Exchanges are designed to make insurance options much more understandable. Both public and private Exchanges follow the same four-step process:

  • Apply for coverage. Consumers can choose to go directly to the web page and get through the process without any assistance…call a phone number and reach a navigator to guide them through their options…or even walk into an Exchange location to get in-person support. In all cases, the process will be enabled by web technology, since both consumers and those who assist them will be using the Exchange web portal. For those in public Exchanges, the first step is to determine if they are eligible for some type of subsidy. Those whose incomes are up to 138% of the federal poverty level (FPL) qualify for Medicaid coverage. Those with incomes higher than 138% but less than 400% of the poverty level are eligible for tax subsidies. Of course, consumers still can choose to buy coverage through an Exchange, even if they are not eligible for subsidies. Qualified Health Plans will be available to individuals and small employers in the Exchange. For employees enrolling in group coverage, the same kind of web experience will become increasingly common as employers expand their use of private Exchanges. In private Exchanges, a defined contribution from the employer will take the place of tax credits or Medicaid. In both public and private Exchanges, consumers will bring a contribution or subsidy to the market and use that support, combined with their own money in most cases, to access coverage.
  • Choose a health plan. This is not an entirely new process. Many large employers now offer their employees choices—and often present those options via the web. What will be different for most people—in the public Exchanges, as well as some private Exchanges—is that they first must select a metal level. Platinum, at the top end of the scale, covers 90% of the actuarial value of benefits. Gold covers 80%, silver 70% and bronze 60% of the actuarial value. Catastrophic coverage—a high-deductible plan—is also available for people up to age 30 or exempted from the mandate to purchase health insurance.
  • Enroll in a health plan. Once consumers have chosen a metal level, they can get to insurers’ product information, see their options and enroll in the plan of their choice.
  • Get insured. Most often, consumers are enrolled in their plan on the same day they choose it, though coverage may not take effect immediately.

How Are Premium Tax Credits and Cost-Sharing Reductions Calculated?

Subsidies or tax credits vary tremendously, based on the consumer’s income. Those making the least—up to 138% of FPL—pay only 2% of their income toward their own insurance, which comes out to just a few hundred dollars per year. Those making the most—up to 400% of FPL—are still eligible for a subsidy but must pay 9.5% of their income toward their policy. (To put things in perspective, 400% of FPL for a family of four is approaching $100,000.) Basically, it’s a sliding scale, with people paying anywhere from a couple of hundred dollars to nearly $10,000 per year.

Those with low incomes also receive cost-sharing support. For those with incomes from 100% - 200% of FPL, the reduction in out-of-pocket liability is two-thirds of the maximum. Those with incomes from 200% - 300% of FPL have a one-half reduction.

Exchange Options for States

There are three basic public Exchange options: state-based Exchanges…state-partnership Exchanges …and federally-facilitated Exchanges. In reality, each of these models includes both federal and state components and responsibilities. For example, even in a state-based Exchange, the federal government serves as the data hub and is responsible for risk adjustment (with the exception of Massachusetts). On the other end of the spectrum, even in federally-run Exchanges, states are responsible for licensing companies, reviewing rates and forms, handling consumer complaints and monitoring market conduct. In fact, states retain those four core responsibilities under every model.

For year one, 16 states plus Washington, D.C. remain on the path toward state-based Exchanges, with some of them likely to need federal assistance with eligibility and enrollment. With Utah recently switching to a state partnership Exchange, there are now eight states pursuing the partnership path. The Utah partnership is unique in having Utah run the small business or SHOP Exchange, while the federal government runs the individual Exchange. That leaves 26 states that have defaulted or decided to go with federally-run Exchanges. Interestingly the state-based Exchanges seem to be clustered on the west coast and in New England.

A Spectrum of Exchange Visions, from Highly Regulated to Market Oriented

Among the states choosing to operate their own Exchanges, there is a continuum of visions—from highly regulated to market driven. Below are some examples of different approaches, ranging from Vermont with the most regulated viewpoint to Utah, which hopes ultimately to make its Exchange a completely private market phenomenon:

  • Vermont plans to evolve its Exchange toward a single payer system that is the only player in the market.
  • California and New York are focused on standardizing their benefit plans.
  • Oregon intends to integrate its Exchange and Medicaid strategies through comprehensive community care organizations.
  • Maryland will have a clearinghouse Exchange, requiring all carriers in the individual and small group markets to participate.
  • Massachusetts has never excluded a carrier but still struggles with small business and non-subsidized enrollment.
  • Minnesota is emphasizing quality, with plans to seek an innovation waiver that would allow it to vary subsidies based on performance across key quality measures.
  • Idaho and Nevada want to run lean and mean, operating clearinghouse Exchanges with as little regulation as the federal government will allow.
  • Utah operates a clearinghouse Exchange, which it hopes eventually to privatize.

Private Exchanges Are in Vogue

If imitation is the sincerest form of flattery, the public Exchanges will be getting a big boost from private Exchanges, which are likely to proliferate, especially in the large-group market. Some of the nation’s leading brokers—including Aon Hewitt, Mercer and Towers Watson—are targeting the large group market (1,000 or more employees) to expand the multi-insurer Exchange marketplace using a defined contribution model. The major national insurers are participating in one or more private Exchanges. Over the next decade, the private Exchanges are likely to enroll more consumers than the public Exchanges, given that the large group market is several times bigger than the individual and small group markets.

The largest insurers also are developing the capacity to offer large and small employers a single insurer private Exchange option in which employees pick from a wide array of products offered by one insurer. The Blue Cross and Blue Shield companies are leaders in this field with the Bloom Exchange, which is owned by several of the Blues. There also are regional private Exchanges—such as Liaizon—and even state-based private Exchanges that may compete with the public Exchanges for small group business.

Finally, there are private Exchanges that are focused on the individual market. eHealthInsurance is the current leader in the multi-insurer, direct-to-consumer private Exchange market, licensed in all 50 states and offering more than 10,000 products from 180 insurers. is another example, offering 6,000 products from 49 insurers and serving as a vendor to the California public Exchange.

Public Exchanges will dominate in the individual market, because they are the only ones that can determine eligibility for subsidies. There is a little known provision in the regulations, however, that allows private Exchanges (called “web brokers” in the regulations) to partner with public Exchanges and help enroll subsidy-eligible individuals through a back office connection to the public Exchange. A similar arrangement was recently announced with insurer-based web sites to help maximize the points of entry for consumers. Partnerships with private Exchanges are at the discretion of each state, so it remains to be seen how widespread the use of this option will be in 2014.

Although public Exchanges are grabbing the bulk of attention today, private Exchanges will play a major role in developing the consumer-facing tools necessary to give people the simple, seamless, Amazon-like experience that is the goal of all Exchanges. None of the Exchanges will reach that objective in 2014, but as the market evolves in that direction, we all will wonder how we ever tolerated such an opaque health insurance market.

How Will Employers Respond to Exchanges?

McKinsey made headlines last year with a study saying that as many as 30% of employers would drop coverage once the ACA takes hold. After a barrage of criticism, McKinsey stepped back from its findings. In fact, the majority of studies show that—particularly for medium- and large-size organizations—there will be very little change in employer-sponsored insurance (ESI) over the next few years. Even in the small-group category, an Urban Institute estimate shows very little movement.

Perhaps the best way to anticipate what will happen is to look at the experience of Massachusetts—the one state that has had an Exchange up for several years. The number of Massachusetts firms offering coverage actually increased by 6% between 2007 and 2008, with a 4% increase for small firms. The Massachusetts example indicates that ESI is likely to remain steady—and perhaps even grow—at least in the near future.