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FEBRUARY 9, 2012

Small Business Insurance Exchanges

EDITOR'S NOTE: An updated brief was published February 6, 2014.

States must form new marketplaces aimed at helping small companies buy coverage more easily and cheaply.

What's the issue?

The Affordable Care Act requires states to create health insurance exchanges, or marketplaces, where small businesses can review, compare, and purchase health insurance. They are one of two types of exchanges that are to be created under the law, the second of which is aimed at individuals.

The small business exchanges, to be created under the law's Small Business Health Options Program (SHOP), will offer group health plans to small companies. The exchanges are supposed to offer a variety of health plans; provide comparative information on benefits, costs, and quality; and facilitate enrollment in a plan of choice.

States have the option of creating these as separate exchanges or combining the individual and small-business markets in one exchange. Although both types of exchanges will have similar functions, they will have unique attributes reflecting the needs of the populations they serve. This Health Policy Brief focuses on issues that states have to confront in designing SHOP exchanges as well as challenges that these exchanges are likely to face.

What's the background?

Policy makers have long been concerned about small businesses' having access to affordable health insurance. The smaller the number of employees, the less likely a firm is to offer health benefits. Premiums for small-business coverage tend to be more expensive per worker because of the higher costs of marketing and administering a health plan for a small group of people, fixed administrative costs spread over fewer people, and costs associated with what's called adverse selection. Adverse selection occurs when a disproportionate number of higher-risk people purchase coverage because they are more likely to need and draw benefits, driving up future costs.

SMALL-BUSINESS CHALLENGES: Small companies often have difficulty "shopping" for health insurance because health plans can vary greatly in the benefits they cover; the cost sharing that they require of people enrolled in the plan; and the providers that are included in a plan's network, if it has one. Because small companies usually lack expertise in managing health insurance benefits, they often rely on agents and brokers to help them select a plan. What's more, small businesses must often pick only one plan for all of their workers because insurance companies typically impose rules that require a minimum number of workers to participate.

The Affordable Care Act's SHOP provisions seek to make it easier for small employers to compare health care plans and offer their employees choices in coverage without making premiums more expensive. The Congressional Budget Office estimates that, by 2019, an estimated 28 million Americans will be covered through the individual and SHOP exchanges. This will give the exchange markets the same market power that large employers have, or more, according to a recent report by the National Academy of Social Insurance.

What's in the law?

Every state is required to establish both individual and SHOP exchanges that are to be available for open enrollment in October 2013 and fully functional as of January 2014. States may establish separate individual and small-business exchanges or combine these into a single entity (with separate risk pools, if the state prefers). SHOP exchanges will serve small companies, defined as those having no more than 100 employees, on average. During the first two years, states may restrict participation in SHOP exchanges to businesses having up to 50 employees. Starting in 2017, states may allow larger employers to participate.

There is no requirement that individuals or small businesses use the exchanges, as there will continue to be an insurance market outside of the exchanges. Employers may also continue to self-insure, thereby avoiding many market regulations and the requirement for community rating, which requires premium costs to be the same for everyone, regardless of their age or health status.

A SHOP exchange may be set up as an executive branch agency, an independent government authority, or a nonprofit corporation. States may also partner with other states to form a regional exchange or may create subsidiaries within a state as long as the geography of the entire state is covered. SHOP exchanges must be operational by October 1, 2013, in time to conduct the first open enrollment period for coverage that will be effective January 1, 2014.

States are currently at differing stages of progress when it comes to establishing and implementing exchanges (Exhibit 1). If a state ultimately chooses not to establish a SHOP exchange, or if it's determined that an exchange will not be fully operational in time, the federal government will set up and operate the exchange. The federal government may operate the exchange directly or through contract with a nonprofit entity, or it may partner with the state and share responsibility for some of the exchange's functions.

Exhibit 1
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As discussed below, the core functions that a SHOP exchange must perform include selection and certification of the health plans that will be offered, consumer education and assistance, eligibility determinations, plan enrollment, and premium billing and collection.

