Over the past few decades, this health insurance delivery model has come under increasing pressure as costs have soared and employers have questioned their ability to design and implement the types of plans that their increasingly diverse workforce needs and wants. In addition, the complexities presented by health reform legislation, both here in Massachusetts and at the federal level, have added to the burden of plan sponsors.
As a result, many plan sponsors are entertaining a transition to a defined contribution approach, away from the employer-driven model to a consumer-driven one. As an analogy, think about the creation of the 401(k) defined contribution plans of the 1980s, and the tremendous migration away from defined benefit pension plans. Instead of designing and offering defined health plans, employers can cap health care costs at the desired threshold by making predetermined contributions to savings accounts from which employees make personal buying decisions. The promise of this strategy includes control over current benefit expenses, the introduction of the concept of consumerism for employees and the mitigation of future liabilities.
The Advent of Private Exchange Platforms
Fueling this transition is the proliferation of private exchange platforms that create online marketplaces, set prices, provide plan specifics and help employees (consumers) make personal buying decisions with the help of decision support tools. Many also include telephonic support using call centers. And platform offerings include other employee benefit programs like life, disability and dental plans, as well as pretax spending accounts…even pet insurance can be offered!
What’s the difference between public exchanges, like healthcare.gov, and private exchanges? The public platforms are run by states and/or the federal government and, for the most part, designed to enroll individuals who are either not eligible for employer-sponsored programs, cannot afford the cost of their company’s plan(s) and/or are eligible for free or subsidized healthcare coverage. The public exchanges provide premium tax credits and subsidies for those applicants who qualify. Whereas public exchanges are “open” to anybody who qualifies, private exchanges are “closed”, and only available to organizations who implement them.
Proponents of the defined contribution/private exchange approach, including the many technology companies that have invested in platform construction, promise employers a chance to fix and predict healthcare costs, to offer more choice to employees and to reduce administrative expenses.
There are many in the health insurance industry, however, who believe that many of the advantages of private exchanges are overstated, that investors who have spent millions building the technology are trying to earn a return by repackaging existing solutions. For instance, many large plan sponsors have been offering online enrollment and employee education for years. Existing benefit administration and HRIS products from payroll vendors like ADP, Paychex and Ceridian, already installed and connected to insurers electronically, have been providing the same type of plan choices and employee education through many renewal cycles.
In addition, some health care economists believe that the value proposition of a private exchange is ambiguous, and question whether or not there are any real savings. Of all of the potential benefits of a defined contribution approach using a private exchange, the number one is cost savings. But a technology platform alone does not address the underlying drivers of escalating healthcare costs: increased utilization caused by an aging workforce and medical inflation. Furthermore, in most cases, initial cost savings are achieved by designing a menu that includes core plans that cost more for participants, effectively shifting costs to employees and their families. Steerage, the strategy used by plan sponsors to entice consumers to choose lower-cost options, can backfire if employees are uninformed, choose the wrong plan solely based upon cost and end up in financial trouble due to higher out of pocket expenses.
Is a Private Exchange the Right Fit for You?
Determining if a private exchange will be the right fit for you depends upon the results of a readiness assessment. Plan sponsors who want to move towards a defined contribution model, and use a private exchange platform have a wide variety of vendors to choose from. And as much as technology companies want you to believe that private exchanges are preassembled, very easy to implement and inexpensive, the real story is a bit more complex.
For instance, experience-rated, larger plan sponsors (generally greater than 100 employees) must go through medical underwriting to obtain plan pricing. Underwriting includes an analysis of a population’s demographics, family content, claims history, industry and geographic location. Only after pricing is established, and enrollment assumptions are made, can a plan sponsor develop the proper contribution strategy in a private exchange.
As far as implementation, employee education is very, very important. Because the exchange marketplace is such a new concept to most employees, a robust communications effort is necessary to assure that they fully understand how to use the platform during open enrollment. Adding in the electronic feeds that must be established to the various insurers/payors, and the monthly fees to run the platform, fees can be substantial. Project timelines of six to eight months for installation are not unusual.
If you are an innovative employer with a diverse population looking to allow employees to design their own benefit program to meet their own personal and financial needs, and/or a CFO looking to manage healthcare costs now and in the future by fixing the organization’s contribution to medical insurance, then a private exchange should be an option you consider before your next renewal.
Any employer or plan sponsor considering a move to a private health care exchange should strongly consider retaining an independent, neutral third-party expert to evaluate the market and conduct a highly competitive RFP process. Any independent advisor’s fees should be transparent and not tied to which insurer wins the business.