Understanding exchanges

A guide to help employers navigate the new health care market

The Affordable Care Act (ACA) includes provisions that extend health coverage to millions of Californians. Rules governing individual health insurance are changing to promote broader risk pooling and standardized age rating, prohibit discrimination because of health status and pre-existing conditions, and improve insurance market efficiency.

With the ACA, most Americans will be required to have health coverage after January 1, 2014. And they’ll have a new way to buy health policies through insurance exchanges set up in each state.1 Your employees will look to you for advice and assistance as they navigate the exchanges, so we’re providing you with information about their new options — as well as exploring the role brokers will play with the agency running California’s exchanges, Covered California.

What to expect and when

Beginning with plans effective as of January 1, 2014, purchasing health coverage may change for you and your employees under the ACA. Exchanges will provide individuals and small business owners with a place to find, compare, and purchase coverage, as well as get financial assistance to afford it.

Benefits of the exchanges

The exchanges will allow individuals and small business owners to compare health plans and purchase one that covers essential health benefits. While individuals and small business owners aren’t required to use exchanges, they may offer advantages for you and your employees.

Types of exchanges

Covered California offers two types of exchanges — an individual exchange and the Small Business Health Options Program (SHOP). For California, a small group is currently defined as having 50 or fewer eligible employees. In 2016, small groups will be defined as those with 100 or fewer eligible employees.

Help with Covered California

One of the greatest challenges for many individuals and small business owners will be navigating their new health coverage options — especially if they’ve never purchased coverage before. It’s expected that brokers will play a role in helping people learn about their health coverage options and providing enrollment support.

What you’ll get through the exchanges

  • Some small business owners will be able to reduce costs by taking advantage of available tax credits, which are available only by purchasing coverage through the SHOP.
  • Small business owners will be relieved of the administrative burden of choosing plans to meet all workforce needs.
  • Small business owners will be able to offer a defined contribution, simplified by receiving one bill and the ability to write one premium check for all employee-selected plans.
  • Your employees will get a broad choice of high-quality health plans.
  • Premium tax credits and cost-sharing reductions will only be available through the individual exchange.
  • A dedicated website and toll-free hotline will make it easier for individuals and families to compare plans by cost, quality, and coverage.

Covered California will provide information and decisions on employee eligibility for Medi-Cal. And by using Covered California’s online calculator, you’ll be able to determine the actual cost of your coverage.

Open enrollment


Although January 1, 2014, is the first effective date for plans, exchanges must be ready for business in time for the initial open enrollment period beginning October 1, 2013. The SHOP permits qualified employers to purchase coverage at any time during the year after October 1, 2013.

Individual Exchange

Unlike the SHOP, the individual exchange will permit individuals to enroll in coverage only during the initial enrollment period from October 1, 2013, to March 31, 2014 — and thereafter during an open enrollment period that will begin on October 15 and last through December 7 annually. There will be special open enrollment periods for triggering events such as marriage, the birth of a child, and loss of employer-based coverage.

Working with Covered California

Covered California will offer plans to both individuals and small groups. You can make plan choices through the appropriate Covered California option.

Get to know Covered California

Covered California’s stated mission* is to increase the number of insured Californians, improve health care quality, lower costs, and reduce health disparities through an innovative, competitive marketplace that empowers consumers to choose the health plan and providers that give them the best value.

Meeting the needs of individuals and families

Each insurer in Covered California will offer a range of plans to suit individuals and families with a variety of needs. And financial assistance will be available to eligible individuals who don’t have:

  • Medicare
  • Medi-Cal
  • affordable coverage
  • coverage meeting the minimum value requirement through an employer
  • incomes exceeding certain levels

Individual financial assistance is only available through the individual exchange, not through the SHOP.

