As states begin to announce which insurers will participate in their Exchange marketplaces, we are seeing public Exchanges dominate the headlines. With more information emerging, we are moving from opinion to fact about the Exchanges that will determine the fate of the Affordable Care Act (ACA). There are many promising signs, particularly in states like California and Oregon that are running their own Exchanges. There is also positive news from states like Michigan and Ohio, where more than a dozen insurers have filed to compete in federally-run Exchanges.

Warning signs are emerging, however, in some smaller states, where only a few insurers have agreed to compete. The cautious response of some major national insurers is a concern. Ideally, the Exchanges will have several well capitalized insurers going head to head for market share—so it’s important to see participation from the large, nationwide players.

Pricing Will Be Settled at the State Level

The facts are less developed on the pricing side, but we are seeing some encouraging signs. There already is an unprecedented level of transparency, with many states publishing proposed rates. It is clear that pricing will be settled at the state level. In fact, 45 states have been certified as “effective rate review” states under the ACA for the individual market.

The strongest pricing trend so far is the tremendous variation, which is not surprising given the difficulty of predicting who will sign up for the Exchanges in 2014. As one CEO said, “I told my actuaries to be bold on our home turf and safe everywhere else.” Consumers can only hope there are a lot of insurers seeking to protect their home base.

Private Exchanges Are under the Radar Screen—but Will Drive Innovation

Although private Exchanges are not yet attracting the media attention that public marketplaces are, they may end up shaping the future. By 2020, it’s likely that more Americans will be comparison shopping in private Exchanges than in public ones. In addition, many significant innovations in Exchanges will start on the private side and migrate to the more regulated public marketplaces.

Let’s look at the numbers. The Congressional Budget Office (CBO) expects seven million consumers to enroll in public Exchanges in year one—with that number growing to more than 20 million by 2019. Projections vary, but most experts expect public Exchanges to attract less than 30 million lives in their first five years.

One big reason is that more than 150 million Americans get health insurance through their employers. With another 100 million or so in Medicare and Medicaid, there simply is not a big enough market for individual insurance—unless employers decide to get out of the business. Some small businesses may make that choice. Public Exchanges are open to small businesses, because they are the ones that often cannot afford to provide coverage.

More than 99% of large employers, however, continue to offer health insurance. It’s unlikely that they will stop providing that coverage, especially since the ACA imposes penalties on large employers that do not provide insurance to full-time employees.

While the vast majority of large employers will offer coverage, they will be seeking ways to make it more affordable. This will give private Exchanges the opportunity to offer the same competitive model as public Exchanges—except employees will bring an employer contribution rather than a tax credit to the marketplace. Even more significantly, private Exchanges will be freer to innovate their way to an Amazon-like shopping experience than public Exchanges, which must work through public processes that make it difficult to move quickly. In addition, private Exchanges will find it easier to offer ancillary products and be directive with consumers—precisely the things that have proven most successful in attracting consumers, particularly younger ones, to web-based purchasing.

For these reasons, Accenture recently predicted that “private Exchange purchasing will approach public Exchange purchasing enrollment levels as soon as 2017 and surpass them soon after.” Recent polls suggest this goal can be met by a growing number of private Exchanges offering large employers various options for a middle ground between sticking with the status quo and dropping coverage.

The Nation’s Largest Employers Will Benefit from Flexible Options

Competition will be most fierce in the mega-group market. Three of the nation’s largest brokers are pitching their private Exchanges to employers with 1000 or more employees:

  • Aon Hewitt was first out of the box with “Corporate Exchange”—a multi-carrier private Exchange with an approach similar to the ACA public Exchange model. “Corporate Exchange” will offer standardized products within metal levels and a sophisticated risk adjustment mechanism to protect against adverse selection. Aon Hewitt has secured the participation of two mega-employers, Sears and Darden. In addition, it announced that nine national and regional carriers—including United Healthcare, Cigna and the Health Care Service Corporation (HCSC), which operates Blue Cross and Blue Shield (BCBS) plans for 14 million members—will offer products on “Corporate Exchange.” The Aon Hewitt model requires employers to provide a defined contribution, with employees able to choose from an array of fully-insured products.
  • Mercer joined forces with Optum’s private Exchange, Connextions, to launch the “Mercer Marketplace.” By offering a more flexible approach that accommodates insured and self-funded options, Mercer secured the participation of the nation’s five largest commercial insurers —Wellpoint, United, Aetna, Cigna, and Humana—as well as of large nonprofit BCBS plans in New York and Georgia.
  • Towers Watson bought Extend Health a year ago to leverage its experience in offering health coverage to 500,000 retirees. The Towers Watson “OneExchange” solution offers employers even greater flexibility in maintaining their current purchasing role, including self-insurance and active purchasing approaches that capitalize on the employer’s prior experience. The three largest national insurers (United, Wellpoint, and Aetna) plus Kaiser and other non-profit plans will participate in “OneExchange.”

