On Private Health Exchanges, Choice Drives Satisfaction

Enrollees choose plans they feel offer best value, selecting among multiple carriers

By Stephen Miller, CEBS March 21, 2013

Data on the use of the first large private health exchange for U.S. employers—providing an online platform for active employees to purchase employer-subsidized coverage—reveal that enrollees chose the health plan they felt offered the best value for themselves and their family, and liked being able to select among multiple carriers.

A multi-insurer private (or "corporate") exchange was launched by consultancy Aon Hewitt in the fall of 2012 for plan year 2013. Subsequently, a number of other HR consultancies—including Towers Watson, Mercer, Buck Consultants and Corporate Synergies, among others—launched their own private exchanges for plan year 2014, with more exchanges coming online for plan years 2015 and beyond.

Unlike the public, government-run exchanges scheduled to launch this fall for plan year 2014, private exchanges do not provide a conduit for the government to subsidize the purchase of policies by low-income employees. Instead, private exchanges let employers provide eligible workers with an employer subsidy to purchase policies that comply with the federal Patient Protection and Affordable Care Act (PPACA) and meet the specifications of state insurance regulators.

The new model is sometimes referred to as "defined contribution health care," comparable with employer contributions to 401(k) retirement plans, in which employers "monetize" their commitment in the form of a defined contribution rather than a defined benefit.

In the case of private health exchanges, employers give each eligible employee fixed amounts for either individual or family coverage, regardless of the plan the employee chooses within those tiers. Workers add their own salary-deferred contributions in an amount they select, and choose among differently priced plans from competing health insurers—taking into consideration factors such as varying premiums, deductibles and networks. If employees select a high-deductible plan that is health savings account (HSA) eligible, they can determine how much extra money from their paycheck they would like to defer into the HSA.

"During the 2013 annual enrollment period last fall, more than 100,000 U.S. employees successfully enrolled in health benefits through Aon Hewitt’s Corporate Health Exchange," said Ken Sperling, Aon Hewitt national health exchange strategy leader, at the 2013 MetLife Benefits Symposium in Washington, D.C. Clients who shifted their health benefits to this exchange included Darden Restaurants (whose chains include Olive Garden and Red Lobster), Sears Holdings Corp. and Walgreen Co.

Walgreens' Move to a Private Exchange

In fall 2013, Walgreen Co., the nation's largest drugstore chain, announced it will send 160,000 full-time workers to a private health exchange run by benefits consultant Aon Hewitt. According to Thomas Sondergeld, Walgreens' director of health, benefits and well-being, who met with SHRM Online, the company has branded its program as "the Live-Well Benefit Store" and will make the same premium contribution for its employees' 2014 plans that it did in 2013. Available plans will vary regionally but all employees will have access to five plan-level options (catastrophic, bronze, silver, gold and platinum) differentiated by premiums, deductibles and networks, offered by three to five competing carriers, along with tools to compare plans based on previous health claims. Dental and vision plans are also on the exchange (Walgreens will provide separate employee credits for medical and dental plans, and pays 100 percent for vision coverage).

Although some private exchanges offer both fully insured and self-insured group plans, Walgreens is shifting from its current self-insured plan options to fully insured plans. According to Sondergeld, "the exchange model provides greater cost predictability," mitigating the need for self-insurance and its associated risks.

Aon Hewitt’s 2013 Health Care Survey of nearly 800 large and mid-size U.S. employers covering more than 7 million employees found that 28 percent expect to participate in a private health exchange in the next three-to-five years.

By offering coverage through a private exchange, "employers are not stepping away, but they are stepping back," said Sperling. Under the private exchange model, employers no longer manage plan design and insurer relationships, including claims appeals, as those matters are outsourced to the exchange. As with other outsourced vendors, however, HR remains responsible for overseeing the employer's ongoing relationship with the exchange provider.

