As of January 1, 2014, the Patient Protection and Affordable Care Act (PPACA) requires most U.S. citizens and lawful residents to either have “minimum essential coverage” or to pay a federal tax. The PPACA also requires each state to have a “Health Insurance Marketplace” (formerly called an Exchange) where individuals and small employers can purchase health insurance policies. People who have health coverage through employment or through a government program (such as Medicare, Medicaid or others) are not required to buy insurance in a Marketplace. This article explains Marketplaces provisions of the PPACA, and how they affect employers and individuals.
Q1. What exactly is a Marketplace?
A Health Insurance Marketplace (formerly called an Exchange) is a virtual marketplace where “qualified individuals” or “small” employers can compare and purchase health insurance policies (called “qualified health plans” or QHPs), either online or by calling in to a customer service center. January 1, 2014 is the earliest date coverage will be effective if purchased in a Marketplace. There are two types of Marketplaces:
- An Individual Marketplace – where individuals can buy health insurance policies for themselves and/or family members and where individuals can possibly receive federal subsidies to help pay for such coverage
- A Small Business Health Options Program (SHOP) Marketplace – where small employers (up to 50 employees in 2014 and 2015) can buy group health insurance policies or allow their eligible employees to select from among different group health plan options.
States can operate the two types of Marketplaces separately, or they can elect to combine them into one Marketplace. See Q/As 6 through 8 for additional details on the individual and SHOP Marketplaces.
Q2. What’s the difference between a State and Federal Marketplace, and why do different states have different types of Marketplaces?
PPACA allows three different types of Marketplaces: State-run, Federally-facilitated and State-Federal Partnerships. A fourth hybrid option has since been added as well. In enacting PPACA, Congress thought most states would want to establish State-run Marketplaces, and the Federally-facilitated Marketplaces were to be the default for those states that did not get state Marketplaces established in time to be operational for the October 1, 2013 enrollment start date. For a number of reasons—the primary two being partisan politics and lack of specific timely guidance from the federal government—twenty-six states have elected to have federally-facilitated Marketplaces in 2014, and only fifteen states and the District of Columbia will have State-based Marketplaces. Seven states will have State-Federal partnerships, and two states (Utah and New Mexico) will have State-run SHOP Marketplaces and Federally-facilitated individual Marketplaces.
The following map shows what type of Marketplace each state has elected to have in 2014.
The URL of the Federal Marketplace web site is: https://www.healthcare.gov/
To obtain the URLs of the various state-run Marketplaces, go to: https://www.healthcare.gov/what-is-the-marketplace-in-my-state
State-run Marketplaces in 2014 (16 states + District of Columbia):
District of Columbia
Federally-Facilitated Marketplaces in 2014 (25 states):
State-Federal Partnership Marketplaces in 2014 (7 states):
Hybrids: Federally-Facilitated Individual Marketplace and State-run SHOP Marketplace
State-run Marketplaces can be one of two models: facilitator or active purchaser. Under the facilitator model, any health insurance policy that meets the minimum state and federal requirements may be offered in the Marketplace, and each insurer sets the price of the policies it offers. Under the active purchaser model, the state Marketplace solicits bids from health insurers and decides which insurance policies will be offered in the Marketplace, and the Marketplace negotiates with insurers to set the price and benefits offered under the qualified health plans.
Q3. What is the timeline for open enrollment in a Marketplace policy and what is the effective date of coverage?
Open enrollment begins October 1, 2013, in both the Individual and SHOP Marketplaces, whether state-run, federally-facilitated, or some combination of both. Coverage will not be effective until January 1, 2014, for individuals who enroll by December 13, 2013. In the Individual Marketplace, the initial open enrollment period will be October 1, 2013 to March 31, 2014. After 2014, open enrollment will be limited to October 15 through December 7 of each year. Outside of open enrollment, individuals generally will not be able to enroll mid-year unless they have a “special enrollment” event, defined the same as under current law for group health plans (e.g., marriage, divorce, new dependent, loss of other employment-based coverage). In contrast, the SHOP Marketplaces will have “rolling” open enrollment periods—usually the first of each month or each quarter—based on the date the employer starts offering coverage through the Marketplace.
Q4. Will all health insurance only be available through Marketplaces beginning in 2014?