Financial assistance and penalties for individuals

Many consumers may be eligible for premium tax credits to help with their health care premiums, including U.S. citizens or legal residents:

  • who have to pay more than 9.5% of their income for employer-sponsored health care coverage based on the cost of self-only coverage, or whose employer-sponsored coverage doesn’t meet the minimum value requirement and whose modified adjusted gross income falls between 133 and 400% of the federal poverty limit (FPL)
  • who aren’t eligible for Medi-Cal
  • who don’t have access to an employer-sponsored health care plan that meets minimum essential coverage requirements and whose modified adjusted gross income falls between 133 and 400% of the FPL

Some individuals may also qualify for a cost-sharing reduction to help reduce out-of-pocket costs. To purchase coverage through the individual exchange, you must live in California and be a U.S. citizen or legal resident of the United States. Individuals who choose not to buy insurance may have to pay a tax penalty that will increase over a period of years. The penalty for not purchasing insurance is the greater of:

  • 2014 — $95 per uninsured person (up to a maximum of no more than 300% of the cost per person) or 1% of household income over the filing threshold
  • 2015 — $325 per uninsured person (up to a maximum of no more than 300% of the cost per person) or 2% of household income over the filing threshold
  • 2016 — $695 per uninsured person (up to a maximum of $2,085) or 2.5% of household income over the filing threshold
  • 2017 — $695 (increased by the cost-of-living adjustment) or 2.5% of household income over the filing threshold

Certain individuals are exempt from the penalty or aren’t required to purchase insurance, including individuals with religious objections, individuals who are certified as being unable to afford coverage, Native Americans, undocumented immigrants, and the incarcerated.


Small business owners can purchase coverage through Covered California’s SHOP. It gives smaller employer groups a broader choice of health plans and eliminates plan participation requirements. In 2014, small businesses with fewer than 25 full-time employees that pay an average annual wage of less than $50,000 and that contribute 50 percent or more toward their employees’ self-only premiums may be eligible to receive up to a 50 percent federal tax credit for coverage purchased through the SHOP. Tax-exempt small businesses may receive a credit of up to 25 percent for 2013. In 2014, this rate for tax-exempt small businesses increases to 35 percent. Although you can purchase coverage outside of the SHOP, you won’t receive the tax credit if you do so.

With the SHOP, you can choose the level of coverage, or “metal” tier, you want to offer and the contribution you want to make toward coverage. Small business owners can offer employees a choice of plans from several insurance companies, with the convenience of receiving a single bill and writing a single premium check.

How Covered California works

When Covered California opens in October 2013 for open enrollment, you and your employees will be able to either call or log on to its website to see what plans are available and whether you qualify for any financial assistance. By law, all exchanges — including Covered California — will certify which Qualified Health Plans will be offered.

Choosing health plans in the exchanges

Insurers that want plans included in Covered California’s exchanges must submit bids. To be selected as a Qualified Health Plan, plans must offer the essential health benefits package and meet all other ACA requirements.

Functions the exchange will perform in order to evaluate potential plans include:

  • ensuring that the plan’s bid includes one standard plan design for each metal tier
  • confirming the actuarial value for each plan submitted
  • confirming each plan’s geographic service area
  • encouraging plans to adopt delivery system reforms such as patient-centered medical homes, accountable care organizations, proven chronic disease management programs, and effective quality and patient safety initiatives

Qualified Health Plans — the metal tiers

The plans offered by Covered California will fall into four metal tiers — bronze, silver, gold, and platinum. Each metal tier corresponds to an actuarial value, which is a measure of how much of the cost for covered services would be paid by the plan. For example, a gold plan with an actuarial value of 80 percent would be expected to pay an average of 80 percent of a standard population’s expected medical expenses, with individuals covered by the plan expected to pay the remaining 20 percent through deductibles, copays, and other cost-sharing features. Health plans and insurers who participate in — and sell products outside of — the exchange must offer, market, and sell the same products they make available to individuals and small employers in the exchange as to those purchasing coverage outside the exchange.

The four metal tiers and their actuarial values are:

  • Platinum — 90% actuarial value
  • Gold — 80% actuarial value
  • Silver  — 70% actuarial value
  • Bronze — 60% actuarial value

There will be a catastrophic plan designed for people under 30 and those who can’t afford other coverage. For those eligible to purchase this coverage, the catastrophic plan will also fulfill the individual mandate to enroll in minimum essential coverage. This plan provides for essential health benefits, but no benefits other than three primary care visits are covered until the individual meets the annual deductible, which is similar to that of a high-deductible health plan. Premium tax credits aren’t available for catastrophic plans.

For more information

Visit these resources for more information on exchanges in general and specific information about Covered California.

1 The U.S. Department of Health and Human Services recently began referring to exchanges as health insurance marketplaces. Throughout this document, we refer to the more widely known term of exchange.

Eligibility for financial assistance varies by state.


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