By: Mark A. Hall, Wake Forest University
Throughout the history of health care public policy, major insurance market developments have inevitably been followed by major regulatory responses. The initial growth of health insurance prompted state regulation of covered benefits. The spread of employer-sponsored health insurance yielded the Employee Retirement Income Security Act (ERISA). The managed care revolution sparked regulatory backlash against restrictive coverage. And the Affordable Care Act’s (ACA’s) creation of public health insurance exchanges carried with it a host of regulatory requirements for “qualified health plans” that participate in public exchanges.
It would be most surprising, then, if the emergence of private insurance exchanges did not prompt some significant regulatory response. The ACA has galvanized renewed attention to the long-standing idea of using insurance exchanges to implement superior forms of managed competition. In addition to the ACA’s public exchanges for individuals, similarly-structured private exchanges have emerged that offer employer-sponsored coverage from competing insurers. Although initial growth has been slower than expected, there is widespread anticipation that these private multi-carrier exchanges could soon become an established component of the health coverage landscape, creating a way for employers to facilitate more choice by workers while more firmly controlling costs.
If so, one would assume that this development, albeit welcome by many, would pose some new public policy and regulatory challenges. To the contrary, my extensive investigation, funded by the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization (HCFO) initiative, concluded that private exchanges to date are an unusual case where regulatory forbearance is the wisest course of action. As detailed in this report (which is summarized here), none of the potential concerns that one might conjure for private exchanges appears to have materialized or to be a real threat. Currently, private exchanges are not a pathway for employers to drop or radically reduce coverage. They are not being offered as a way to circumvent or exploit other federal or state regulatory standards. And, they do not pose a threat to the public exchanges.
These findings are based on an extensive literature review and in-depth interviews with several dozen expert market participants and observers. These sources reported that private exchanges have not degraded employer sponsorship of health benefits, and informed experts believe this is not likely to happen. Instead, there is good reason to believe that private exchanges might enhance employers’ willingness to continue offering health benefits by making costs more predictable through the use of “defined contribution” vouchers. Although capping employer contributions could result in unaffordable premiums, so far this has not occurred because most employers want their workers to enroll in good coverage.
Private exchanges also do not appear to threaten the ACA’s regulatory structure. For the most part, they are not in direct competition with the small-employer component of the public exchanges (known as SHOP), and direct competition remains unlikely now that the small group market is likely to remain at 50 employees, rather than increasing to 100. Also, private exchanges are not being promoted as a way to circumvent or minimize the ACA’s various regulatory requirements, such as through inappropriate self-funding for small firms.
Rather than regulators needing to guard against potential threats of private exchanges, some observers and market participants think that regulators should consider measures that facilitate their development. Views on that point are divided, however. The dominant view is that private exchanges face no substantial regulatory barriers or uncertainties, and thus they are able to succeed in the market if they demonstrate their inherent economic value. Others, however, believe that adoption of private exchanges would accelerate if laws were to confer safe harbor to adopting employers from certain existing regulatory requirements, such as those under ERISA.
The strongest accelerant would be if tax law were changed to allow workers to use pre-tax employer contributions to purchase individual insurance. Current law makes premium contributions toward non-group coverage fully taxable, which confers a substantial financial advantage on group coverage. Acknowledging that the government has reason to prevent “double-dipping” by using pre-tax dollars to purchase subsidized insurance, some exchange advocates argue with force that, now that the individual market has been fully reformed, government should not prohibit employers from facilitating pre-tax purchase of non-group coverage outside the public exchanges, where coverage is not otherwise subsidized. Others, however, disagree, fearing that these or other measures might create new problems, possibly doing more harm than good.
On balance, regulatory forbearance appears to be the wisest course of action for private exchanges, at the present time. No potential public policy concerns have materialized as a real threat. Instead, private exchanges appear to hold real promise for improving choice and competition in the group insurance markets. Although lawmakers might consider facilitative measures, the more prudent stance would simply be “watchful waiting” - standing back to see how private exchanges develop within existing market conditions and regulatory pathways.
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Mark Hall, J.D., is one of the nation’s leading scholars in the areas of health care law, public policy, and bioethics. The author or editor of 20 books, including Making Medical Spending Decisions (Oxford University Press), and Health Care Law and Ethics (Aspen), he is currently engaged in research in the areas of health care reform, access to care by the uninsured, and insurance regulation. Professor Hall has published scholarship in the law reviews at Berkeley, Chicago, Duke, Michigan, Pennsylvania, and Stanford, and his articles have been reprinted in a dozen casebooks and anthologies. He also teaches in the University's Graduate Programs for Bioethics and its M.B.A. program, and he is on the research faculty at the Medical School. Professor Hall regularly consults with government officials, foundations and think tanks about health care public policy issues.