Mid-Size Employers Will Have Customized Options

With the big brokers focusing on the largest employers, a different marketplace is emerging for regional and state-based employers and carriers. There are two leaders in this space. The first is Liazon Corporation, which is partnering with Arthur Gallagher to offer the “Bright Choices Exchange.” The second is the Bloom Exchange, which was purchased by three BCBS carriers in 2012 to partner with BCBS plans and other carriers at the state level. Bloom, Liazon, and others will offer customized options in any state where there is a critical mass of employers and carriers interested in establishing a private Exchange. In most cases, their target market is employers with more than 50 employees, who are not eligible for the public Exchanges until at least 2016.

There Is a Role for Private Exchanges in the Individual Market

The individual market is likely to be dominated by the public Exchanges, since they are the only ones who can determine eligibility for tax credits. The federal government, however, has carved out a role for private Exchanges to partner with public Exchanges in offering subsidized coverage.

Back in July 2011, the first set of proposed Exchange regulations included a provision (now codified as 45 CFR 155.220) allowing “web-based brokers” to enroll consumers in subsidized coverage by establishing a “back-office” connection to the public Exchange. The connection lets subsidy-eligible consumers have their applications sent to a public Exchange for an eligibility determination and then returned to the private Exchange, where they can select a plan.

The regulation requires registration and training, as well as adherence to specific consumer safeguards. The most important protection is the requirement that private Exchanges must display all “qualified health plans” or QHPs (the products that meet ACA standards for subsidy eligibility), so consumers have the same choices presented in the same even-handed manner as they would on a public Exchange. In May 2012, the Department of Health and Human Services (HHS) announced that the federal Exchange (since rebranded as the federally-facilitated marketplace or FFM) would contract with web-based brokers in any FFM state where the state allowed it.

In 2014, there will be 34 FFM states. eHealthInsurance, the nation’s largest multi-carrier private Exchange in the individual market, recently announced that a partnership with the FFM is “imminent.” The FFM also is likely to partner with a broad assortment of entities in a position to help enroll low-income applicants in subsidized coverage. It is less clear whether the 16 state-based Exchanges and D.C. will enter into similar arrangements. Federal regulations clearly allow it—and there is a strong argument in favor of giving consumers as many ports of entry as possible.

Some states have expressed concerns, however, that private Exchanges and other web-based brokers won’t follow through on giving consumers full access to all QHPs. These are valid issues, given that these entities may have commission-based models or other financial incentives to steer business to some carriers over others. It is interesting to note, however, that HHS recently went a step further in increasing possible points of entry, allowing carriers to enroll consumers in their own QHPs through “issuer specific” web sites without having to offer the QHPs of competing carriers.

The new guidance, published on May 1, 2013, may be controversial in some states—but it does attempt to achieve a balance and ensure fair representation of all QHPs. HHS expects that agents and brokers will inform consumers about their “business relationships” as well as the “additional information and choices” available on public Exchanges. It remains to be seen how well the balance will be maintained.

Are There Synergies or Conflicts between Public and Private Exchanges?

California recently said it would not embrace web-based brokers in 2014—and we may see conflicts emerge between public and private Exchanges over branding and other issues. In reality, public and private Exchanges can prove beneficial to each other in multiple ways. Both aim to build transparent, consumer-oriented marketplaces in which traditional insurers and new entrants must elevate their game to compete effectively, much as sellers in other web-based marketplaces have had to do.

The sponsors of private Exchanges have been candid in acknowledging that the multifaceted campaigns to promote the public Exchange marketplaces will help raise the profile of their efforts as well. By the same token, public Exchanges have much to gain from private Exchanges. Efforts to discredit the ACA are a bit more difficult if large employers are gravitating toward similar Exchange models. Public and private Exchanges can help legitimize each other, as they both work to increase the transparency of the health insurance marketplace.

We do not know yet which Exchange marketplaces will prove most successful. There will be some Americans who instinctively trust the public Exchanges more, secure in the knowledge that products have been vetted. Others will gravitate toward private Exchanges, confident that the private market will be more innovative and responsive to their needs. States like Vermont will view their Exchanges as a precursor to a single payer, while states like Utah will look to privatize their Exchange marketplaces. Some public and private Exchanges will experiment with active purchasing strategies, testing the potential to use market leverage to reduce prices and improve quality. Others will take a clearinghouse approach to achieve the same ends.

One thing we do know is that we’ll see many different approaches and preferences, as both public and private Exchanges seek to find the optimal model. In the end, the hope is that consumers will benefit from experimentation along many different paths—all aimed at getting us to a health insurance system that is more transparent, easier to navigate and better geared to our needs.