Leveraging Healthcare Exchanges

Unless the U.S. Supreme Court rejects the entirety of the healthcare-reform law, healthcare exchanges will become effective in 2014. And while some are fearful of the change, the shift could be a very good thing for employers and employees alike.

Monday, November 21, 2011
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It is rare a day that goes by when somebody doesn't ask me, "What is a healthcare exchange?"

But, it's a good question, given today's rapid change in healthcare, political dynamics and legislative wangling. It's also a question that, by its very nature, represents the core issue with healthcare exchanges.

I hear it in the voices of the people asking, with tones representing everything from excitement to confusion or apprehension.

Exchanges represent change, for sure, but they also represent opportunity. It's an opportunity for employers to hit the "reset" button on healthcare, enabling employees to get a better understanding of this significant purchase, while creating greater choice and competition. That is the primary driver of every established exchange.

So, let's start by answering the question: What is an exchange? An exchange of any kind is nothing more than a marketplace where buyers and sellers meet. It's a business model where supply and demand interact.

Some of today's great brands are based on "exchange" models, including iTunes -- record companies and artists (supply) work through iTunes (exchange) to sell to customers (demand); Amazon -- individuals (demand) go to (exchange) to purchase books from authors and publishers (supply); and Expedia -- the market is "hosted" by Expedia (exchange) and individual consumers (demand) use tools to evaluate and buy travel packages through hotels and airlines (supply).

A healthcare exchange is along those lines: It's an interactive hub where people can evaluate, learn and buy health and benefits products.

When it comes to healthcare, the average individual gathers some information here, reads a little there and ignores much of the material available -- to their detriment.

Aon Hewitt has a database of U.S. employers representing 13.1 million participants, 1,300 plans and $51.4 billion in 2011 healthcare spending. It shows the average cost of health coverage per employee will cross the $10,000 mark for the first time ever in 2012, with the employee premium contribution expected to be about $2,300.

The cost of healthcare is increasing at an average rate of 7 percent to 10 percent in 2012, while salaries will increase at an average rate of about 3 percent.

Nowhere else, and in no other situation other than in choosing healthcare coverage, would individuals continue to hand over increasingly significant amounts of money annually without doing the proper due diligence.

Ironically, I bet many of us will spend more time planning our next trip on Expedia or buying the latest music from iTunes than we do evaluating the right medical programs for our families.

The move to a healthcare exchange means a shift from data gathering to data purchasing, which represents a shift from a passive to active consumer.

The hope is that employees will take greater advantage of the educational information available, and maybe even contribute to the process of how the material is communicated in the future. Whatever the approach to consuming the information, one thing is clear -- exchanges will create more educated buyers of healthcare than ever before.

Gone will be the days of simply defaulting to an annual plan.

Of course, before we get to that point, some key things need to happen. The idea of an exchange as an alternative to traditional employer-sponsored health insurance only works if participants are able to purchase coverage in a competitive environment. This is the main reason health-insurance exchanges have had success for Medicare-eligible retirees.

The Medicare markets offer a viable individual marketplace, with hundreds of competing plans offering significant value. The exchange serves as a centralized place to help seniors pick the plan that is best for them, complete the enrollment process and, in some cases, offer ongoing customer support and advocacy services.

The success of exchanges in this market, combined with the changes in the tax treatment of government subsidies available to employers that provide retiree-health coverage, has started a major shift toward exchange delivery as a preferred employer strategy.

This shift does not mean employers are abandoning their retirees -- quite the contrary. For the same dollar subsidy, the employer is providing more choice, greater value and, often, enhanced customer service.

In the case of active employees, as long as insurers can deny coverage based on medical history or pre-existing conditions, an employer cannot use the individual market in place of employer-sponsored coverage. However, that will change by 2014.

Regardless of whether the mandate for individuals to buy insurance coverage holds up under judicial review, the ability of insurers to medically underwrite will expire in 2014, making the individual insurance market viable at that point -- and allowing exchanges to develop in the private sector, similar to what has evolved for Medicare retirees.

The corporate exchange concept has the potential to transform the way in which employers provide health coverage to employees, and over time, create a competitive, efficient and consumer-centric marketplace in which employees can choose coverage that follows them from employer to employer.

Based on the health exchanges Aon Hewitt currently offers for retirees, this is a look at how a healthcare exchange would work for active employees and their dependents:

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* Employers would seek out an exchange that offers group-specific insured rates.


* The employer would then decide how much "credit" to provide employees to purchase coverage.

* After accessing the exchange, the employee would take this credit and review the various plan options, each representing different levels of coverage and price.

* The employee would choose a plan and insurer that best meets his or her health-insurance needs and personal budget. If the employee has a credit of $500 per month, for example, and picks a plan that costs $600 per month, then he or she would pay the additional $100 through pre-tax payroll deductions.

Employers would decide each year how much to increase the credit amount. However, rather than being a hidden subsidy, employees will see the explicit employer annual contribution increasing and determine whether to drop down to a lower level of coverage and avoid an increase in payroll contributions, or keep the coverage they have at an additional cost.

The introduction of consumer choice is a much more satisfying outcome than employees feeling the company unilaterally takes more money out of their paychecks.

For the employer, moving to a "defined-contribution" approach for healthcare benefits creates greater alignment with total rewards, and enables them to set an increase in healthcare similar to that of compensation (2 percent to 3 percent) versus a traditional healthcare rate of trend (7 percent to 10 percent).

While change is rarely met with open arms, healthcare coverage needs to evolve. It simply has to: The current rate is unsustainable for employers and employees alike.

There needs to be better education on health coverage, using vehicles as diverse as the workforce; incentive programs with "teeth" that include reward and penalty implications; and a better understanding of and employee assistance with leading cost drivers, such as chronic conditions.

As this change happens -- as employers demand more from employees in serving as partners in controlling healthcare costs -- the question employers ask will shift from, What is a healthcare exchange? to, How would we benefit from an exchange?

For many, it will be a better use of benefit dollars, while providing a better understanding of healthcare coverage, cost and choice for employees.

Healthy employees mean productive employees. When done well, a health exchange will educate and motivate employees toward better health. There is no question about that.

Craig Maloney is chief executive officer at Aon Hewitt Healthcare Exchanges and is responsible for the development, design and delivery of the company's emerging Medicare, corporate, and state exchanges. Prior to that, he was senior vice president at Aon Hewitt's Mid-Market Division, was with Hewitt's Benefits Outsourcing business, helped establish and lead Employease, and was at Marsh.

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