Home – Another Setback for Health Insurance Exchanges: Why Should Employers Follow these Developments?

Another Setback for Health Insurance Exchanges: Why Should Employers Follow these Developments?

Another Setback for Health Insurance Exchanges: Why Should Employers Follow these Developments?

By Nita Garg, Barnes & Thornburg LLP

Controversy erupted when the Centers for Medicare and Medicaid Services awarded a contract to Quality Software Services Inc. (QSSI) to construct an integral part of the federal health insurance exchange. Republican leaders expressed concern that UnitedHealth Group would receive preferential treatment in the federal exchange, as QSSI is a subsidiary. Wanting more details on the policies, if any, in place to avoid such a conflict of interest, Reps. Fred Upton (R-Mich.) and Cliff Sterns (R-Fla.) requested that the Department of Health and Human Services (HHS) provide all documentation relating to the work to be performed by QSSI and discussing UnitedHealth Group’s acquisition of QSSI.

This is only one of the many recent setbacks for the HHS and the Obama Administration in their implementation of health insurance exchanges. After earlier extending the deadline for states to submit detailed applications required by federal officials to Dec. 14, 2012, the Obama Administration announced last month that states will be given an additional four more weeks to declare whether they intend to run their own health insurance exchange.


The extension was announced amidst a flurry of governors declaring that they would not create an exchange, thus defaulting to the federal exchange. Many of these governors have cited the cost of implementing and maintaining an exchange at a time when many states are still dealing with the effects of the economic recession. Critics note that the majority of the governors opting against a state exchange are Republican governors who have spoken out against the impact of the Affordable Care Act on state governments.

State resistance is not the only potential hindrance to the success of health insurance exchanges. A recent study concluded that, due to uncertainty and the likelihood for pricing errors, developing premiums under the exchanges will be difficult. Much of this uncertainty stems from how accurately actuaries can predict what percentage of individuals will purchase insurance through the exchange, particularly relatively healthy young individuals who may opt to forgo insurance and pay the penalty mandated under the Affordable Care Act (ACA). Additionally, the June 2012 Supreme Court ruling on the ACA allows states to determine whether to participate in Medicaid expansion. Medicaid expansion, or lack thereof, in turn, could significantly impact an individual’s decision to purchase insurance through the state’s exchange.

Why This Matters to Corporations

Companies should pay close attention to these developments. These exchanges have the potential to significantly impact those employers who sponsor health insurance for their employees. As premium subsidies will be available from the federal government for individuals and families with incomes between 133% and 400% of the poverty level, employees may opt to purchase insurance through the exchange rather than their employer.

Employers who sponsor health insurance should be aware that if an employee opts to purchase insurance through an exchange rather than their employer, the employer will then owe an excise tax on each employee, even those that use employer sponsored insurance. The justification for this penalty is that the government will be paying a portion of these benefits through a subsidy. Companies with 50 or more employees face penalties in 2014 if they don’t offer minimum essential health coverage to their employees, but some employers may consider dropping coverage, as employees could utilize exchanges, and the associated penalties may be cheaper than actually offering health coverage.