SEPTEMBER 18, 2014
In some SHOP Marketplaces, small-business employees can select health coverage from multiple insurers. By 2016 the option is expected to be available nationwide.
|What's the issue?
Small businesses have historically been less likely than larger firms to offer comprehensive health insurance or a choice of health plans, and their employees are more likely to be uninsured or underinsured. In addition to reforming insurance rules for the small-group market to address marketwide inefficiencies that have hindered many small businesses from offering coverage, the Affordable Care Act (ACA) created Small Business Health Options Program (SHOP) Marketplaces in each state.
SHOP Marketplaces were intended to further assist small businesses with offering affordable coverage by providing a one-stop-shop for small businesses and their employees to compare and enroll in qualified health plans, promoting transparency and price competition among participating insurers and creating a mechanism for employee choice, in which small-business employees can select from among multiple insurers and health plans made available through the SHOP.
To date, the majority of state-based SHOP Marketplaces have chosen to implement employee choice, but federal regulations have made implementation of employee choice voluntary until 2016. This feature has not yet been made available in federally run SHOP Marketplaces. Fourteen states with federally facilitated SHOP Marketplaces are expected to offer employee choice for 2015, with the remaining eighteen federally run SHOP states to follow in 2016. Not all stakeholders have embraced the employee-choice concept: While a majority of small businesses say they are interested in giving employees more plan choices, detractors have raised concerns that employee choice may overwhelm employees with too many choices or result in higher premiums in the SHOP if higher-risk employees can select more comprehensive plans than lower-risk employees.
The implementation of employee choice has also been hindered in some instances by broader technological problems with health insurance Marketplaces and insufficient insurer participation. While it is too early to determine the success of employee choice and SHOP Marketplaces generally, their phased implementation across the country offers an important opportunity to evaluate these longstanding policy ideas.
|What's the background?
Improving small employers' access to coverage has long been a challenge for policy makers. Prior to the ACA, legislation at the federal level had envisioned various mechanisms through which small employers could pool their purchasing power to buy health insurance coverage. Various state and private efforts to help small businesses offer coverage and to provide them with better choices have yielded mixed results with attracting adequate enrollment and keeping premiums competitive.
Small businesses have historically been less likely to offer health insurance coverage than larger firms. Those firms that did offer coverage had typically provided limited, if any, health plan choices for their workers. According to the , only 20.7 percent of firms with fewer than fifty employees offered two or more health insurance plans in 2012, compared to 50.4 percent of firms with 100-999 employees and 67.3 percent of firms with fifty or more employees.
These limited choices for smaller firms have been due to several factors. First, small businesses have typically been subject to insurer requirements that a minimum number of workers participate in any given plan, and there have not been widespread mechanisms to allow employers to contribute to more than one plan selected by employees, making it impractical to offer workers a choice of plans.
Second, the small-group market has to date been very concentrated, limiting small employers' choice of insurers overall. According to a , the small-group market in most states was not competitive as recently as 2010, with a single insurer accounting for more than half the market in twenty-six states and the District of Columbia that year.
Finally, prior to 2014, insurance companies in most states were also allowed to charge small businesses different rates depending on factors such as employees' gender, occupation, and prior health status, pricing some businesses out of the full range of plans that might otherwise have been available to them or out of coverage altogether.
While the small group-market reforms attempt to create a more level playing field for small businesses whether or not they purchase through SHOP, the SHOP Marketplaces are intended to add value to small employers by providing the opportunity to view comparable plans side by side and establish a mechanism for employee choice.
|What's in the law?|
To make the SHOP Marketplaces more attractive to small businesses, the ACA requires the Marketplaces to offer a feature known as employee choice, in which employers can offer their employees a choice from multiple health insurance plans. When the law was enacted, it envisioned employee choice being available in all SHOP Marketplaces beginning in 2014. Subsequently, the Department of Health and Human Services (HHS) delayed the employee-choice requirement until 2015. Then, in a later rulemaking, HHS allowed insurance commissioners to recommend an additional one-year delay of employee choice in their states until 2016, if they believed such a delay would be in the best interests of small employers, their employees, and dependents.
Along with the delays in the employee-choice requirement, HHS delayed an accompanying feature known as "premium aggregation," in which SHOP Marketplaces are required to present small employers with a single bill regardless of how many plans their employees choose.
Variants on employee choice: There are several variants on the employee-choice concept. In the only employee-choice model required by the ACA, the employer designates a level of coverage from among the bronze, silver, gold, and platinum coverage levels, or "metal tiers," defined in the law. Employees can then select a plan from different insurers offering coverage at that metal tier within their geographic area. This option is also known as "horizontal choice."
