The Landscape of Small

Five years ago, a start-up called Liazon began offering businesses a new way to provide health insurance to employees. On Liazon's Bright Choices, an online marketplace, a company can specify how much money it wants to spend on each employee's benefits, and employees can use that contribution to buy the plan of their choice.

Liazon was among the first companies to establish a private health insurance exchange, where the benefit provided by the employer is a defined contribution rather than a defined benefit (competing private exchange operators include Aon Hewitt and Towers Watson). 'A company can make a budget, and decide exactly how much money they want to allocate to benefits,' said Alan Cohen, who founded Liazon along with Ashok Subramanian and Tim Godzich. 'It has nothing to do with what some insurance company happens to say in a given year.'

It also gets employers mostly out of the business of choosing health plans for their work force. And, he said, the company's experience with 2,500 business customers, which have enrolled 45,000 employees, shows that workers 'make much more prudent decisions' about where to spend their money. 'Eighty percent of employees choose a plan that's different than what the company chose for them,' Mr. Cohen said, 'and 90 percent of those people choose something less expensive.'

This week, of course, the landscape of small-business-sponsored health insurance is changing, as the insurance exchanges established by the Affordable Care Act begin operations. Mr. Cohen says he expects the new law to be a net plus for Liazon, primarily because more people will become acclimated to the idea of employees making their own decisions.

We spoke to Mr. Cohen about the impact of the Affordable Care Act, or Obamacare, on small businesses in a series of conversations that began in June and have been edited and condensed.

Q. Where did the idea behind Liazon come from?

A. I started a company in 1996 called Online Benefits, which was one of the first Web-based software companies that helped firms manage their benefits programs. We had 5,500 companies and two million people using our software. We had a tremendous amount of data. And I came to realize that the decisions the companies were making were not the decisions that the people would make if they were the ones who had control of the money. Ashok, my co-founder, was at McKinsey consulting for health insurance companies. McKinsey had determined - and Ashok was a big part of this - that the fact that people were not really in the purchasing process was part of the runaway inflation in health insurance and health care.

Q. What's the experience for a business that signs with Liazon?

A. First of all, you have to decide how much money you want to allocate to your employees, and we've built technology tools to help companies do that. It's like scenario analysis - working with your insurance broker, you decide what's in your budget for benefits. As for the store where employees shop for insurance, we've negotiated deals with major carriers to come up with a menu of plans, and the company decides which of those menus to choose from. The premium rates are still determined on a client-by-client basis, because they're still written to the company. So as a company you still get some level of control, but we try to limit the number of choices and really give people pretty good guidance.

Q. Liazon has experienced rapid growth this year. Why?

A. Clearly the health care reform has brought this into the consciousness of people in a way that we could never have, with our minuscule marketing budget. The No. 1 objection we've gotten over the years has been, 'I don't think my employees can do it. I think they'll be confused.' As we come into 2014, that statement is just going to seem more absurd.

Q. How well do you think employers understand the law?

A. Generally, most companies know the headlines. Once you get into the details, the lack of knowledge is kind of shocking. We actually did some market research on this. We came up with a list of 15 statements that asked, 'How familiar are you with the following provision of the law?' And among those 15 items, we had five that were untrue. One of them, I remember, was, 'How familiar are you with the provision in the law that health insurance plans on the exchange will be more expensive than health insurance plans off the exchange?' The law actually says the opposite. People rated the things that were untrue as well as they rated the things that were true.

Q. The law's critics say companies will have to offer more expensive health care than they do now. Do you think that's true?

A. I don't think that's true.

A. Those people are pointing to two things. First they're pointing to essential benefits, which now have to be part of health insurance coverage. And I'll grant you that some of those may not be part of typical policies nowadays, but we're talking about things on the margin. We're talking about occupational therapy and things like that. The second thing they point to is the actuarial value.

Q. That's the share of average health care costs the plan pays for.

A. So now a company can't offer a plan that has less than 58 percent actuarial value. Well, 99 percent of plans out there have more than 58 percent actuarial value.

Q. Do you think the new law is as radical a change as some fear?

A. A sea change for the employers is that now companies over 50 employees are required to offer health insurance, or pay a penalty - and not just offer it but offer it to all full-time or full-time-equivalent employees. That full-time equivalent, that's a dangerous thing for a lot of companies. A good example would be a nursing company that pays their employees on a per diem basis. If any of those per diem nurses one month shifted over 30 hours - boom, you've got to pay for that person. So, that's a big deal for certain types of companies, but not for most companies.

Q. A lot of companies with more than 50 employees that have not previously offered health insurance - restaurants, for example - fear a huge new expense. Do you have any advice for them?

A. It is without question that companies greater than 50 employees that don't offer insurance have a new expense. That new expense is going to be either insurance or the penalty. I think a lot of companies will find that it is better for them and better for their employees not to offer health insurance if they have lower-paid employees. If you offer the lowest level of insurance and pay the lowest amount possible, you take away the subsidy eligibility from every one of your employees. And they might be much better off if you didn't offer insurance and let them go get their subsidy.

Q. Considering your view that employers should not be making these decisions for employees anyway, wouldn't it be a good thing if companies let their employees go to individual exchanges?

A. I think that's true except for two problems, taxes and subsidies. The money goes from being tax-free to being fully taxed, and the effect is really essentially almost doubling the cost of the insurance for employees. If that company stops offering health insurance, what's going to happen is that the government is going to end up paying the company's share.