Viewpoint: Group Policies vs. Subsidized Individual Coverage—The Impact of Exchanges

Existing private exchanges, such as those for retiree 'Medigap' policies, provide some lessons

By Bryce Williams, Extend Health Inc. April 16, 2010

The landmark health care reform legislation passed in March 2010 will enable small businesses, the self-employed and the uninsured to choose health insurance plans offered through state-run exchanges, beginning in 2014. However, most people who already have insurance will probably continue to get it through their employer group plans

So, why should employers care about exchanges now? There are two important reasons:

Exchanges for individuals point to a future where employers can offer their employees more choices in health plans.

Exchanges can provide a way for employers to meet their health care obligations to employees while managing costs.

The Power of Exchanges

Many lessons have been learned from existing private health care exchanges, including Medicare policy exchanges such as (of which the author is the CEO), which offers private supplemental Medicare coverage plans. Retirees can compare and choose from among hundreds of private Medicare plans offered by more than 55 carriers. The vast majority of the retirees in the exchange pay premiums, co-pays and other out-of-pocket medical expenses with funds set aside for them by their former employers in health reimbursement arrangements.

There is mounting evidence that well-run exchanges can offer three things that are rare in our health care system: personalization, choice and competition. They also expose the growing inefficiencies of group health plans. Conventional wisdom says that group insurance is superior to individual insurance because it offers better benefits at lower cost. This was true in the past when most large employers were located in company towns and their employees worked and lived within a few miles of the company headquarters. Health insurers serving employers in that region were able to build and maintain strong networks of health care providers and negotiate good prices in exchange for volume business.

Well-run exchanges offer personalization,
choice and competition.

In today’s world of international business and telecommuting, a large employer’s workers are much more likely to be dispersed, living and working outside the primary health insurer’s most efficient network. Seniors are especially likely to move away once they retire. To serve these individuals in a group plan, health insurers must “rent” other insurers or third-party administrators, often paying premium prices for that privilege, which they must pass along to employers in the form of higher premiums. Such attempts to retrofit a 1940s company-town model of health insurance into the global economy of 2010 are proving to be outdated and inefficient.

Another historical advantage of group insurance was that employers could negotiate good rates because they were insuring hundreds or thousands of people, enough to provide a reasonable risk pool for the health insurer and purchasing power for the employer. This was never true for private Medicare plans because, with few exceptions, it's "guaranteed issue" coverage—no one who is eligible for Medicare can be denied.

More Options for Employees

With health care reform, which mandates coverage for most Americans, the purchasing power advantage of group plans will disappear. The individual market risk/purchasing pools will be much larger than any single-employer pool—a powerful driver for keeping premiums in line. Is a pocket of 20 retirees or 100 active employees in Pensacola, Fla., more likely to get lower pricing from a national carrier or from local/regional carriers that have been operating in the area for decades? The answer is more likely the latter.

Another significant limitation of group plans is that employers have had to limit the number of plan options for their employees. Given the time required to analyze, negotiate and administer each plan option, most employers have been unable to offer more than one or two group plan alternatives.

This one-size-fits-all-approach to health insurance was an acceptable tradeoff when group plans were the only game in town, but not in the new world of guaranteed coverage for individuals. Group health plans give employers no alternative but to offer essentially the same benefits to unmarried men in their 20s as they do to married women in their 30s and workers in their 40s, 50s and 60s, regardless of their life situations and their health needs. Imagine the different choices people in these categories might make if they were allowed to compare and purchase individual plans in an exchange.

Individual Empowerment with Sustainable Company Support

The state-run health insurance exchanges coming online in 2014 will likely make a huge difference to Americans who have been shut out of our largely employer-sponsored health insurance system. But an exchange has already proven to be a game changer in the private Medicare market, where employers that have subsidized retirees' purchase of supplemental policies reduced their retiree benefit costs by as much as 35 percent, allowing them to continue to meet commitments to their retirees. The transition has allowed these employers to get out of the business of managing retiree health care plans with their cycle of yearly plan review, difficult negotiations with insurance providers, and time-consuming communications and enrollment procedures. Not to mention calls from retirees throughout the year with questions about plan changes, eligibility and whether a new prescription will be classified as Tier 1 or 2 on the formulary, if it's covered at all.

Being part of an exchange has benefitted individual retirees as well. Just as employers gain greater control over long-term obligations, retirees now have a dependable stipend to pay for health care expenses. Historical data shows that, on average, retired couples who buy supplemental Medicare insurance through the exchange see a $500 a year reduction in total out-of-pocket medical expenses— not an insignificant amount, especially for people on a fixed income in a time of ever-increasing medical costs.

Retirees Today, Active Employees Tomorrow?

No one likes change—it’s disconcerting to many and frightening to some. And health care is a highly charged, very sensitive issue. But after initial skepticism, even the vast majority of individual retirees who have purchased insurance through a private exchange report high satisfaction with their plans, the prices they paid for them and the experience of buying from an exchange. This is because, in the end, exchanges take the fear, uncertainty and doubt out of the health care system for everyone involved.

Exchanges are not a silver bullet, and transitioning active employees from group plans to an exchange would be a change of seismic proportions for any employer. But exchanges are coming, and for employers, the time to explore and educate themselves and their employees about them is now.

Bryce Williams is CEO of Extend Health Inc., which operates the largest private Medicare exchange in the U.S. at The exchange has helped more than 70 employers, including GM, Ford, Chrysler, Caterpillar, Eastman Chemical, Lawrence Livermore National Labs, Avon, Whirlpool and others, save on their retiree health insurance costs.

Related Article:

Exchanges Will Alter Competition and Choice, HR News, March 2010

Quick Links:

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SHRM Online Health Care Reform web page

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