Healthcare finance leaders should understand the potential effects of the health insurance exchanges on their organizations and devise a game plan for participating.
At a Glance
Developing a health insurance exchange strategy begins with:
- Understanding how both the public and private exchanges work
- Conducting a thorough analysis to quantify how exchanges will affect the organization’s current and future patient populations and revenue base
- Determining when to participate in the exchanges, keeping in mind current market position as well as competitors’ actions
The advent of public health insurance marketplaces, also known as exchanges, and the continued growth of private exchanges could have a significant impact on hospitals and health systems nationwide by altering their patient population and payer mix. The speed at which such changes could take place will vary by market, depending on variables such as available provider networks, enrollment, and payment levels offered through the exchange plans.
As a result, healthcare organizations will face both challenges and opportunities related to revenue and market share under the exchanges. Expansion of coverage to uninsured individuals may bring new revenue sources for hospitals and health systems, but in many states, more exchange enrollment is projected to originate from those with existing commercial coverage. With payment under the exchanges expected to be less overall than traditional commercial payment, organizations are at risk of losing a significant portion of their current commercial revenue.
In markets that see high enrollment, the exchanges ultimately may affect an organization’s ability to generate excess cash flow to continue its mission. To ensure operational and financial success moving forward, healthcare leaders should develop an “exchange strategy” to prepare their organizations for these new market dynamics. A disciplined, three-pronged approach to planning that addresses strategic, financial, and tactical considerations is essential.
The Basics of Public Exchanges
The first step in developing an exchange strategy is to understand how the exchanges work.
Health insurance exchanges are marketplaces that allow individuals or businesses to compare a variety of healthcare plan options and purchase coverage. The public exchanges are designed under the Affordable Care Act (ACA) and are available in all 50 states, with the first benefits taking effect this month. They target uninsured, underinsured, and self-insured individuals. The Small Business Health Options Program (SHOP), also implemented under the ACA, is geared toward businesses with 50 FTEs or less.
Enrollment projections through the exchanges vary. The Congressional Budget Office (CBO) estimates that 25 million people will be enrolled through the public exchanges by 2016. That includes 22 million through individually purchased coverage and 3 million through the SHOP exchanges (Health Insurance Exchanges: CBO’s May 2013 Baseline, CBO, 2013).
Plans are broken into four levels—bronze, silver, gold, or platinum—with each meeting a minimum level of benefits, as mandated under the ACA. Catastrophic plans are available for individuals under age 30 who provide proof that they cannot afford other coverage. Individuals and families with incomes between 138 percent and 400 percent of the federal poverty level (FPL) are eligible for tax-credit subsidies. If they are in a state that is not expanding Medicaid eligibility, those federal subsidies will extend to 100 percent of the FPL.
The number of plans available varies by market depending on insurer participation. The platinum plans provide the most comprehensive coverage, meaning that individuals pay a higher premium but have lower total out-of-pocket exposure. By contrast, the bronze plans have the lowest premiums but provide the least comprehensive coverage and have higher out-of-pocket exposure. The actuarial value, reflecting the projected annual cost covered by the insurer, is 90 percent for platinum plans compared with 60 percent for bronze. All plan premium rates are community rated rather than individually underwritten for more balanced premium pricing.
For hospitals and health systems, a key factor to consider is that public exchange plans are competing primarily on premium price, since the ACA mandates consistent benefit standards nationwide. This means that insurers are looking to maintain margins by minimizing their contractual rates with providers.
Understanding Private Exchanges
Within the private sector, private exchanges are becoming increasingly common. They typically involve arrangements between employers and the private exchange operator (usually either an insurance company or a benefits management/consulting company). Approximately 1 million people are projected to be enrolled in private exchanges in 2014, and interest is growing rapidly. One firm estimates that 40 million people will be enrolled in private exchanges by 2018, compared with 31 million in public exchanges, resulting in more than one in five Americans purchasing benefits through public and private exchanges (Birhanzel, R., Brown, S., and Tauber, J., Are You Ready? Private Health Insurance Exchanges Are Looming, Accenture, May 2013).
Private exchanges appeal to both private and public employers because they make it easier to control healthcare costs through defined-contribution plans. Employees receive a fixed dollar amount to apply to the costs of insurance coverage of their choice and are offered a variety of plans with a broader scope of services than in the public exchanges or through traditional group coverage.
