Is the Time Right for Private Exchanges?
There is so much to consider and address before moving your health insurance – and potentially other benefits – to a private exchange. A whole host of deciding factors includes whether a defined-contribution health or benefits plan makes sense for your organization, whether ancillary benefits should be included, and much, much more.
By Carol Harnett
Peter Allen -- the Australian songwriter and entertainer -- used to sing, "Everything old is new again." And the same may be said for the resurgence of private health exchanges and defined-contribution health plans.
Private health-insurance exchanges date back to the mid-1980s when Nortel financed the International Medical Exchange in Louisville, Ky.
In November 1999, PricewaterhouseCoopers predicted "a better than 50 percent chance that we will see a defined-contribution system in Medicare by 2010" in its HealthCast 2010 report. In addition, PwC related in a survey of U.S. health leaders that more than 60 percent believed employers were likely or very likely to move to a defined-contribution system by the start of our current decade.
A July 2013 Employee Benefits Research Institute brief reviewed that these changes did not come to pass for a multitude of reasons. Employers were concerned about the quality of individual health plans as compared with group policies. They also worried that employees would not be able to secure individual coverage.
In my own experience as an advisory board member of organizations that included the Institute for Health and Productivity Management, we were selfishly troubled in the early part of the new millennium by how defined-contribution health plans would impact the connection we promoted between employee health and workplace productivity.
In the post-healthcare-reform era, many invested parties continue to worry about what will happen to workplace-performance initiatives associated with employee health -- especially when surveys from companies such as Accenture, Mercer and others predict that at least 20 percent to 28 percent of employers may transition to a private exchange by 2017.
But can -- and indeed will -- that many employers shift to defined-contribution benefit plans and private exchanges when Accenture estimates that less than 1 percent of U.S.-based employees are currently enrolled in a private exchange?
A number of things have changed in the last decade, including healthcare reform, the elimination of pre-existing conditions from individual health policies and the introduction of the public health insurance exchange. Experts such as Wharton School marketing professor Jonah Berger add that the "social proof" that comes with the media coverage of the public exchange alone is enough to get employers to consider the idea of both public and private exchanges.
In a recent episode of the CoHealth Checkup radio show that I broadcast with Fran Melmed, we interviewed John Vlajkovic of Bloom Health as well as Tracie Foster and Mark Moksnes of WellPoint about private exchanges. (WellPoint is an investor in Bloom Health and the companies are working together to offer private exchanges that include ancillary benefits such as dental, vision, life and disability insurance.)
Vlajkovic indicated that a "very large employer" is committed to moving to a private exchange within the 2014-2015 timeframe and that "may start a domino effect" of other employers shifting to exchanges.
So, as an HR executive, should your company consider moving your health insurance -- and potentially other benefits -- to a private exchange?
The analysis actually starts with a strategy decision. Does a defined-contribution health or benefit plan make sense for the company?
According to EBRI, "employer issues addressed with an exchange/fixed contribution approach include cost certainty, total compensation transparency, uniformity of benefits in multi-state environments, COBRA costs, the looming excise tax on high-cost coverage … under PPACA, the potential for reduced administrative costs, and higher employee satisfaction."
On the other hand, "issues not addressed [by this approach] include worker preference of, and satisfaction with, employment-based coverage, group purchasing efficiencies, the role of employer as advocate in coverage disputes, delivery innovation and healthcare quality, and health-literacy issues."
If an employer chooses a defined contribution strategy, then this benefits approach can either stand on its own, or the company can use a private exchange. Private exchanges may help the employer and its employees in a number of ways:
* The private exchange can assist employers in communicating the decision to offer a defined-contribution plan and prepare employees for what to expect.
* According to Vlajkovic, the exchange may help the employer expand its benefit offerings and provide a better administrative platform -- allowing most employers to move from two to six coverage options. He says, "Expanding your benefit design gives [employees multiple] choices between their current [level of] coverage and the lowest value plan."
Employers, however, must keep in mind that offering more choices may actually confuse employees -- driving many workers to select a plan that is most similar to their current coverage.
* To avoid confusing the employees, the private exchange agent usually employs "choice architecture" that evaluates the qualitative aspects of the worker's personality and often winnows down the various options to two choices.
While most employers that access a private exchange are fully insured, some exchanges allow companies to use a self-insured funding arrangement.
Other considerations for employers using a private exchange include how many carriers will be offered.
Generally, exchanges either offer a single carrier with multiple types of benefits and multiple plan designs, or multiple carriers.
If the employer is fully insured and has fewer than 4,000 employees, Vlajkovic says only one carrier can be used. Otherwise, the insurance company has to load its fees due to the adverse-selection elements that come from too few employees combined with multiple carrier options.
When considering how to design the exchange, HR leaders need to decide whether the company will use the platform for health insurance only, or ancillary benefits such as dental, vision, life and disability insurance as well.
If the employer limits the exchange to health, dental and vision benefits, a Healthcare Reimbursement Account structure may be used. Otherwise, if a broader benefits array is included, then a Section 125 plan-account structure will be needed.
Another important strategic decision is how to subsidize the defined-contribution plan. The employer needs to select the fixed contribution level. And, if other benefits are included, it needs to determine whether there will be a single subsidy or separate subsidies (one for the health benefit and the other for other types of benefits.)
Foster indicated that her biggest fear about how the private exchanges will play out is that, if offered a single subsidy, workers will put all their money toward health insurance and neglect important benefits such as disability insurance.
For the HR executive, the consideration of a defined-contribution employee-benefits strategy along with the use of private exchanges involves a series of complex decisions. While few employers currently make use of the exchange/fixed-contribution approach, that may quickly change.
One final thought to keep in mind is Vlajkovic's greatest fear concerning how the private exchanges will play out.
Vlajkovic foresees that exchanges "won't get at the underlying cost structure." He cautions that providing employees with more choices and decision support won't be enough. And that, ultimately, will only cost-shift more benefit expenses to employees.
Carol Harnett is a widely respected consultant, speaker, writer and trendspotter in the fields of employee benefits, health and productivity management, health and performance innovation, and value-based health. Follow her on Twitter via @carolharnett and on her video blog, The Work.Love.Play.Daily.