  • Plan selection and certification. A SHOP exchange must have a clear process for selecting health plans that will be offered in the exchange. It must also certify that each insurance plan meets minimum federal requirements as a "qualified health plan" and complies with other requirements.

    These include the benefits that must be offered; charging the same premium rate for a plan regardless of whether it is offered through the SHOP exchange, directly to consumers, or through agents; complying with quality improvement standards, including reporting of quality and outcome measures and enrollee satisfaction; and complying with marketing practices that do not discourage enrollment of people with significant health needs. States may also impose additional requirements to address state or local concerns, such as the adequacy of provider networks.

    States may adopt an "any-willing-plan" model in which all plans that meet minimum certification requirements will be offered through the SHOP exchange. Or they may decide to act as "active purchasers," offering only those plans determined to be in the interest of the people and employers served by the exchange. If they choose to be active purchasers, states may use such strategies as competitive bidding, selective contracting, and even negotiating with specific plans over price.

    In the current insurance market, plans for small businesses are priced according to the health status of employees in the plan. In small firms that have workers with significant health needs, the cost of coverage can be very high. Since small firms typically ask their employees to pay as much as half of the annual premium, workers who perceive themselves as healthy may decline coverage, leaving only those who already have health expenses participating in the plan.

    However, under the Affordable Care Act, health insurance plans will not be priced according to the health status of the people employed by each small business seeking coverage. Instead, premiums will be set according to what is known as modified community rating. In effect, every business in the small-group pool will pay the same basic rate for insurance. Premiums will be allowed to vary based only on geography and age and on whether or not an insured person uses tobacco.

  • Consumer information and assistance. A key function of the exchange is to provide standardized, "user-friendly" information that allows people to compare plans based on benefits, cost sharing, provider networks, premiums, and the degree to which plans meet quality measures, such as consumer satisfaction. This information must be made available through a website as well as a toll-free telephone call center. The exchange must also conduct outreach and education activities to make the community aware of the insurance availability.

    SHOP exchanges will also provide grants to public or private organizations, called navigators, which are intended to have established relationships with the small-business communities served by the exchange. Navigators are to provide impartial information, facilitate enrollment, answer questions, deal with complaints and grievances, and make referrals to consumer assistance or other state and local agencies as appropriate.

  • Eligibility determinations and enrollment. SHOP exchanges must verify the eligibility of employers applying to participate in the exchange. To be eligible, an employer must meet the definition of small employer, make all full-time employees eligible for coverage, and be located in the exchange service area. The exchange must also verify that people applying for coverage have an offer of coverage by a qualified employer, as either an employee or a dependent.

    SHOP exchanges must conduct initial, annual, and special open enrollment periods for each employer, during which time the employer and employees may begin or change coverage in a health plan. Enrollment in qualified health plans by SHOP exchanges will be done on a rolling basis based on each employer's plan year rather than a single open enrollment period for all employers and employees participating in the exchange.

    A significant design issue for the SHOP exchanges will be how much choice employees will have in selecting a plan. Plans will be available at four different levels of so-called actuarial value: bronze, silver, gold, and platinum. The law requires exchanges to allow employers to choose one of these levels of coverage, and then have their employees choose from among all the health plans offered by the exchange at that level. The employer contribution would then be applied to the premium of the plan selected.

    Proposed regulations issued by the Department of Health and Human Services (HHS) would allow other alternatives as well. For example, an exchange could decide to allow employees to enroll in any qualified health plan at any level offered by the exchange, or it could allow an employer to select a single health plan for its employees.

  • Premium billing and collection. A unique function of SHOP exchanges is to administer a streamlined premium billing and collection system. The exchange will prepare and issue a single bill to each participating employer that reflects premiums owed for all plans in which its employees are enrolled. The employer will make a single payment to the exchange, and the exchange will be responsible for paying the various plan issuers.

