Tax regs could help private exchanges but “wait-and-see” approach is advised

Private multi-carrier exchanges have not taken off as anticipated, and, according to an issue brief from the Changes in Health Care Financing & Organization, the issuance of regulations that would allow workers to use pre-tax employer contributions might be an effective accelerant. However, based on survey responses from companies operating private exchanges, benefits advisors and consultants, and health benefits lawyers, among others, Mark A. Hall, J.D., the author of the issue brief, advises regulatory forbearance.

Respondents reported no substantial existing regulatory barriers to the formation, spread, or adoption of private exchanges, and, although some thought that small employers would “flock” to private exchanges if favorable tax treatment were extended to the purchase of individual insurance outside the health care exchanges, others felt that large employers would want to maintain involvement with plan selection and administration. Respondents also said that, to their knowledge, private exchanges do not appear to be used by employers as a “glide path” toward dropping employee coverage, nor did they indicate that private exchanges have taken any business away from the public exchanges. Similarly, the survey respondents were not aware of evidence that the use of private exchanges is in any way tied to inappropriate self-funding as a mechanism for circumventing the Patient Protection and Affordable Care Act’s (ACA’s)(P.L. 111-148) regulatory structure, or to a reduction in employer contributions or narrower provider networks.

Tax regulation suggestions. Private health care exchanges are structured similarly to the ACA’s public health care exchanges, with the difference being that the coverage offered by competing insurers on the private exchanges is employer-sponsored. Customers shopping on the public health care exchanges are often entitled to premium subsidies, which help with coverage costs. The government has been understandably reluctant, Hall says, to risk the possibility of double-dipping, which would result if customers of the public exchanges were allowed to use pre-tax dollars to purchase subsidized insurance. Now that the individual market has been substantially reformed, some exchange advocates are stating that regulatory policies should be issued that would allow employer-provided pre-tax dollars to be used for the purchase of individual coverage outside the public exchanges, including coverage purchased on private exchanges.

Some respondents to the survey expressed concerns with this approach. They theorized that, if there were a large number of people moving from group to non-group insurance products, providers might be less willing to offer the same low rates that they do to previously-uninsured people purchasing insurance through the public exchanges. Other respondents pointed out that there is typically more turnover in the individual market than in the group market. Consequently, insurers in the individual market take what Hall describes as a shorter-term view of delivery system innovations, meaning that they have less incentive than do large employers to invest in innovations that might provide long-term health benefits.

Would reduction in ERISA fiduciary duties help? Whether or not an employer contracts out some or all ERISA fiduciary duties associated with the sponsorship of health benefits to a private exchange, it is the employer who remains ultimately responsible for any fiduciary breaches, Hall advises. Some of the respondents to the survey thought that, if the use of a private exchanges either absolved employers from most ERISA fiduciary duties, or acted as a safe harbor, they might be more likely to try them. Most of those responding to the survey, however, instead thought that such a change would have little effect, and that fiduciary duties as they relate to health plans are not particularly onerous, especially when they are compared to retirement pension plan fiduciary obligations. Many respondents also thought it unlikely that private exchanges would be willing to take up that responsibility, and would balk at the potential legal exposure.

SOURCE: “Private Health Insurance Exchanges for Employers,” Mark A. Hall, J.D., for the Changes in Health Care Financing & Organization, Robert Wood Johnson Foundation.

Visit our News Library to read more news stories.