms, even retailers. The constant is that these exchanges allow those seeking health insurance to go online and compare what’s available in a virtual marketplace.
Private health insurance exchanges can take many forms, but one likely structure is the deﬁned contribution plan. Just as traditional deﬁned beneﬁt retirement plans have lost ground to deﬁned contribution retirement plans, such as 401(k)s, so traditional employer health plans may be supplanted by deﬁned contribution arrangements.
Here, the “deﬁned contribution” could be the amount an employer gives its employees to shop for coverage on a private exchange.
Example: Melanie Wilson owns a small business with 25 employees. She enters into an agreement with a health insurance exchange managed by an employee benefits firm. Melanie’s employees will be able to go online and examine the offerings from three specified health insurers; each health insurer will make four different plans available. Employees can choose among the offerings as they’d choose among the investment options of a 401(k) plan.
Melanie decides to allow each employee to spend up to $300 a month on health insurance. If Bob Smith picks a plan that costs $400 a month, Bob will have to contribute the extra $100 each month; if Claire Jones picks a plan that costs only $250 a month, Claire might use the extra $50 for some other type of coverage, such as disability insurance.
If handled properly, Melanie’s outlays will be treated as tax- deductible business expenses for the company, while her employees will not have to include the $300 monthly allowance as taxable income. That’s how today’s standard health insurance plans are taxed.
Advocates of private health insurance exchanges say that they can help employers control expenses and reduce paperwork responsibilities. Employees not only get to choose a plan that ﬁts their needs and ﬁnances, they’ll also gain an appreciation of how much of the health care costs employers are bearing.
Nevertheless, there can be drawbacks to private exchanges. Coverage won’t qualify for the subsidies that public exchanges may deliver. The area is still new, so there’s not much of a track record to examine. If your company is interested in exploring the idea of a private health insurance exchange for its employees, our oﬃce can help you compare the costs and beneﬁts with those of your present health plan.