RD129 - Analysis of Section 125 Plans and Virginia Health Insurance Exchange

Executive Summary:

In 2006, Senate Joint Resolution 4 directed the Joint Commission on Health Care (JCHC) to study the derivative effects of increases in health care costs on health insurance premiums and ways the Commonwealth could reduce health care costs. Stemming from the findings of that study, JCHC members recommended that staff review the advisability of encouraging employer adoption of Section 125 plans and of establishing a Virginia health insurance exchange targeted for small businesses.

The JCHC review found that encouraging adoption of Section 125 plans would be useful as such plans typically reduce the “actual" health insurance costs for most employees and employers. However, establishing a Virginia health insurance exchange for small businesses was not likely to lower the cost of health insurance premiums significantly.

Section 125 Plans

A Section 125 or “cafeteria plan" allows employees to pay their health insurance premiums with pretax dollars which can result in savings of 25 to 40 percent for the employees. In addition, adopting a Section 125 Plan often reduces an employer’s payroll taxes (assuming the employer already offered health insurance). Despite these savings, less than 35 percent of the small businesses that offer health insurance in Virginia have adopted a Section 125 Plan. By comparison, more than 90 percent of larger employers offering health insurance have Section 125 Plans. To encourage adoption of Section 125 Plans, JCHC members approved policy options designed to disseminate information about the requirements and benefits associated with Section 125 plans.

Health Insurance Exchanges

The basic idea of a health insurance exchange is to provide a clearinghouse for health insurance products. The exchange may be operated by a state or private entity and may address individual, small or large group insurance markets or a combination of all three markets. Health insurance exchanges generally attempt to: promote competition between health insurers; provide consumers a single access point for a wide variety of high-quality of health insurance products; and provide insurance product information in an understandable way. This review found that Virginia’s insurance laws allow insurers to set premiums based on individual and group claims history which does not allow for standardization of rate quotes which is necessary for allow an effective health insurance exchange. Also, significant resources may be needed to create and operate an exchange. Consequently, it is unlikely that having an exchange would improve Virginia’s health insurance market efficiency or lower the cost of premiums significantly.

Joint Commission members and staff would like to thank the numerous individuals who assisted in this study, including representatives of: America’s Health Insurance Plans; Agency for Healthcare Research and Quality; Anthem; Asset Protection Group, Inc.; BB&T Insurance Services, Inc.; Benefit Solutions Inc.; Connecticut Business and Industry Association; Connecticut General Assembly Office of Legislative Research; Independent Insurance Agents of Virginia; Internal Revenue Service; Iowa Insurance Division; Joint Legislative Audit and Review Commission; local Commissioner of Revenue offices; Maryland Health Care Commission; Massachusetts Commonwealth Connector; Massachusetts Joint Committee on Health Care Financing; Minnesota Department of Health; Missouri Joint Committee on Legislative Research; National Conference of State Legislatures; National Federation of Independent Businesses; Office of the Secretary for Health and Human Resources; Rhode Island Office of the Health Insurance Commissioner; Riverside Health System; State Corporation Commission; Total Administrative Services Corporation; Virginia Association of Health Underwriters; Virginia Attorney General’s Office; Virginia Association of Health Plans; Virginia Chamber of Commerce; Virginia Department of Business Assistance; Virginia Department of Human Resource Management; Virginia Department of Health; Virginia Department of Taxation; Virginia Employment Commission; Virginia Farm Bureau; Virginia Health Underwriters Association; and Your Benefits Partner.