Private Exchange Designs Continue to Morph
There is a long consideration list to review before making the move to a private exchange. If you don't like the current blueprint for exchanges, express your opinion and wait. Things may shift again soon.
By Carol Harnett
I chaired a session entitled, Is The Time Right for Private Exchanges?, at the Human Resource Executive© Health & Benefits Leadership Conference in Las Vegas in March 2014 where my discussion panel included Walgreens' Tom Sondergeld and WellPoint's Tracie Foster. The breakout was a follow-up to my July 2013 column and the radio show I co-hosted with my friend, Fran Melmed.
I made a commitment to summarize the information we shared, as well as provide additional material on questions we didn't have time to answer. We also committed to provide information in a style that would allow HR leaders to discuss the topic with senior executives.
For the purposes of this column, we are limiting our information to private exchanges for active employees.
What is a private exchange? Would a company accomplish the same goals by simply using a benefits administration platform?
A private exchange is simply an online insurance marketplace (that is separate from the Affordable Care Act's public exchange), where employers can choose to offer their employees health (and ancillary) benefits.
A benefits-administration platform can provide a similar benefits marketplace, but may not give employees decision-support services -- or, what you'll hear vendors refer to as "choice architecture" -- to help workers sort through the variety of benefits options. (I could not obtain a comment on this subject from the major benefits-administration vendors prior to completing this column.)
Is moving to an exchange an all-or-nothing decision, or can you phase in different employee classes over time?
It would be difficult to stage the switch to a private exchange. The nature of the exchange is to provide a mass of members to the marketplace so risk is offset (adverse or anti-selection is reduced) and the insurance carriers have the opportunity to compete for as many members as possible.
An HR executive could decide to take a staged approach, but there are significant challenges and risks with doing so, particularly if your insurance program is fully insured. If you choose this strategy, employee benefits communications and the overall management of two different programs becomes more complex. And, if your company is fully insured, your "on-exchange" and "off-exchange" employees will be viewed as two different risk pools.
What is adverse or anti-selection?
According to the National Association of Insurance Commissioners, adverse selection occurs whenever people make insurance-purchasing decisions based on their own knowledge of their insurability or likelihood of making a claim on the insurance coverage in question. Simply said, employees are sometimes more likely to sign up for coverage when they know they will file a claim. If the majority of employees who sign up for a benefit use it immediately, the insurance carrier needs to increase its premiums to cover the higher-than-expected claim numbers.
What are important criteria to consider when choosing a private exchange?
For Walgreens, Sondergeld considered three questions:
1) Is your organization good at handling change? Moving to an exchange model for delivering benefits is a large change and requires keen benefits-communication strategies, strong change-management skills and leadership support.
2) Is the change a cost advantage for the company and the members?
3) Is the best approach for your organization to stay self-insured or move to fully-insured? If you are looking for cost stability, the fully-insured solution might be a better approach.
Foster says there are a couple of other considerations HR executives should weigh. If an employer wants to quickly move employees to a consumer-directed health plan, a private exchange can be a tool to help workers make the transition and find options to meet their needs.
How an employer wants to direct its overall health and wellness strategy is important, too. Walgreens moved to a fully insured, exchange-based model for its health, dental and vision benefits. In doing so, Sondergeld says the company now puts all of its in-house focus on its employee-wellness initiatives. Other employers may take an approach that uses a self-insured, single-carrier exchange with one coordinated wellness tactic.
Is a defined-contribution-benefits strategy required to participate in an exchange?
No. The private exchange is a great vehicle for achieving a defined-contribution approach, but the two are not mutually exclusive.
Is a private exchange used only for purchasing health-insurance benefits?
No. Private exchanges typically offer dental and vision benefits, and many are starting to offer life, disability and a full range of supplemental products. As private exchanges mature, employer and employee demand will determine the benefits offered.
How many health-insurance options are typically available to employees through the exchange?
This depends on the flexibility of the solution and the provider. Most offer up to five metallic options (Bronze, Bronze +, Silver, Gold and Platinum) similar to the public exchange. Most also require that an employer offer at least three of these options.
There can be any number of carriers on the exchange. In the AonHewitt model (which Walgreens selected), there are currently up to five carriers depending upon the region involved. Some regions offer all options, many present three carriers and some have less than three. The future will likely bring even more regional carriers to the table to continue to drive competition.
Another approach for companies is to offer a set of employer-specific plan designs across one carrier on either a fully insured or self-insured basis. In this model, the employer specifies the number of plan designs. Early experience indicates that most employers choose between five and eight options.
How many ancillary product options (dental, vision, life and disability insurance) does an employee have to choose among?
