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Creating a Successful Small Business Exchange

Small businesses continue to face unique challenges in providing coverage to their employees. ACA allows states to create exchanges for small businesses called “Small Business Health Option Programs” (SHOPs) where small employers can shop for quality, affordable coverage and the lower wage employers can access tax credits.

California’s Former Small Business Purchasing Pool

In July 1993, California launched a small-employer health insurance purchasing pool called the Health Insurance Plan of California (HIPC). HIPC included market reforms such as guaranteed issue of coverage and restrictions on rate variations. Although these regulations existed both inside and outside HIPC for small-group plans, insurers were allowed to charge different rates for the same plan inside and outside HIPC. HIPC, later renamed PacAdvantage, eventually attracted a large number of high-risk individuals, causing rates within the pool to increase. Without incentives or a need to stay in the pool, employers began to opt out of the costly care and select lower cost coverage outside the pool. PacAdvantage was forced to close in 2006.

Today, Small Business Majority and Center for American Progress released a report called “SHOPping Around: Setting up Health Care Exchanges for Small Businesses: A Roadmap.” The report analyzes implementation processes, challenges, and lessons learned/best practices from previous and existing exchanges. Among the lessons learned, the report explores some of the factors that led to the downfall of PacAdvantage, listed below. In September 2010, California passed legislation to create the California Health Benefit Exchange. In order to avoid repeating the same challenges of PacAdvantage, certain provisions were included that are listed below in italic.

Lessons Learned from PacAdvantage and Applied to California Health Benefit Exchange Legislation

Enrollment was low from the beginning due to the voluntary nature of the program. Participation was voluntary for plans, voluntary for brokers, and voluntary for small employers. Additionally, in the mid-to-late-1990s, less than a third of employers were well-informed of the exchange, indicating a need for more effective outreach. Further, low enrollment numbers resulted in high per-capita administrative costs.

  • Tax credits for small businesses will only be available through the Exchange. (Creates incentives for employers to join the Exchange.)
  • Requires Exchange-participating insurers that sell any products in the outside market to “fairly and affirmatively market” their Exchange Qualified Health Plans (QHPs) in the outside market. (Increases outreach.)
  • Only plans in the Exchange may offer “catastrophic plans.” (Incentivizes young, healthy individuals to enter the Exchange.)

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