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Despite their potential benefits, private health insurance exchanges have been a tough sell for many employers.
They were supposed to be a game changer. Touted as sophisticated, turnkey solutions for controlling costs and turning benefits selection into a retail shopping experience, private health insurance exchanges were expected to be must-haves for employers. So far, the reality has been quite different.
While private health insurance exchanges for retirees have been around for many years, private exchanges for active employees began operating around 2012, shortly after the Affordable Care Act (ACA) took effect and brought widespread attention to the health insurance exchange model. Employers that were early adopters of these private exchanges say they’re pleased with their initial experiences and results. But many more remain on the sidelines waiting to see if private health insurance exchanges will perform as advertised.
While private exchanges are separate from the federal and state public exchanges established under the ACA, the problematic rollout of the ACA may have dampened employer interest in private exchanges. Another likely reason the model hasn’t caught on: Most employers just don’t understand what a private exchange is and what it can do for them. A 2014 Society for Human Resource Management (SHRM) survey of more than 1,400 HR professionals who have a role in deciding their organizations’ benefits found that only 36 percent of respondents are aware of any existing private health insurance exchange. (Not surprisingly, larger organizations are more likely to know about private exchanges, with 53 percent of companies with 2,500 or more employees aware of them.)
Perhaps because of this lack of familiarity, only 3 percent of surveyed companies use a private exchange to provide health benefits. Another 26 percent are evaluating the option. That’s a far cry from the 40 percent of employers that were expected to join private exchanges within the first years after they opened.
Assessing Results So Far
Preliminary returns show that most private exchange pioneers are satisfied with their decision, according to a survey of employers conducted by the
Private Exchange Evaluation Collaborative:
64% of employers that have moved to a private exchange said the move has saved money.
24% said it was too soon to tell if they will save money.
12% said costs stayed the same.
Aon Hewitt, which runs its own exchange, found that, during the first two years, employers on its exchange saw premiums grow by a compound annual rate of 2.6%. (Like most private exchanges, Aon Hewitt builds all exchange-related fees into plan premiums.)
However, the 15 companies that joined the exchange in 2014 are now seeing second-year cost increases averaging 5.3% for 2015. That’s only slightly better than the 5.5% increase Aon Hewitt projects for all employers in 2015, adding fuel to questions about how much cost-savings private exchanges can deliver over the long run.
At its most basic, a private exchange is a marketplace for selling health plans. It uses online technology that allows individuals to shop for and purchase health insurance. The exchanges handle plan enrollment and relay information to the chosen health insurance carrier, or to a third-party administrator when an employer is self-insured. On some exchanges, employees can purchase a broad array of benefits—for example, voluntary benefits such as disability coverage, supplemental medical plans and long-term-care insurance.
Benefits of private exchanges include:
To be sure, the benefits are attractive, and private exchanges may yet become widely adopted. But many employers are waiting for more definitive proof that the exchanges will provide real and ongoing cost-savings, meaningful support for consumer-driven health care, and the ability to influence health care delivery, outcomes and value.
“There is a lot of interest by large employers [in private exchanges] but not a lot of movement right now,” says Brian Marcotte, president of the
National Business Group on Health in Washington, D.C. Employers are asking, “What are private exchanges going to do differently to improve health care delivery and manage costs than what employers are already doing today?” Marcotte says. “The model creates healthy tension in the market, but is it sustainable over time?”
Above all else, the promise of cost control could get more employers off the bench and into the private exchange game. For at least some early adopters, private health insurance exchanges provided an opportunity to move to a defined contribution health plan. Rather than paying a percentage of ever-changing and often unpredictable premiums on employees’ behalf, these organizations now provide a set amount of money to employees for use in purchasing coverage.
Sears Holdings Corp. was among the first employers to move to a private health insurance exchange for its 90,000 benefits-eligible employees. The company now is in its third year on the exchange and has seen positive results.
When Sears made the transition, it shifted to a defined contribution funding approach. It also moved to a private exchange that offers fully insured health plan choices, allowing the company to wind down the self-insured model it offered in the past. As expected, those changes have led to much more predictable health benefits costs, says Michael O’Malley, vice president of compensation and benefits for Sears Holdings in Chicago.
A related benefit is expected to result from competition. Insurance carriers competing on an exchange for business every year should drive prices down. “Some of the pricing is pretty competitive, and carriers that do not get a big book of the available business will get more competitive with the prices next year,” O’Malley says.
It’s likely that the first adopters and other employers using private exchanges will realize further benefits as more employers join up and the insurance pool grows larger because of the resulting economies of scale, says Jeffrey Cava, a member of the SHRM board of directors and executive vice president and chief human resources officer at Starwood Hotels and Resorts Worldwide in Stamford, Conn., another early adopter of the exchange model.
Ideally, exchanges offer an array of health plan choices at different price points. That’s important to employees, especially under a defined contribution model.
“The defined contribution approach is a trade-off in which employees get a set amount for health coverage but more choice to pick a plan that works for their situation,” says Bruce O’Neel, vice president of total rewards and HR operations for CSG International Inc., a business support and software company with about 3,500 employees based in Englewood, Colo. The company is planning to move to an exchange within three years.
More employers could follow CSG as they realize the exchanges can offer many more health insurance options to employees. That’s likely to resonate especially well with smaller employers that can’t afford to provide more than a couple of plans. In some cases, employers have been able to increase the number of plans they offer to 30 or more after moving to a private exchange. Moreover, many private exchanges give employees decision-making support through online tools designed to make the health plan choice less intimidating and better-tailored to the employee’s individual situation.