Employer's Subsidy and Employee's Contributions Remain Pre-Tax

In Aon Hewitt's corporate exchange, "the contracts between insurers and employers are traditional group contracts" covered under the Employee Retirement Income Security Act (ERISA), Sperling explained in a follow-up e-mail to SHRM Online. "The employee contributions are still covered under Section 125, so the employer subsidy is deductible and the employee contributions are pre-tax, just like today. Nothing changes from a tax perspective."

The corporate exchange model, Sperling added, avoids issues stemming from limits that federal regulators announced in January 2013 on employers' use of "nonintegrated" health reimbursement arrangements (HRAs) to fund employee purchases of individual (nongroup) coverage on government-run health care exchanges (see SHRM Online's article "Regs Limit Use of HRAs for Exchange-Purchased Coverage"). Private exchanges do not use HRAs, in which the employer subsidies are actually credits in a notional account, to fund the purchase of individual policies, Sperling pointed out.

Private Exchange Goals

Create a competitive market in health care benefits at a retail/consumer level:

  • Drive efficiency and mitigate cost increases through competitive forces.
  • Consolidate purchasing power in the private sector to drive systemic reforms of the health care delivery system.

Facilitate the movement to a defined contribution model for those employers who are aligned with this philosophy:

  • Provide a PPACA-compliant alternative to public (state/federal) exchanges, allowing employers to subsidize employee coverage and avoid penalties.
  • Slow health care cost inflation to a compensation-like rate of increase.
  • Treat health benefits as an element of total rewards.

Expand choice, allowing consumer selections (e.g., networks, formularies, premiums, deductibles) that could not be driven unilaterally at the employer level.

Source: Aon Hewitt.

Competition Among Carriers

Competition among insurance carriers on the exchange lowers the cost for offered plans, Sperling said. In addition, "because enrollees from multiple companies participate, the exchange has greater leverage to negotiate lower plan costs for coverage that is comparable to what employees received through the traditional, single-employer plan enrollment model," which in most cases will lower the employers' overall health care expenses, even after fees paid to the exchange are factored in, he explained.

"The exchange uses a fully insured model to create competition at a consumer level, and whenever markets are competitive, consumers benefit," said Sperling. "This is not about shifting cost to employees; it’s about reducing the top line cost of health care. Employers can then redirect these cost savings to enhance company-wide programs to increase employee health, well-being and engagement.”

HR consultancy ​Findley Davies has posted a checklist of issues and questions to help employers evaluate private exchanges.

Options for Employees

During enrollment, employees can sort and filter benefits options by price, carrier and plan. “When given more options, employees become empowered to make individual choices based on value, provider network, price and health status,” said Sperling. “Employees are not limited to a pre-determined plan and insurance company.”

For plan year 2013 enrollment, the Aon Hewitt exchange offered a range of health, dental and vision benefits options from multiple national and regional carriers, including UnitedHealthcare, Kaiser Permanente, HealthNet, Health Care Service Corp. (operating Blue Cross Plans in several states) and Florida’s Blue Cross and Blue Shield Plan.

“Aon Hewitt’s corporate exchange allowed us to move away from a one-size fits all approach to providing health benefits,” said Danielle Kirgan, senior vice president of total rewards and shared services at Darden Restaurants, who joined Sperling at the symposium. "This year, we were able to offer a broader array of health care choices than we have in the past, giving our employees the flexibility to choose the level of coverage that best meets their needs at a price they could afford.”

Participating insurance providers highlighted their plans' unique features and capabilities to help employees differentiate between coverage options, Kirgan said. The exchange's support team provided employees with guidance throughout the enrollment process.

Enrollment by Plan Type

According to Aon Hewitt’s post-enrollment analysis for plan year 2013:

  • 39 percent of employees with access to policies through the exchange enrolled in a consumer-driven health plan (CDHP)—a high-deductible plan with an HSA or HRA. In 2012, before their employers shifted to the newly launched exchange, only 12 percent of these employees were enrolled in a CDHP option.

  • Conversely, the number of exchange-eligible employees who enrolled in a traditional preferred provider organization (PPO) plan decreased from 70 percent in 2012 to 47 percent in 2013.