Federal regulations specified that states running their own SHOPs may provide additional employee-choice models, which, subject to employers' decisions, would allow employees to select from multiple metal tiers or from any plan offered through the SHOP. The regulations also gave SHOP Marketplaces the flexibility to allow employers to offer a single plan to employees--a model known as "employer choice."
Implementation to date: Implementation of employee choice to date has varied based on whether the SHOP Marketplace is being run by an individual state or the federal government.
As of July 2014, seventeen states and the District of Columbia were operating their own SHOP Marketplaces, while thirty-three states had SHOP Marketplaces operated by the federal government (see Exhibit 1).
|What's the debate?|
Stakeholders--including some small employers, insurers, brokers, and state regulators--have expressed varying levels of support for the employee-choice concept. While small employers are interested in offering workers a choice of plans, at the same time maintaining a predictable contribution to employee coverage, other stakeholders have cautioned that too much choice can add complexity, as employers or brokers must assist employees with selecting the right plan.
Insurers have also raised concerns that allowing employees more choice will result in higher premiums related to insurers' expectations about attracting higher-risk enrollees, but it is too early to determine whether this trend, known as adverse selection, is actually occurring. Employee choice may also increase competition and reduce the market share of dominant insurers.
Finally, employee choice necessitates the creation of new insurance premium allocation methods and technology that can accurately distribute a single employer payment to multiple health plans. Particularly within the context of broader technological difficulties with SHOP Marketplaces, stakeholders have expressed concerns that the complex formulas required to implement employee choice could lead to problems with properly allocating payments to insurers.
These issues, among others, have played a significant role in overall state and federal policy decisions to delay employee choice, state decisions about how to structure employee choice, and insurer decisions to participate in SHOP Marketplaces.
CHOICE WITHOUT COMPLEXITY
Employee choice--which has long been available for large companies and public employers--represents a clear departure from the single-plan model most commonly used by small employers today. While employee choice can simplify the process of offering coverage for employers in some respects--for instance, relieving employers of the challenge of finding a single plan that works for all of their employees' needs and preferences--it can add complexity in other ways. Research shows that too much choice can be confusing and can result in consumers selecting health plans that may not adequately meet their health needs or protect them financially.
Employee choice requires employers to decide how much choice to provide their employees. It also gives employees more responsibility for selecting a health plan, a process with which they may not be familiar if they were previously uninsured or did not have a choice of plans in the past. Although the required choice of different plans on one metal level may be less choice than consumers may have in Marketplaces for individuals, some employers fear that they will have to master an entirely new way of offering group coverage and take responsibility for helping their employees to understand new, complex choices, or (worse) take the blame if they make what turn out to be "wrong" choices.
Notwithstanding these trade-offs, according to a survey of small employers conducted by Jon Gabel and colleagues, 56 percent would prefer "offering workers a choice of plans, with the employer paying a fixed amount, and the employee paying any extra cost for choosing a more expensive plan"...than in "offering workers one plan with less administrative work for your firm."
As implementation of the employee-choice model continues to develop, both small employers and their employees are likely to continue to need personalized assistance with the plan selection process and can be expected to continue to use the services of agents and brokers, as 80 percent of small businesses do now. State and federal SHOP Marketplaces can also be expected to continue building on technology to facilitate a more user-friendly shopping experience, including a functioning online enrollment process, plan comparison tools, and portals to allow agents and brokers to manage their clients' portfolios.
Small employers are extremely sensitive to the price of health insurance coverage. The premiums of SHOP Marketplace plans will depend on a number of factors, but the SHOP Marketplace does offer employers something that large businesses and public employers have offered for years: the ability to provide their workers a choice of plans while making a predictable contribution to coverage, regardless of the plan an employee chooses.
This is also known as "defined contribution," which is relatively simple to administer when employers contribute a set percentage toward a single plan for all employees. To make employee choice possible, SHOP Marketplaces must develop a mechanism to allow employers to contribute to each employee's individual premium.
In 2014 most state-based SHOP Marketplaces chose to establish a mechanism allowing employers to designate a percentage contribution toward one particular plan--known as a "reference plan"--from among the menu of plans available to employees. This percentage contribution can then be translated into a defined dollar amount, based on the premium for the reference plan. If employees choose plans that are more expensive than the reference plan, they pay the difference.