For Walgreens, the exchange currently offers multiple medical options and single carriers for dental and vision insurance. In the larger exchange environment, an associate can usually choose between two or three dental and vision products.
Life and disability insurance products can also be offered on a private exchange, as well as some strictly voluntary products such as critical illness and accident insurance. Life and disability benefit design often offers an employer-paid-core product with the option for the employee to buy additional coverage, which Foster encourages to ensure employees continue to have some financial protection.
Self-Insured versus Fully Insured
Can an employer still be self-insured and participate in an exchange?
Yes, there are some private exchanges (for example, Towers Watson's, Mercer's and Buck's) that offer a self-insured solution.
Why would an employer want to switch from self-insurance to a fully insured model?
As discussed at the conference, for Walgreens, a fully insured solution allows the employer to share the risk with the carriers and the employees. In the self-insured solution, the employer carries most of the financial risk.
Don't you lose tax advantages when you make the switch to fully insured?
No. The plan remains employer-sponsored and under Employee Retirement Income Security Act regulations. However, under the Affordable Care Act, there are additional fees and taxes the insurance carriers need to pay. The carriers often bake these fees into the premiums they charge the fully insured companies and their employees.
If an employer makes the switch, is there a future break-even point when the advantages of being fully insured are financially equal to being self-insured?
The answer will depend upon the make-up of the employee population, the overall risk of those covered and year-over-year claims spend. Walgreens will track this over time.
What are the advantages and disadvantages of going with a multi-carrier versus a single-carrier exchange for health insurance and/or ancillary benefits?
The multi-carrier approach allows for competition, which is a key driver of pricing in an exchange. A single-carrier solution would not have this pricing competitiveness.
How can a single-carrier model be considered an exchange?
An exchange, by definition, is meant to offer a wide variety of options for the user. A single-carrier solution can still offer a broad array of options and designs.
How do you help workers sift through all the choices available on the exchange?
Most of the private exchanges offer a set of web-based tools and comparison options to help employees make choices. These tools fall under a broader heading called "choice architecture." Some exchanges make specific recommendations to individuals based on their personal circumstances and provide dedicated call-center support.
Does the employer hold any liability by using vendor-provided tools to help employees make decisions?
Most contracts between employers and the exchanges indemnify each entity from any liability.
How do you communicate the benefits of a private exchange to employees?
While each employer's specific communication needs and challenges vary based upon the makeup of the workforce and overall culture, a mix of online, print and in-person sessions work well both leading up to and during open enrollment.
Walgreens used many layers of communication tools to get the attention of the workforce. These included posters, interactive post cards, manager toolkits and Internet-based communications. The goal was to reach each person at least three times prior to and during enrollment.
What type of account structure has to be used: health-reimbursement account or Section 125 (cafeteria plan)?
It varies depending on how the employer and private-exchange provider set up the exchange. In a defined-contribution model, an HRA or Section 125 plan is used if the employer wants any leftover dollars made available to the employee. An HRA is used for medical, dental and vision benefit plans, while a cafeteria plan is used if the defined-contribution account is also used to pay premiums for other benefits (such as a life or disability insurance).
In Walgreens' model -- whereby the employee doesn't have control over any leftover dollars -- there isn't a true account structure. Instead, a dollar amount is displayed to the employee to help offset his or her coverage costs. This money is not used for anything other than securing coverage.
Is it possible for an employer to provide a core benefit and then allow employees to buy up?
No, not for medical benefits offered through the private exchange. Walgreens offers a core and buy-up benefit in most of its plan designs outside of the exchange. Employers can offer a core life and disability benefit and allow employees to buy up.
How many employees choose larger health-insurance benefits on private exchanges?
At Walgreens, approximately 25 percent of employees bought up and 27 percent bought down from the original benefit. The remainder stayed at nearly the same benefit as the prior year.
Foster adds that Bloom Health saw 11 percent of employees buy more medical coverage across its book of business and 66 percent buy less. The remaining workers stayed in a plan similar to their pre-private-exchange plan design. In subsequent years, 70 percent stayed at the same level as the year prior. (WellPoint is an investor in Bloom Health and the companies work together to offer private exchanges that include ancillary benefits such as dental, vision, life and disability insurance.)
Why is it important to have more people participate in an exchange if employers are rated individually?
As in a non-private-exchange model, more people in the exchange means more balanced risk between those who are healthy and those who are not. (This is why, under ACA, it was important for most people who were not insured to enroll in the public exchange.)
How do you incorporate a voluntary benefits strategy into the private-exchange model?