However, while a significant number of employees migrated to high deductible, low premium CDHPs when given the choice, a fair amount instead chose to increase their health coverage by purchasing a plan with a lower deductible at a higher premium:

  • For 2013, 32 percent of employees chose a plan similar in type to their current coverage (e.g., PPO to PPO), while 26 percent of employees "opted up" and chose to pay more for broader coverage.

  • Forty-two percent of employees chose to reduce their regular payroll contributions by selecting a less comprehensive plan.

According to Sperling, “Employees who want richer coverage are free to purchase it—and they do. Health care is personal, and people have different needs. This model lets employees decide which plan and which insurance company is best for them, and they are free to modify that choice on an annual basis.”

Enrollment by Plan Type

At employers who shifted coverage to the Aon Hewitt Corporate Health Exchange, below are the percentages of employees enrolled in different types of plans for 2013 (using the exchange) vs. 2012 (traditional enrollment).












Source: Aon Hewitt.

Among other findings reported by Aon Hewitt, almost 80 percent of exchange enrollees said they were confident they chose the health plan that offered the best value for them and their family, and almost all (93 percent) indicated they liked being able to choose among multiple carriers.

Increased Use of Decision-Support Tools

Employees who enrolled in their benefits through the exchange model used online decision-support tools, including health plan comparisons and cost estimators, significantly more than the 10 million workers who completed a traditional enrollment through Aon Hewitt, Sperling noted. Specifically:

  • 68 percent of exchange enrollees used a health plan comparison tool, while just 48 percent of employees who completed a traditional enrollment did so.

  • 57 percent of exchange enrollees used a provider search tool, compared with only 14 percent of those who completed a traditional enrollment.

Communications Challenges

Kirgan noted that an issue likely to cause confusion among employees is how the new private exchanges (which are not eligible for government-subsidized coverage) will differ from the new public exchanges (which are). The private exchanges have adopted the public exchanges' “bronze, silver, gold and platinum” plan terminology, denoting higher premiums for more extensive coverage, which adds to the blurring of differences.

Kirgan said that Darden Restaurants intends to help its employees who work less than 30 hours per week "get connected with coverage through government-run public exchanges," which will require clear communications Kirgan said that Darden Restaurants intends to help its employees who work less than 30 hours per week "get connected with coverage through government-run public exchanges," which will require clear communications Kirgan said that Darden Restaurants intends to help its employees who work less than 30 hours per week "get connected with coverage through government-run public exchanges," which will require clear communications regarding which workers are eligible for which type of exchange.

Regs Limit Purchasing Individual Policies with Pretax Dollars

On Sept 13, 2013, federal agencies issued IRS Notice 2013-54 and DOL Technical Release 2013-03, reiterating that health reimbursement arrangements (HRAs), premium reimbursement arrangements (PRAs) and other employer payment plans cannot be used to pay for individual policy premiums on a pretax basis, such as when individual coverage is purchased by employees through a public health insurance exchange or on the individual market.

The regulations do not limit employers from providing their active employees with a defined dollar amount, on a pretax basis, to purchase group coverage through a private exchange.

Also, for a true “retiree-only plan” under the tax code and ERISA, employers can still sponsor an HRA or PRA and reimburse individual policy premiums on a pretax basis.

An IRS Q&A posted on May 13, 2014, "Employer Health Arrangements," further clarified that pretax employer payment plans "cannot be integrated with individual policies."

Update: Enactment of the 21st Century Cures Act in December 2016 lets small businesses use "qualified small employer health reimbursement arrangements" (QSEHRAs) to fund, with pretax dollars, employees who buy individual plans on the open market. However, an employer that is considered an applicable large employer (i.e., with 50 or more full-time employees or equivalents) is not permitted to offer a QSEHRA. See the SHRM Online article New Law Lets Small Employers Use Stand-Alone HRAs.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Articles:

Private Exchanges Spur Health Coverage Shift, SHRM Online Benefits, September 2014

Time for Defined Contribution Health Care?, SHRM Online Benefits, September 2013


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