The Value of Private Health Exchanges
As almost everyone knows in the benefits world, the federal government is moving toward health care exchanges as one outflow of guidelines in the Affordable Care Act. As well, several states also have their own health exchanges active or in the pipeline for activation. Another option being introduced into the market place is private health exchanges. Few are currently active, and more are coming online as time progresses. Although this idea is not new, because of market expectations and initiatives, private exchanges are getting a lot of attention this year.
According to MCOL, “health insurance in the U.S. is at the cusp of a major transition from an employer-driven payer model to a model directly involving many more employees and consumers. Private health insurance exchanges with a defined contribution approach represent a significant step toward catalyzing this change. While public health insurance exchanges can ultimately serve markets beyond individual and small group, proactive stakeholders involved in the midsized and large employer marketplace have emerged with demand for private health insurance exchange solutions on a defined contribution basis.
Private exchanges may not be a panacea for rocketing healthcare costs. Nevertheless, the healthcare landscape is changing, and employers will seek approaches such as private exchanges to transition health benefits from an employer driven model to a more consumer driven one. Payers require a robust competitive response. If executed thoughtfully and deliberately, launching or joining a private exchange could be a critical strategy for payers to adapt and thrive.”
There are several players in the private exchange market—Aon Hewitt, Mercer, Buck Consulting, and Towers Watson. These companies have invested significant capital into developing or purchasing exchanges as an alternative to the public state exchanges due to start enrolling individuals starting in October, and then full swing next year. Additionally, other smaller benefits companies, such as Zane Benefits and Bloom Health, have implemented private health exchanges for employers.
According to the Society for Human Resource Management, unlike the public, government-run exchanges scheduled to launch this fall for plan year 2014; private exchanges do not provide a conduit for the government to subsidize the purchase of policies by low-income employees. Instead, private exchanges let employers provide eligible workers with an employer subsidy to purchase policies that comply with the federal Patient Protection and Affordable Care Act (PPACA) and meet the specifications of state insurance regulators. The new model is sometimes referred to as “defined contribution health care,” comparable with employer contributions to 401(k) retirement plans, in which employers “monetize” their commitment in the form of a defined contribution rather than a defined benefit.
In the case of private health exchanges, employers give each eligible employee fixed amounts for either individual or family coverage, regardless of the plan the employee chooses within those tiers. Workers add their own salary-deferred contributions in an amount they select, and choose among differently priced plans from competing health insurers—taking into consideration factors such as varying premiums, deductibles and networks. If employees select a high-deductible plan that is health savings account (HSA) eligible, they can determine how much extra money from their paycheck they would like to defer into the HSA.
“Every employer, whether they participate in exchanges or not, has a vested interest in the health and performance of their employees,” said John Zern, U.S. health and benefits practice director with Aon Hewitt. “Investing in wellness and health improvement will continue to be a priority with employers regardless of their delivery model. That said exchanges may enable employers to reduce the staff time focused on benefit plan design, increasing attention on efforts that improve health and lead to increased workforce performance.” According to Aon Hewitt’s post-enrollment analysis for plan year 2013:
- Thirty-nine percent of employees with access to policies through the exchange enrolled in a consumer-driven health plan (CDHP)—a high deductible plan with an HSA or HRA. In 2012, before their employers shifted to the newly launched exchange, only 12 percent of these employees enrolled in a CDHP option.
- Conversely, the number of exchange-eligible employees who enrolled in a traditional preferred provider organization (PPO) plan decreased from 70 percent in 2012 to 47 percent in 2013.
- However, while a significant number of employees migrated to high deductible, low premium CDHPs when given the choice, a fair amount instead chose to increase their health coverage by purchasing a plan with a lower deductible at a higher premium:
- For 2013, 32 percent of employees chose a plan similar in type to their current coverage (e.g., PPO to PPO), while 26 percent of employees “opted up” and chose to pay more for broader coverage.
- Forty-two percent of employees chose to reduce their regular payroll contributions by selecting a less comprehensive plan.
According to CFO magazine in an article, dated October 2012, entitled “Eight Tips for Assessing Private Health Exchanges,” stated some benefits consultancies, which most companies hire to help with plan design, selection, and compliance, are betting the private exchange market will move from niche status to a strong force in employee health benefits. Towers Watson bought Extend Health, a retiree exchange, and plans to launch an exchange for active employees within a couple of years. However, consulting firms that have no presence in the exchange field are looking to make hay out of it as well.
“Benefits consulting in its current form will have something to lose” if the private-exchange market becomes robustly developed, says Chris Calvert, health practice leader for Sibson Consulting. “The key will be to transform, in the way that pension consulting did when companies moved to defined-contribution 401(k) plans. We are moving from assessing the differences among insurance carriers based on clients’ needs to assessing the proper platform — exchange-based or traditional ¬— through which our clients should deliver health benefits,” per Calvert in the CFO magazine article.