Private exchanges are expected to draw both small and large employers over time. Some exchange operators are designing private exchanges specifically targeting small businesses, and one has already gained 2,000 employer participants. On the other end of the spectrum are exchanges such as the Corporate Health Exchange—one of the larger private exchanges, with more than 260,000 employees enrolled from Walgreens, Sears, Darden Restaurants, and other employers. Research by the exchange’s sponsor, Aon Hewitt, showed that enrollment in consumer-directed health plans increased from 12 percent in 2012 to 39 percent in 2013, while enrollment in preferred provider organizations dropped from 70 percent to 47 percent over the same period (“Enrollment Results Show Aon Hewitt’s Corporate Exchange Empowers Employees to Become More Astute Health Care Consumers,” press release, Aon Hewitt, March 18, 2013).
Expanding enrollment in exchanges already is having ripple effects that are expected to accelerate in the industry. Hospitals and health systems should consider the implications of expanding enrollment in their markets, how to prepare, and when and how best to participate.
Anticipating Changes in Payer Mix
In evaluating the potential impacts of exchanges on their organization, healthcare leaders should assess possible changes to payer and payment mix. Both types of exchanges reflect a “retail,” or individual, purchasing environment. As lives move from the “wholesale,” or employer, group environment to the retail channel, the adoption of high-deductible and narrow-network products will accelerate.
The public exchanges are drawing patients from both the uninsured and commercially insured populations, but the degree of shift from traditional commercial plans will differ by segment. Although the newly insured offer providers a major market share opportunity, providers may lose market share or see reimbursement reduced by the shift of individuals from commercial group or individual plans into the exchanges.
In many states, a greater proportion of exchange enrollment is projected to originate from commercial lives than from the uninsured. About 90 percent of commercially insured individuals currently have coverage through their employers, according to a January 2012 report by the Urban Institute (Blavin, B., Buettgens, M., and Roth, J., State Progress Toward Health Reform Implementation: Slower Moving States Have Much to Gain). Those covered by small employers are most likely to move to the public exchanges, either because their employers participate in the SHOP exchanges or have chosen to discontinue employee coverage altogether.
The Urban Institute notes that those who are not covered through their employer and who purchase commercial coverage on their own typically constitute about 10 percent of the overall commercial market. A significant portion of these individuals are expected to shift to public exchanges to access either federal subsidies or, where available, lower-priced plans. Fifty-nine percent of individuals who purchase commercial coverage on their own have incomes lower than 400 percent of the FPL, according to a March 2011 report by the Kaiser Family Foundation (A Profile of Health Insurance Exchange Enrollees). That population therefore is more likely to seek coverage through the exchanges. Private exchange enrollment also is expected to come primarily from commercially insured individuals who currently are covered through their employers.
As for the extent of the shift, an analysis by Kaufman Hall estimates that 16 to 66 percent of hospitals’ current commercial lives will be at risk for transfer to the exchanges by 2018.a The midpoint scenario projects a 40 percent shift, with 23 percent going to private exchanges, 13 percent moving to individual public exchanges, and 4 percent in the SHOP public exchanges.
We expect the degree of shift to vary materially by market, making it critical for hospitals and health systems to comprehensively analyze their commercial populations and employer demographics to develop market-specific projections.
The impact will be particularly significant for organizations that rely on revenue from commercial contracts to offset lower revenue from Medicare and Medicaid. To prepare for these changes, hospitals and health systems should conduct a thorough analysis to quantify how exchanges will affect their current and future patient populations and revenue base. This analysis should include a comprehensive evaluation of their commercial populations and development of market-specific projections. Key questions to ask include the following:
- Will the organization participate in the exchanges, and if so, how?
- Will there be a different strategy for participation in the public exchanges versus private exchanges?
- What contracts should be pursued and secured for one or both?
Hospitals and health systems that elect not to participate in exchanges risk losing market share and revenue, while those that do participate may see significantly lower payment rates. For example, a large Southern health system with a strong market position and commercial contract rates as high as 180 percent of Medicare opted not to participate in exchange plans in 2014, after being offered a rate that lies between Medicare and Medicaid. However, other area providers accepted the lower rate, and the large system now is concerned about the competitive impact on its existing revenue and growth.