  • SHOP exchange financing. Federal grants are available for states to fund the development and initial operations of SHOP exchanges. The health care law requires, however, that the exchanges be self-sustaining operationally as of January 1, 2015. How this is achieved will be left to the states' discretion. As one potential means of funding, the law authorizes the exchanges to assess fees on health insurers offering plans through the exchange.

CHALLENGES: To be successful, SHOP exchanges need to attract sufficient participation among small businesses to establish a broad, stable risk pool and to be self-sustaining. To this end, they will need to demonstrate value by relieving employers of some administrative burdens and, more important, by moderating cost increases. States will also need to ensure that there is a level playing field in terms of regulations and premium rating for plans sold both inside and outside of the exchange.

In addition, some small companies may opt to avoid regulations by maintaining a "grandfathered" health insurance plan (one in effect at the time the Affordable Care Act was passed and allowed to continue) or by choosing to self-insure and thus avoid certain requirements. (See the Health Policy Brief published October 29, 2010, for more information on grandfathered health plans.)

What's next?

State and federal efforts to create health insurance exchanges will intensify during 2012. States must enact enabling legislation or take necessary regulatory action to create their exchanges. At the federal level, regulations and guidance pertaining to many complex issues are still under development but must be released in time for states to design their exchanges and apply for approval by HHS by January 1, 2013.

As of the publication date of this policy brief, it appears very likely that the federal government will have to step in and establish exchanges in some states. So far, 49 states and the District of Columbia have collectively received nearly $730 million in federal exchange grants. But as of November 29, 2011, only 28 states and the District of Columbia have been awarded Exchange Establishment Grants to move from planning to implementation. Additional states applied for establishment grants in December 2011, and HHS expects to announce awards in mid-February 2012. Several states have indicated that they do not intend to implement the exchanges, and the governors of Kansas, Louisiana, Oklahoma, and Wisconsin have returned some or all of the exchange grants that their states initially applied for and received.

Implementation of the Affordable Care Act is taking place in a politically charged environment. The US Supreme Court is expected to rule on the constitutionality of various provisions of the law by mid-2012. Depending on the outcome, there could be significant changes affecting the establishment of SHOP exchanges. Election-year politics and the outcome of national elections in November 2012 could also affect implementation efforts at the federal and state levels.


Bachrach, Deborah and Patricia Boozang, "Federally-Facilitated Exchanges and the Continuum of State Options," National Academy of Social Insurance, December 2011.

Collins, Sara R. and Tracy Garber, "State Health Insurance Exchange Legislation: A Progress Report," Commonwealth Fund, January 11, 2012.

Hall, Mark A., "Regulating Stop-Loss Coverage May Be Needed to Deter Self-Insuring Small Employers from Undermining Market Reforms," Health Affairs 31, no. 2 (2012): 316-23.

Jost, Timothy S., "Employers and the Exchanges under the Small Business Health Options Program: Examining the Potential and the Pitfalls," Health Affairs 31, no. 2 (2012): 267-74.

Kingsdale, Jon, "How Small Business Health Exchanges Can Offer Value to Their Future Customers--and Why They Must," Health Affairs 31, no. 2 (2012): 275-83.

Weiner, Jonathan P., Erin Trish, Chad Abrams, and Klaus Lemke, "Adjusting for Risk Selection in State Health Insurance Exchanges Will Be Critically Important and Feasible, but Not Easy," Health Affairs 31, no. 2 (2012): 306-15.

About Health Policy Briefs

Written by
Julia James
(James previously worked on Capitol Hill and as a consultant in Washington, DC, and Oregon.)

Editorial review by
Jon Kingsdale
Managing Director
Wakely Consulting Group, Boston

Len Nichols
Center for Health Policy Research and Ethics
George Mason University

Ted Agres
Senior Editor
Health Affairs

Anne Schwartz
Deputy Editor
Health Affairs

Susan Dentzer
Health Affairs

Health Policy Briefs are produced under a partnership of Health Affairs and the Robert Wood Johnson Foundation.

Cite as:
"Health Policy Brief: Small Business Insurance Exchanges," Health Affairs, February 09, 2012.

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