The reference to 401(k)s is apropos, because that is the funding model most companies that use private exchanges are moving to for now. Broadly defined, exchanges are online portals populated with a variety of easily comparable health-plan options offered by one or more insurance carriers that contract with the exchange. By making a defined contribution that employees can use to buy a health plan that matches their needs, a company will know what its healthcare costs will be at the start of a plan year. In addition, depending on the exchange, the company may have a chance to offload much of the administrative load related to health benefits.
Because of those attractions, it seems inevitable that competition will expand in the private-exchange field. Benefits consultants want to be ready for that. Moreover, especially in the early days, they may exaggerate their expertise or the complexity of the decisions an employer must make around health care. Here are eight characteristics, according to CFO Magazine; you may look for in an exchange:
- Administrative Complexity–How much will the employer have to do to ensure smooth interaction between the exchange and the company’s human resources and payroll systems? Will you literally just have to send a check every month for X number of employees times the amount of employer contribution? In fact, a company may not even want to outsource plan administration. How would that affect the interaction between employer and exchange?
- Compliance with Affordable Care Act Requirements–When an employer signs up with a private exchange, will there be any difference in how ACA rules apply to the employer? It is not yet settled whether a company using an exchange means it will be deemed as providing a “qualified health plan,” as defined by the act. “If you’re putting money into what is, in effect, a health-reimbursement account, will that mean the employer is still providing a health plan? Or will you not be providing a plan because you are simply providing access to a set of plans?” according to Calvert.
- Employers in the latter category could be hit hard financially. Employees of organizations with no health plan or a nonqualified plan (i.e., a poor-quality one as defined in the ACA) could qualify a federal tax credit to subsidize their purchase of insurance through state or federal exchanges. At this point, the employer would be subject to a penalty by the federal government — the lower of $2,000 annually for every full-time worker or $3,000 for each employee who gets such a tax credit.
- Ability to Offer Access to the Public Exchanges–Does the private exchange allow lower-income workers and families eligible for the public subsidies to access public exchanges from the private-exchange portal? At least one private-exchange vendor, eHealthInsurance, is vocal about its plan to offer that service.
- Flexibility on Plan Design and Coverage Tiers–The greater the number of plans and tiers offered in an exchange, the more difficult it may be for an employee to compare all of them with one another. “Do you want flexibility, which brings complexity, or just want to keep it simple where everybody knows exactly what they’re looking at?”
- Cost to Employer–Private exchanges typically assess a per-employee administration fee to the employer, which may vary from exchange to exchange.
- Cost to Employee or Retiree–There are new complexities around the underwriting of insurance products offered in private exchanges, according to this report in CFO magazine. There could be large rate swings from one year to the next if big employers join an exchange and radically alter the demographics of the enrolled population. In addition, the rates employees are subject to usually build in commissions that insurers pay to exchanges for distributing their products. These too may vary from exchange to exchange.
- Relationships among Exchange Managers, Coverage Providers, and Corporate Plan Sponsors–Today, most large and many midsize companies work directly with the health carriers when there are claims issues or problems with plan administration. You know who to call to get such issues addressed. “Companies feel like they understand the chain of command to ensure the plan is being administered and their employees are being treated fairly. With this new [exchange] model, is that so clear? If an employee has been denied coverage, does the employer have any influence?” —says Calvert. And do you call the carrier or the exchange? If the carrier, are you just calling an 800 number?
- Concerning employees’ questions, an exchange might argue that it is not the employer’s problem anymore. “But I think it’s a bit naïve to say that just because you’ve moved to a defined-contribution model, the HR department isn’t going to get the calls when things go wrong.” —according to Calvert.
- Ease of Navigation Within the Exchange–How easy is it to assess the various options?
Private exchanges are coming online fast, and the commercial appeal has stakeholders eyeing the capabilities of various platforms that have more reasonable and affordable options than the government controlled exchanges.
When referring to exchanges, either private or public, most experts in the field describe them as online portals populated with a variety of easily comparable health-plan options, according to CFO Magazine in October, 2012, in an article titled “Private Exchanges” Could Trigger Health-Benefits Revolution.” They reported, “In essence, they are like shopping malls. Their operators build or license technology platforms to deliver the portals, and they solicit participation from and contract with insurers. There are multicarrier plans that insurers join for the same reason stores locate in malls: to get the foot traffic from people shopping at all the other stores. Far more prevalent, presently, are single-carrier plans, which insurers join because it is another distribution channel, with the exchange’s corporate client a captive audience. A greater choice of carriers seems at first blush to be better for customers, but some observers say the single-carrier approach offers similar value.”
CFO magazine also reported that most private exchanges generate revenue through a per-employee fee to client organizations. All exchanges have unique elements and idiosyncrasies. Aside from pricing, however, the key differentiating element among private exchanges is the number of carriers and plans included. Companies generally are not eager to adopt new health-insurance schemes because of the cost and organizational pain such shifts can produce. But exchanges could help employers in several ways:
- Plan sponsors shift to a defined-contribution model, offering employees a predetermined chunk of cash with which to buy health insurance themselves through the exchange. That means a company’s health-benefits costs will be almost entirely predictable (as is the case with the many companies that have replaced defined-benefit pension plans with 401(k) plans and other defined-contribution plans).