Developing an Exchange Strategy
Hospitals and health systems must be proactive in developing their exchange strategies, be alert to what is happening in their market, and be involved in conversations with local payers, employers, and providers. The expansion of the exchanges is expected to accelerate the industry’s transition from a wholesale to a retail insurance model, as payer arrangements and cost-of-care and quality information become increasingly transparent to consumers.
Determining when to begin participating in exchanges will be key. There likely will be pros and cons to any decision. Organizations should consider their current market position as well as the actions of competitors.
For example, a health system that has a non-dominant market position and low payment rates may experience “first mover” advantages by entering the exchange market this year. Depending upon enrollment rates and what other health systems are entering the exchanges around the same time, these advantages may include increased market share, narrow network priority access, and revenue growth. Meanwhile, a health system that has a strong market position and high payment rates that waits to enter in 2015 may see “second mover” advantages, such as rate/revenue preservation and access to more favorable contracts once the market has begun to mature.
On the other hand, early entrants may see disadvantages by locking in at unsustainably low contract rates and increased exposure to bad debt. Health systems that wait also run the risk of facing potential disadvantages, such as revenue and market share loss due to less favorable contract options or exclusion from narrow networks.
Specific strategic considerations and dynamics affecting the financial impact of public and private exchanges on hospitals and health systems will be determined market by market. Key drivers include the following.
Current commercial price levels. Higher prices relative to Medicare create more “room” for undercutting and amplify the potential for material financial impacts.
Capacity utilization. If capacity is constrained in the region, narrow/tiered networks have less impact because significant steerage of patients isn’t possible.
Market willingness to give up choice. The price discount required for consumers to give up choice will vary by market, leading to different trade-offs between price and volume.
Urban versus rural. Competition is required for narrow/tiered contracts to be practical and effective; rural markets with sole community providers will be less dynamic.
Organizations should carefully consider how they may be affected by shifts in their patient populations and payer mix. In evaluating contracts, they should consider the level of market share that might be achieved and at what contract rates with each population. The exhibit on page 68 outlines the implications of exchange participation on a hospital’s current contracts and contracted rates.
To ensure success, organizations should develop a comprehensive plan for preparing for the exchanges, effectively negotiate for the most favorable rates possible, be willing to assume increased risk for population health, and commit to delivering high-quality, high-value care for patients. They should undertake all of these action steps with the expectation that the organization also must significantly lower its cost structure for long-term sustainability.
The exchanges are here. Make sure your organization is fully prepared.
Andrew S. Cohen is a vice president, Kaufman Hall & Associates, New York, and a member of HFMA’s Metropolitan New York Chapter.
Charles Kim, MBA, is a senior vice president, Kaufman Hall & Associates, Skokie, Ill., and a member of HFMA’s First Illinois Chapter.
Jason O’Riordan, MBA, MHSA, is vice president, Kaufman Hall & Associates, Skokie, Ill.
James J. Pizzo, MBA, is a managing director, Kaufman Hall & Associates, Skokie, Ill.
a. Kaufman Hall analyses notes: Distribution of lives by segment were estimated using national data on employees by segment (Census Bureau, Bureau of Labor Statistics), insurance uptake by segment (Kaiser Family Foundation/Health Research & Educational Trust survey), and individual market size estimates (Urban Institute). Individual public exchange assumptions in the high scenario are adapted from Singhal S., Stueland J., and Ungerman, D., How U.S. Health Care Reform Will Affect Employee Benefits, McKinsey & Company, June 2011.
Determining the Right Approach
Key questions for organizations in developing an exchange strategy include the following:
- What proportion of our market is likely to purchase insurance through the exchanges?
- What effect will the exchanges have on utilization and the size of our currently commercially insured population?
- What effect might the exchanges have on our bad debt collections and charity care programs?
- Will we participate in exchange offerings and, if so, with which health plans, employers, payers, and providers? Should we look for “narrow network” exclusivity within our market?
- What is our contracting strategy? Should we contract independently, or partner with our physicians and other providers?
- What types of payment models do we wish to pursue?
- What are our pricing and risk-assumption strategies?
- How can we improve efficiency to attract consumers, employers, and payers?
Publication Date: Wednesday, January 01, 2014