A private exchange is a great mechanism for incorporating voluntary benefits and can increase the participation rate of those products. A well-designed private exchange will place voluntary products in context with other benefits -- for example, offering critical-illness coverage can help employees view high-deductible plans more positively.
When will exchanges be available to companies with fewer than 4,000 workers?
Many exchanges (including Mercer and Bloom Health) are open for employers in this size category.
The Big Question:
What are the pros and cons of choosing to offer benefits through a private exchange?
Sondergeld offers the following sets of pros and cons:
Pros: (1) An exchange allows employees to consider all benefits at once as they enroll in programs offered through the platform. (2) It allows employees to supplement their medical choices with other similar or supplemental coverages such as disability or critical-illness insurance. (3) An exchange allows employers to optimize their benefits communications into one package.
Cons: (1) The decision making around the exchange options requires more time from employees. This may make it daunting for workers to consider ancillary or voluntary benefits at the same time. Employers could consider offering non-medical-benefits enrollment in the off-cycle. (2) Ancillary and voluntary benefits are often not offered in the same manner as medical benefits (for example, the healthcare benefits may have many options with several carriers, while the ancillary benefits will usually only have one option with one carrier), so the experience can feel clunky. (3) The communication materials associated with private exchanges can become very large, complicated and overwhelming.
Foster closed with this assessment of private exchanges, saying that, in most situations, the pros outweigh the communication and change management that's needed. Among them are:
· The potential for the employer to have more cost stability, particularly with a defined contribution approach, and/or cost savings when compared with the industry's average trend.
· The private-exchange industry will probably grow with your company and its changing needs. For example, private exchanges are a great way to increase appreciation of and enrollment in a narrow network with ACO-based products and, in the future, could incorporate retirement benefits and paid-time-off.
· Employees can supplement their medical choices with other coverage lines through one platform.
The biggest potential con in a private-exchange strategy is losing the momentum an employer may have built into designing an overall health-and-productivity management tactic. Integral to an HPM approach is the integration of the data from key benefits and programs, including health and disability insurance, incidental absence, paid and unpaid family medical leave, and prevention-and-wellness program participation. Coordinated care between health and absence-management programs also becomes more difficult when multiple carriers are involved. HR leaders should make certain they will be able to merge these data pools and integrate care management under a private-exchange model if that is important to them.
I want to leave HR executives with a few thoughts to consider about private exchanges.
I have followed this topic for the last several years. Every time I revisit the private-exchange concept in detail, a number of key issues change. For example, one year ago, most private exchanges required employers to be fully-insured. Having a defined-contribution-benefits strategy in place was the initial screening question used when helping employers decide whether a private exchange was appropriate. And there was a limited number of benefit design plans, particularly for ancillary benefits. All three "requirements" have been removed.
So, if you don't like the current blueprint for private exchanges, express your opinion and wait. Things may shift again soon.
It's important to keep in mind that private exchanges were started -- initially by benefits consulting houses -- for a reason. Many speculate it was a way to make up for a projected decrease in billable hours related to the ACA. The exchange concept was easy to present to employers due to the "social proof" attached to the media coverage associated with the public exchange -- as well as the readily-embraced idea that private industry could produce a better healthcare marketplace than the government.
Be aware that most private exchanges require all employees to sign up for medical coverage -- even if the employee is covered under another medical plan. This was a challenge related to the initial cafeteria plans and resulted in employees who were over-insured. This requirement is in place today because insurance carriers base their ratings on a certain number of employees being covered under the plan. In fact, in a split-subsidy model (whereby the employer provides one subsidy for the healthcare plan and a second for the ancillary benefits), the exchange often requires enrollment in the medical plan before an employee can access the ancillary benefits' subsidy.
The benefits-subsidy structure is an important decision point. People with backgrounds like mine and Foster's believe it is important to use a split subsidy. Many employees will use the entire subsidy to offset the medical-insurance cost if separate dollar amounts for the employer-provided subsidy are not segregated into one pool for healthcare and a second for ancillary benefits. This will leave workers financially unprepared for major life events, such as periods of disability.
Realize there is a cost for insurance companies to participate in the private exchanges. This fee can become a financial stumbling block for smaller insurance carriers and may be prohibitive for certain ancillary-line insurers. So, lack of participation in an exchange by one of your preferred insurance companies may simply be a financial decision, and a desire by the carrier to not load rates to cover the fee.
Finally, I want to close with the same greatest fear concerning how private exchanges will play out -- expressed by John Vlajkovic – mentioned in my first column on the topic. This trepidation is that private exchanges "won't get at the underlying cost structure." Providing employees with more choices and decision support won't be enough. And, ultimately, that 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.