Federal regulations allow premiums in the small-group market to be adjusted based on the allowable rating factors (age, geography, tobacco use, and family size) for each employee for plan years beginning January 1, 2014. In most states, employer contributions will be based on an employee-specific premium, also known as a "list bill," and will, therefore, vary by the employee's individual rating factors. As a result, some small-business employees may experience the effects of age rating for the first time, with older employees paying more and younger employees paying less than they would have under composite billing.
Some states have attempted to develop models that mimic group coverage by allowing employers to contribute equally to all workers regardless of their age, but such models are challenging to implement. As SHOP Marketplaces continue to develop, it will be important to monitor the effect of different contribution strategies on the actual premiums paid by employers and their workers.
Employee choice gives individual employees greater freedom to select plans based on their anticipated health needs. This raises concerns that adverse selection could result if higher-risk employees within the SHOP disproportionately choose more comprehensive coverage at higher metal tiers than lower-risk workers. The ACA includes programs intended to mitigate the impact of adverse selection. Nonetheless, insurers have raised concerns that employee choice could result in higher premiums in the SHOP because insurers price their plans based in part on anticipated use of health services by enrollees. Adverse selection may be of particular concern to insurers with greater market share or name-brand recognition in a given small-group market.
The manner in which employee choice is structured can affect the likelihood that adverse selection will occur in a given SHOP Marketplace. In general, the more choices employees are given to select plans across metal levels and carriers, the greater the risk that adverse selection will occur. Less selection can be expected to occur under the basic "horizontal choice" variant that will be available under the federal SHOP Marketplaces because employees are given a choice of only one metal tier, in which the comprehensiveness of coverage is similar from one plan to another. Among states that opted to provide employee choice in 2014, all but California opted to offer more than the "horizontal choice" variant, with seven states offering "full employee choice" (see Exhibit 2). that in 2015, employers will be able to offer coverage in two rather than the single benefit level they were able to offer in 2014.
To mitigate concerns about adverse selection, some state-based SHOP Marketplaces placed constraints on the coverage levels employers and employees could choose. For example, some states limited employers' and employees' choice of plans to contiguous metal tiers, even while offering broad employee choice.
PLAN PARTICIPATION AND COMPETITION
In order to provide employee choice in practice, SHOP Marketplaces must attract enough insurers and enough plans to offer a meaningful range of choices to small employers. Insurers have indicated that their participation in the SHOP may be predicated, at least in part, on states' approaches to implementing and structuring employee choice. In 2014 nearly all state-based SHOP Marketplaces attracted enough insurers to offer small employers and employees a choice of insurers and plans, across a range of coverage levels and in nearly every county.
In Washington State only one insurer chose to participate in 2014, but additional insurers are considering participating in 2015. In Hawaii, however, one of the small-business insurers recently announced it will no longer participate in 2015, leaving small employers there with just one insurer in the SHOP.
The employee-choice mechanism allows employees to make their own decisions with respect to health plan features, such as premiums, cost sharing, and provider networks, instead of having the employer select one plan for the entire group. Employee choice thus creates the potential for increased competition among insurers, must attract the enrollment of individual employees instead of relying on small employers as an intermediary for plan selections.
"Horizontal" employee choice models--such as those that allow employees to choose among multiple insurers--may foster more competition than "vertical" models that allow employers to offer plans at multiple metal tiers, but only from a single insurer.
Employee choice is considered one of the central selling points of SHOP Marketplaces. The launch of SHOP Marketplaces in all fifty states and the District of Columbia over the next several years offers policy makers an important opportunity to evaluate the success of employee choice, along with related strategies for improving the accessibility and affordability of coverage in the small-group market.
To date, implementation of employee choice has been uneven across the country, with state-based SHOP Marketplaces leading the effort in 2014. . As more data become available, it will also be important to evaluate how often employers are opting to give their employees a choice of plans; which variants of employee choice are most appealing to small employers; and their effects on adverse selection, competition, and premiums.
Finally, as technology improves and employee choice is phased into states with federally run SHOP Marketplaces in 2015 and 2016, it will become easier to understand whether employee choice--independent from the current operational challenges--is successfully attracting more small businesses to offer coverage through the SHOP.
|About Health Policy Briefs||
Kevin W. Lucia
Editorial review by
Small Business Majority
Health Policy Briefs are produced under a partnership of Health Affairs and the Robert Wood Johnson Foundation. This Health Policy Brief is based on the authors' ongoing research at Georgetown University Health Policy Institute supported by the Commonwealth Fund .
Cite as: "Health Policy Brief: Employee Choice," Health Affairs, September 18, 2014.
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