How Private Exchanges Are Coming of Age

More types of benefits are being offered, and purchased, through private benefit exchanges

John Scorza By John Scorza December 5, 2016
How Private Exchanges Are Coming of Age

Over the past decade, it had been expected that private benefit exchanges would become a common way for employers to meet their workers' diverse personal and financial needs by providing an ever-growing array of benefits. While the growth of private exchanges hasn't kept pace with some of the more enthusiastic early predictions, adoption rates among private-sector employers have been steadily rising. Today, more employees and dependents are enrolling in benefits through private exchanges as the number of available products has expanded.

Private exchanges are commercially marketed platforms that allow employees to purchase benefits from a menu of options. Employers typically provide employees with a set amount of dollars or credits to spend on the exchange. The employer negotiates prices and contracts with carriers, and the available options are presented in one comprehensive package.

The widespread adoption of private exchanges began in the wake of the Affordable Care Act, which gave momentum to this approach by creating public exchanges so that individuals without employer-sponsored insurance could buy their own health coverage.

The average number of products employers have made available on private exchanges has been inching upward over the past three years—from 12.9 in 2013 to 14.2 in 2015, according to Understanding Product Offerings and Choices on a Private Exchange, an October report by the Private Exchange Research Council (PERC), a New York City-based think tank made up of insurance brokers and consultants.

For employers competing for talent, these products offer a competitive advantage. "Benefits are a valuable tool for recruiting and retaining top-tier employees," said Alan Cohen, co-founder of Liazon, a private benefits exchange company in New York City and a member of PERC. "The exclusive data in this report point to an increased recognition among employers that, by offering a wider selection of benefits each year, including nontraditional products, they can set themselves apart and better engage their workforce."

The findings are based on information collected from Liazon's private exchanges between 2013 and 2015, representing the experiences of 740 client companies across the country providing access to private-exchange benefits for 375,205 employees and dependents.

Top 15 Benefits Offered on Private Exchanges

The following benefits were most frequently offered last year for employees to purchase on private exchanges.

Benefits Percent of companies offering product through a private change
Medical insurance100%
Health savings account (HSA)95.7%
Vision insurance95.5%
Dental insurance95.4%
Employee life insurance87.7%
Spouse life insurance87.2%
Child life insurance87.2%
Legal plans74.1%
Identify theft protection71.4%
Long-term disability71.2%
Short-term disability71.2%
Telemedicine 70.3%
Pet insurance67.7%
Health coaching66.1%
Accident insurance46.8%
Source: Private Exchange Research Council.

When it comes to the number of benefits available for purchase, company size doesn't appear to matter that much, the findings show. Employees at both large and small organizations had a choice of an average of six medical plans. (Some businesses went even further, with 10 percent offering 12 or more medical plans.) Likewise, the number of dental (three) and vision (four) options were the same on average regardless of company size.

[SHRM members-only discussions: SHRM Connect Benefits Group]

There was one significant difference, though. In an effort to stand apart, smaller-sized companies were more likely to offer nontraditional voluntary products such as legal plans, pet insurance and identity theft protection compared to larger companies. 

Overall, transit and health-related benefits were the most common ones added to exchanges by employers last year.

Fastest-Growing Products Offered by Employers

The following are in the "up and coming" category of benefits that are increasingly being offered on private exchanges:

  • Transit flexible spending accounts.
  • Parking flexible spending accounts.
  • Hospital indemnity insurance.
  • Critical illness insurance.
  • Accident insurance.

Employee Purchases Tick Up

Workers bought an average of 2.9 products through private exchanges last year, up slightly from 2.7 in 2013. Employees who bought at least one product purchased an average of 4.4 products in 2015, up from 3.6 in 2013.

It's no surprise that employees focused on basic benefits—medical, dental and vision—when shopping on the exchange. But socioeconomic circumstances, such as a worker's financial situation and life stage, also influenced purchasing.

For instance, people who bought more products tend to have greater financial resources, a greater need to address health issues or financial challenges, or are at a point in their life where greater financial security is desirable, such as for Generation X workers with children.

Top 5 Benefits Purchased on Private Exchanges

The benefits below were most commonly purchased last year on private exchanges:

Benefits Percentage of participating employees who purchased a plan
Medical insurance77%
Dental insurance71%
Vision insurance56%
Employee life insurance44%
Long-term disability43%
Source: Private Exchange Research Council.

Employee Life Stages

The report found that Generation X employees (born between the mid-1960s through the 1970s) tended to purchase the most products compared to other generations. Approximately 44 percent of Generation X employees purchased four or more products compared with 30 percent of Generation Y workers (those born in the 1980s through the mid-1990s), for example.

Generation X workers often have responsibilities to both their parents and their own children and may have a particular need to protect themselves financially against unforeseen events.

Additionally, the data indicate that married people and those in poor health tend to purchase more products.

"Knowing what plans people want and how they choose them will go a long way in helping the benefits industry better meet employers' and employees' needs," said benefits attorney Christopher Condeluci, principal of CC Law & Policy in Washington, D.C., and a member of PERC.

Fastest-Growing Product Purchases by Employees

The following benefits showed sustained growth last year in terms of purchase rates:

  • Legal plans.
  • Hospital indemnity insurance.
  • Identity theft protection.
  • Telemedicine.
  • Critical care insurance.

Exchanges Fuel Growth of HSAs

The trend toward more exchange-based purchases shows little sign of slowing. From 2014 to 2015, the number of "heavy purchasers"—employees who bought seven to nine benefit plans—increased by 20 percent. At the same time, the number of participating employees who bought only one to three plans declined by more than 7 percent.

The percentage of people who bought an HSA-qualified high-deductible health plan on a private exchange, when offered that option, increased steadily from 2013 to 2015—from 38 percent to 42 percent. Men were more likely than women to buy these plans, as were younger workers. Additionally, the likelihood increased for those with higher incomes and in better heath.

Of the employees who enrolled in an HSA-qualified plan, 63 percent elected an HSA. Of those, 86 percent contributed a portion of their paycheck to the HSA, with most allocating less than $2,000 per year. This may be a missed opportunity for these employees to gain the tax advantage of investing more in their HSAs, the report noted.

The report found that the increased interest in HSA-qualified plans on private exchanges may be because:

  • Employees on an exchange are seeing the full cost of all their medical plan options and often will choose to buy less expensive plans.

  • Employees on an exchange are becoming more educated about the different plan options available to them and are learning how to use high-deductible plans together with an HSA to save them money.

  • Many employees on an exchange are receiving recommendations that identify HSA-qualified plans as the best for them due to the financial savings and the availability, through the exchange, to purchase supplemental coverage products at a reasonable cost to offset additional financial risk, such as critical care and accident insurance policies.

There may be some disconnect between what workers want and what companies are offering, the findings indicate. Employers increasingly are offering hospital indemnity insurance and critical care insurance, which are popular with employees. But they may be missing an opportunity to provide other in-demand benefits, like telemedicine and identity theft protection, which a growing number of employees are choosing to purchase when these are added to an exchange's menu.

Related SHRM Online Articles:

At Hilton, How a Private Exchange Dropped Costs, Upped Satisfaction, SHRM Online Benefits, May 2015

Thinking Strategically About Private Exchanges, SHRM Online Benefits, December 2014

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

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