No, individuals and employers will be able to purchase health insurance either inside or outside the Marketplaces, and employers who wish to will still be able to self-insure their group health plans. Additionally, government health coverage such as Medicare, Medicaid, Tri-Care and others will continue to be available to qualified individuals.
However, all non-grandfathered* individual and small group insurance policies, whether sold in or outside the Marketplaces, must be “qualified health plans” (QHPs) that meet specified actuarial values, provide “essential health benefits” and meet other specified requirements including adjusted community rating.
* Non-grandfathered policies are those that are not grandfathered. Grandfathered plans or policies are those that were in existence on March 23, 2010 (the date PPACA was enacted), have remained in existence continuously since then, have covered at least one participant, and have not made specified changes in cost or coverage since then. Subject to a limited exception, any new policy or contract of insurance (instead of renewal) issued after March 23, 2010 is, by definition, a non-grandfathered plan.
Q5. What exactly are “qualified health plans”?
Qualified health plans (QHPs) are health insurance policies or plans that:
- Meet specified actuarial value levels – bronze, silver, gold or platinum, and
- Provide coverage for a core set of 10 benefits and services called “essential health benefits”, and
- Include specified limits on deductibles and cost-sharing, and
- Are priced based on only four risk adjustment factors (California limits it to only three).
Specified Actuarial Values: QHPs must meet specified actuarial values, often referred to as “metals” levels because they are: bronze (60% actuarial value), silver (70%), gold (80%) and platinum (90%). These values must be met plus or minus 2%; meaning, for example, that the 70% silver level can provide an actuarial value of 68-72% but cannot go beyond these parameters.
Actuarial value is a measure of the plan’s generosity. It is the percentage of the overall cost or value of covered benefits that is paid by the plan (or insurer) rather than by the participant. For example, in a silver level plan, the plan or insurer would pay, on average, 70% of the cost, and the participant would pay 30%. The participant’s share is paid through “cost-sharing” such as deductibles, co-pays, coinsurance and other out-of-pocket amounts, but does not include amounts paid for premiums.
Essential Health Benefits (EHBs): EHBs—listed below—are 10 core health benefits items and services the Institute of Medicine (IOM) and the federal government have determined all individual and small group health insurance policies should provide. Most large group health plans already provided at least eight or nine of these 10 services (many did not include pediatric dental or vision, or habilitative care).
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance use disorder services, including behavioral health treatment
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive and wellness services and chronic disease management
- Pediatric services, including oral and vision care
Limits on Deductibles and Out-of-Pocket Maximums:
- The maximum annual deductible for plans in the small group market will be $2,000/$4,000. This limit on deductibles does NOT apply in the individual market. Even in the small group market, there is an exception: a plan can have higher maximum annual deductibles if the plan cannot reasonably reach the actuarial value for its “metal level” and comply with the deductible limits. (It is generally thought this flexibility may in practice apply only for bronze level plans—plans that pay 60% of the total cost of the plan.)
- The maximum annual limitation on cost-sharing (out-of-pocket maximum) will be the amount that applies for High Deductible Health Plans (HDHPs) associated with Health Savings Accounts (HSAs). For 2014, this amount is $6,350 for single coverage and $12,700 for family coverage.
- Both cost-sharing limits (above the maximum annual deductible and the maximum annual out-of-pocket limits) will be increased each year by the “premium adjustment percentage.” Regulators will publish this percentage annually.
- For plans that use a network of providers, the annual limits on cost-sharing and deductibles do not apply to amounts paid for out-of-network services.
- Also, cost-sharing does NOT include amounts paid for non-covered services.
Risk Adjustment Factors: Beginning in 2014, carriers may set premium rates in the individual and small group market based only on four factors (three in California). This is referred to as “Adjusted Community Rating” or “Fair Health Insurance Premiums. The allowable factors are:
- Age (adults age 64+ cannot be charged more than 3 times as much as adults age 21)
- Geographic rating area (each state is sub-divided into regions)
- Family size
- Tobacco use (tobacco users cannot be charged more than 1.5 times as much as non-users)
- California does not allow tobacco use as a rating factor
Health insurers may no longer use other risk adjustment factors to set premium rates. In the past, carriers used factors such as gender, pre-existing conditions, health status, claims history, duration of coverage, occupation and small employer size
Remember, only individual and small group insurance policies are required to meet specified actuarial values, to provide essential health benefits and limit deductibles, and to use only specified rating factors. All plans must provide at least 60% actuarial value and must comply with the above limit on out-of-pocket maximums.