For Cottonwood Centers Inc. in Tucson, Ariz., the decision to move employee health benefits to a private exchange was all about offering more choices to its 110 employees. Before moving to an exchange run by its insurance broker this year, Cottonwood was only able to offer two plans—a basic plan and a slightly richer plan for employees willing to pay more for their coverage.
Now, the addiction rehabilitation center offers a defined contribution that employees can spend on any of the 15 health plans available on the exchange. It’s a change employees appreciate. “We have been getting rave reviews from people who are happy to decide for themselves what kind of plan to buy,” says Lauren Dubs, the organization’s CFO.
SHOP vs. Private Exchanges
Smaller employers exploring the potential of private exchanges are likely to find plenty of options, with some private exchanges serving employers with as few as 25 employees. Of course, employers with 100 or fewer employees also have the option of using the Small Business Health Options Program (SHOP) available through public health insurance exchanges run by individual states and the federal government.
Both types of exchanges have their advantages and drawbacks, so it is important to evaluate them carefully. Here are some key considerations:
Basic functions. At a minimum, an exchange should help smaller employers access streamlined administrative functionality that enables online enrollment and payment and that generally reduces employers’ plan administration burden. Decision-support tools should be available to help employees choose their health plan. While the public SHOP exchanges have had a rough rollout, employers cannot simply assume that every private exchange will provide a smooth transition.
A bigger pool. An exchange should allow small employers to access more health plan options for their employees, provide a larger pool of insured individuals to help spread out risk and, ideally, offer better premium pricing than the employer could get on its own.
Good advice. Brokers, consultants and business advisors can help employers evaluate exchange options and operations. They can help employers to understand what is and is not covered by stated exchange pricing, for example, or to evaluate health plan options on each exchange.
The more plans an employer can offer, the more likely employees will be able to find a plan that meets their needs and budgets. Most employers have a very small range in the price of their plans—maybe a 15 percent differential between the highest- and lowest-cost plans if they offer two or three options, says Doug Adelberg, senior vice president of
Lovitt & Touché, a Phoenix-based insurance broker that launched a private health insurance exchange last year. By contrast, a private health insurance exchange can offer pricing with a 50 percent differential from the highest- to lowest-priced plans.
Freeing Up Resources
Private exchanges allow employers to offload their health benefits administration. While this logically would be attractive to small businesses with limited resources, many first adopters were actually large employers in the retail and hospitality industries. These industries have notoriously high turnover rates, which makes health plan administration complex and costly and health care costs more difficult to predict. Private exchanges hold the promise of alleviating that administrative burden.
While the question of whether to move to a private exchange is a long-term strategic decision for all employers, companies’ primary goals for doing so may differ. The purpose for CSG International’s anticipated move, for example, is to free up resources to improve other elements of the employee value proposition that are more important to the company.
CSG wants to be able to compete for talent, but it doesn’t feel the need to be a top benefits provider. “I am firmly in the camp that we do not need health benefits to win; we need [them] to play,” O’Neel says. The company’s current health benefits offering uses a cost-sharing structure in which the company pays about 70 percent of health plan costs.
By switching to a private exchange with a defined contribution for health benefits, O’Neel expects, the company will be able to continue to offer employees access to quality health care. At the same time, the transition is expected to free up resources for CSG’s various programs, including those for incentive pay, base pay, recognition and employee engagement.
Waiting and Seeing
While private exchanges have failed to catch on so far, expectations remain high. “This may become a new platform to provide new tools and new information, insights, and performance measures around providers,” Cava says.
Private exchanges could become active advocates for employees and influential players in the quest to manage health care costs. “They can drive change within the delivery system itself by partnering with all of these different health plans,” Marcotte says. “That would be different than what an employer may be doing today, or more influential.”
But clearly, many employers are not convinced that private exchanges would work for them. Some are concerned that an exchange, even with its multiple health plan choices, would simply divide the workforce into a handful of plans: Employees with high health risks would move into a richer, higher-cost plan, while low-risk employees would migrate to a lower-cost plan until the richer plan is no longer a sustainable choice for the company to offer.
With little concrete data so far, employers question the true potential of private exchanges. Office products manufacturer ACCO Brands Corp. was eager to see how a private exchange could help it reduce costs and administrative complexity and engage employees in health care decision-making. “The idea of a private exchange—where the company can get out of the benefits administration business, our employees have great plan choices, it’s easy to use and it provides effective cost control—sounds like utopia,” says Kristin Berdelman, the company’s director of health and welfare benefits in Lake Zurich, Ill.
However, the reality did not measure up. “The more we got into the details, the more we realized that there is substantial confusion over what a private exchange really is,” Berdelman says. “It was also unclear specifically about how a midmarket employer like ACCO Brands would save money, especially if it moved to a fully insured plan that would introduce a number of new taxes and federal mandates.”
ACCO Brands, which is self-insured, has been aggressive about managing its costs and has kept its cost trend below average levels for many years, Berdelman says. Nevertheless, in each of the last two years the company modeled several different scenarios and options involving a private exchange—but it did not see how it would obtain the promised cost-savings. “Without that,” she says, “it is difficult to justify the move.”
The company continues to keep an open mind but is firmly in the “wait-and-see” category. Mostly, it is waiting to see whether private exchanges will be a viable long-term strategy for cost control in three to five years. “Is this just shuffling the cards?” Berdelman asks.
That’s a question employers are asking as private exchanges continue to evolve and mature. Many employers are intrigued by the concept and could still make the leap. But private exchanges will have to earn employers’ confidence before companies are sold on them.
Joanne Sammer is a New Jersey-based business and financial writer.
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