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SHOP Exchanges: Let’s Talk About Choice, Baby

[The following post was written by Micah Weinberg, Senior Policy Advisor for the Bay Area Council.]

Today the Pacific Business Group on Health (PBGH) issued a paper I wrote with Bill Kramer which reviewed the “lessons” from California’s experience for those setting up the new small employer (SHOP) exchanges in federal healthcare reform.  PBGH was the administrator of California’s own small employer exchange from 1999-2006.  This exchange, PacAdvantage, ultimately had to close due to a number of factors including its attracting a relatively unhealthy pool of enrollees.  If we learn from its experience, though, SHOP exchanges may succeed where PacAdvantage failed.

Part of that success will be understanding the key value proposition of these new marketplaces.  The main thing of value that these exchanges offer is choice.  But, as we write in the paper, the experience of PacAdvantage shows that choice can come in many forms. The two main types are “employer choice,” in which management selects among a number of health plans for their workers and “employee choice,” in which management provides a certain level of financial assistance and leaves the selection of health plans up to the workers entirely. The most commercially successful product offered through this purchasing pool was a hybrid that combined employer and employee choice. The “PairedChoice” product allowed an employer to select among a number of different PPOs, one of which would be paired with an HMO from the large integrated delivery system, Kaiser Permanente. Employees then chose between the PPO and the HMO paying higher premiums if they wanted lower point-of-service costs.

PacAdvantage developed this product after determining that although employers who participated in this pool were allowed to offer a wide range of employee choices, few actually did, and most that did so utilized a “paired PPO/HMO” structure.  Many employers offered a more limited version of employee choice because they found that the administrative burden was higher when their employees selected from among a large number of health plans. In theory, the administrative burden of employee choice can be outsourced to the exchange or to a broker. Since there is a single bill, the administrative demands on small businesses should be the same whether their employees select among two plans or twelve. In reality, however, employers are often expected to handle employee concerns about access to doctors or coverage decisions of insurers; therefore, the actual administrative hassle is higher when employees select from among a wider range of insurance plans.

PairedChoice split this difference by providing a highly structured set of choices that were attractive to employers while providing some autonomy to employees. Through incorporating elements of cost-conscious consumer choice, it may have helped to encourage price competition among the health plans. We suggest in the paper that SHOP exchanges should consider offering hybrid choice options to employers in addition to unrestricted employee choice.  The appeal of the PairedChoice product was also based, in part, on the price advantage of the Kaiser Permanente HMO. In the past ten years, though, other HMOs in California and throughout the nation have developed differentiated networks that allow them to become more price competitive. Hence a small group exchange may be able to offer a broader range of choices for a similar “paired” product.