Employers and Marketplaces
Q6. What employers can purchase coverage in a SHOP Marketplace?
In 2014-2016, only “small” employers can purchase coverage in the SHOP Marketplace.
- In 2014 and 2015, “small” is defined as having not more than 100 employees, but states can elect to define it as not more than 50 employees, and many states have (including California and Utah) opted for the 50 employees definition.
- In 2016, employers with up to 100 employees can purchase coverage in the SHOP Marketplace.
In 2017 and beyond, states can elect to allow employers of any size to purchase coverage in the SHOP Marketplace.
Q7. Why would an employer want to purchase or offer coverage in the SHOP Marketplace rather than outside the Marketplace?
The main reason some small employers might want to offer their employees coverage through the SHOP Marketplace is that the employer might qualify for the Small Business Tax Credit. This credit applies for employers with not more than 25 employees, with average annual wages of less than $50,000. Beginning in 2014, this tax credit applies only for group health insurance purchased in the SHOP Marketplace; not for policies (even the same policies) purchased outside the Marketplace. The maximum credit amount is 50% of the premium amount paid by the small for-profit employer (subject to specified maximums), and 35% of the amount paid by the small not-for-profit employer. A small employer might qualify, retroactively, for the Small Business Tax Credit for coverage offered to employees prior to January 1, 2014 but the credit is 35% of the premium amount paid by the small for-profit employer and 25% of the amount paid by the small not-for-profit employer.
Another reason some employers might want to offer their employees coverage through the SHOP Marketplace is to allow their employees to each select their own carrier, plan and network. Feedback from certain employers who have already purchased in the Utah SHOP Marketplace (Utah’s SHOP Marketplace is called Avenue H, and it is already open), suggests that employees are happier with their plans, and make fewer complaints about health coverage to their employer, because they’ve selected a plan and network that best fits their individual needs rather than a one-plan-fits-all approach. This potentially creates a higher employee satisfaction level and higher employee retention rates.
Additionally, in some state Marketplaces (such as Covered California and Avenue H in Utah), an employer will be able to pay at least a specified percentage of employee coverage (in Utah’s Avenue H, a flat dollar amount and not a percentage may be selected) and allow employees to select which level health insurance plan they want in the Marketplace. This option should be available in all State and Federal SHOP Marketplaces in 2015, but for 2014 it will not be offered in the federal Marketplaces, and each state Marketplace can elect whether or not to offer this option.
All policies sold in the SHOP Marketplace also will be available outside the Marketplace. Additionally, some carriers may offer policies outside the Marketplace that have different plan designs from those in the Marketplace, but all policies must meet one of the metals levels and actuarial values specified above (i.e., bronze, silver, gold or platinum).
Individuals and Exchanges
Q8. What individuals can purchase coverage in an Individual Marketplace, and what is the advantage or disadvantage for an individual to purchase coverage in a Marketplace?
First, any U.S. resident can purchase health insurance in an Individual Marketplace, but only “qualified individuals” will be eligible for a subsidy.
One reason an individual might want to purchase health insurance coverage (in or outside a Marketplace) is that, beginning in 2014, the “individual mandate” (technically called Individual Responsibility) requires most U.S. citizens and lawful residents to either have “minimum essential coverage” or to pay a federal tax. “Minimum essential coverage” is defined as health coverage provided by an employer, by the government, or by an individual health insurance policy. The federal tax imposed for not having minimum essential coverage is only $95 annually per person in 2014 (or 1% of income, if greater), but it increases in subsequent years. The tax will be paid with the individual’s federal tax return that is filed for that year.
Another reason many individuals may want to purchase health insurance in a Marketplace in 2014 and beyond is that people with household incomes between 100%-400% of the federal poverty level (FPL) will be eligible for federal subsidies, if they are not eligible for government health benefits (such as Medicare, Medicaid, SCHIP, Tri-Care or others) or for “affordable” employer-provided coverage that provides at least “minimum value” (defined as 60% actuarial value). The two types of federal subsidies are the advance premium tax credit (APTC or just PTC), and the cost-sharing reduction.