- Workers get a range of easy-to-compare health plans to choose from. Displaying pricing and other key plan details in a way that allows for apples-to-apples comparisons between plans is central to the exchange concept. That could help keep their costs in check, because the exchange may offer plans that are more affordable than the limited options their employers had been offering previously.
- Plan sponsors are, in many cases, spared much of the administrative burden associated with insured or self-insured plans.
CFO magazine additionally stated that one key difference between public and private exchanges is that the latter typically offer more decision-support tools and personalized help for users than state and federal government exchanges are likely to provide. But several private exchanges are in talks with states about providing such services to them. Another difference is that while only lower-income individuals and families will be eligible for federal subsidies to help pay for insurance bought through a public exchange; on the private side all employees will typically get an employer contribution.
MCOL’s “Thought Leaders” newsletter reports that the most significant changes are coming through private exchanges and HIT implementation. Around the country, the rise of health insurance exchanges through benefits consultants/advisors and coalitions are growing. This is not dictated by the ACA, but it is surely a response to the marketplace that says, “Businesses have a vested interest in the health and well-being of their employees and dependents, and we, as businesses and large revenue producers in the communities, must use our skills to purchase, educate, and measure outcomes that impact our business strategies,” according to Cyndy Nayer, Founder of the Center for Health Value Innovation.
“In order to do this effectively, they are testing and modeling with existing health information technologies and emerging tech to find the right solutions that will improve engagement and accountability for outcomes. They are moving rapidly away from putting the responsibility on the health plan and consumer alone. Instead, they are beginning the bundled payments and outcomes-based contracting that produce wider participation in health management by consumers, wider adherence to national guidelines by providers, and measurable, predictable outcomes from the health plans. It’s a mindset that has changed, showcasing the improved attention to the business costs of inappropriate and inconsistent health management; businesses are demanding answers and following the lead of CMS in putting portions of negotiations into risk contracts”, according to Cyndy Nayer.
Part of the health care debate concerning private health care exchanges is over ancillary services, such as dental, vision, wellness, and other products in this category. Although physician care and major medical coverage are the primary focus on both public and private exchanges, what do consumers and employers do about securing and engaging in these extra benefits? For the most part, those services are often not included as part of the medical package and listed typically as a voluntary option for employee participation. But people still want them. Likely, those services at some point are going to be part of the private exchange solution.
Among employers, interest in ancillary insurance products has been limited. But companies operating private insurance exchanges anticipate substantial growth — in everything from short- and long-term coverage to pet insurance — as employers migrate to a defined-contribution strategy, according to AISHealth.
“When you look at the emerging private exchange model, I don’t know of any [exchange operators] that aren’t looking into ancillary benefits,” says Don Garlitz, executive director at bswift, a benefits administration software company that works with public and private exchanges. Employers historically have seen ancillary products as an administrative headache with limited appeal to employees. But having medical and other benefits on a single platform simplifies the administration. “The convenience of one-stop shopping could be particularly attractive when you have an employer funding, on any level, through defined contribution.”
Private health insurance exchanges will have a leg up on public ones when it comes to ancillary benefits. Products sold through state and federally facilitated exchanges will be limited to those identified as an essential health benefit or offered through a state’s benchmark plan. “One of the big, gaping holes in public exchanges is that they won’t cover the other products and services that an employer would be interested in,” says John Reynolds, Ph.D., CEO of CieloStar, a health care benefits technology company that operates numerous private insurance and benefits exchanges.
Currently, one unique private exchange available for dental plans is through Careington, based in the suburban Dallas area in North Texas. Currently, it is offering dental discount plans using multiple network options, and pricing is the same regardless of the plan you purchase. Called My Dental Choices.com, the website recently went live and is already seeing quite a bit of traffic. The company plans to expand the offerings soon to include dental insurance plans with various carriers at affordable rates. The dental exchange is definitely a viable format and is unique to health care; and as additional plan options are added, businesses and consumers are certain to see more choices for provider access, greater savings and real value.
Private exchanges are part of the new health care landscape. Now is the time to start considering how you or your organization can take advantage of private health care without Big Brother looking over your shoulder. Make the most of your options, and find out now how best to manage health care costs. They are only going to get more expensive as time moves forward. Be prepared to make choices that best fit your needs, and find out how you can take advantage of private health exchanges.
About the Author:
Mark Roberts’ professional sales background includes 30 years of sales and marketing in the tax, insurance and investment markets. Mark is a licensed life, health and accident insurance agent in all 50 states and DC, for insurance products and discount health plans. He serves as Manager of National Accounts at Careington International Corporation (www.careington.com). Additionally, Mark works with clients needing insured products (www.careingtonbenefitsolutions.com) in the US and discount dental and optical schemes in the UK (www.healthydiscounts.co.uk). Mark has been writing a health care blog for the past five years, (www.yourbesthealthcare.blogspot.com), which is a topical weblog about various health care issues. He also regularly contributes articles to magazines for both medical and dental topics in both the U.S. and the UK. You can reach Mark at firstname.lastname@example.org.