By Brian Schilling
When the Affordable Care Act broadly introduced the concept of a health exchange to the nation two years ago, the intent was to develop a means of extending coverage to millions of individuals and small employers by offering more coverage options in an organized, convenient marketplace that offers comparable information and affordable prices. The health exchange concept has gained real traction in the broader market, too. Insurers, consultants, and employers of all sizes are all now looking into the possibility of establishing their own private exchanges that would operate alongside their public counterparts.
Like the forthcoming public exchanges, private exchanges would organize and repackage information from participating health plans and make it easy for people to compare and buy coverage online. Employers would contract with these exchanges to offer coverage to their employees. But during open enrollment, the employees, not their employers, would take the reins, making all their own coverage decisions autonomously. Employers would still foot much of the bill, presumably, but on a defined basis. Each employee would receive only a set amount per month to be used on the health care plan of their choice. If employees choose a particularly generous plan, they'll make up the difference themselves.
The appeal of private exchanges is based primarily on two things: simplicity and predictability. In terms of simplicity, from an employer's perspective, insuring workers through an exchange would be considerably simpler than doing so through a carefully selected handful of health plans. Gone are the headaches associated with selecting health plans, managing open enrollment processes, educating employees about options, and negotiating with plans about rates, services, and coverage. Instead, the employer's involvement would be limited to selecting an exchange, directing employees to that exchange to select coverage, and paying a portion of the premium. Many employees won't mind; coverage options would probably increase for most participants as exchanges would likely offer a menu of plans broad enough to satisfy any employee.
Private exchanges could also offer employers the sort of cost predictability many crave. Through an exchange, employers would simply pay a set amount per employee per month: a "defined contribution." Coverage bought through an exchange would be fully insured, thus eliminating the worry associated with self-insuring and possibly experiencing higher-than-expected claims down the road. An employer with a stable employee population could, in theory, budget its health care costs almost to the dollar on the first day of every year.
"There is enormous potential for private exchanges to grow very quickly over the next three to five years and become a driving force in the market," said Ken Sperling, National Health Exchange Strategy Leader at Aon Hewitt, a benefits consulting firm that recently launched a private exchange and is now lining up clients for a fall 2013 launch. "Our expectation is that we'll have 100,000 enrollees by the time we launch and continued strong growth thereafter. Employer interest is high."
Insights from the Transition to 401(k) Plans
To the skeptics who point out that interest does not beget growth, it's worth noting that this wouldn't be the first time the benefits world has been upended by an attractive newcomer. Between 1980 and 2005, 401(k) plans leapfrogged the once-dominant pension model and became the new normal in terms of how Americans save for retirement. Among the Fortune 100, the trend is even more stark. In 1985, 89 Fortune 100 firms offered a defined-benefit pension plan; just 13 do so today.1
"Two of the reasons 401(k)s became so popular so quickly are that 1) they offered employees a lot of choice and control, and 2) they offered employers a way to fix their costs and budget effectively," explains Sperling. "Those same advantages also apply to health exchanges."
Sperling's firm, Aon Hewitt, is not waiting for 2014 to test the private exchange concept. Last year all 20,000 of its U.S. employees used the company's own private exchange to select the coverage that best met their needs. The transition went smoothly, Sperling says, with 93 percent of employees reporting they were very satisfied with the experience and with their choice of plans. Sperling says Aon Hewitt's overall costs didn't increase and because the plans offered through the exchange were fully insured (and thus had a set price), it allowed the firm to do something it couldn't normally do: budget its health care costs accurately.
"For employers I think the ability to budget effectively may be one of the biggest draws of the exchanges," noted Sperling. "That's going to appeal to a lot of CFOs and benefits managers."
Aon Hewitt is not alone in the private exchange space. Last August, a subsidiary of UnitedHealth Group bought Connextions, a technology and consulting firm that specializes in helping public and private clients form health exchanges. The following month, WellPoint and Blue Cross Blue Shield of Michigan bought a stake in Bloom Health, a Minneapolis-based exchange host. Shortly thereafter, they announced plans to launch a national private exchange. Many other such efforts are now taking shape.
Surveys Support Employer and Employee Interest
Two national surveys suggest that private exchanges may have a place in the nation's health care future. Aon Hewitt's Corporate Health Exchange Survey, published in March 2012, found that 72 percent of employers were very or somewhat interested in exploring whether a private exchange could help control health care costs. Nearly 45 percent said they expected to offer benefits to employees through a private exchange within the next three to five years even though only 4 percent do so now.
A second survey attests to similarly high interest among employees. J.D. Power and Associates' 2012 U.S. Member Health Plan Study found that 39 percent of workers who are currently covered under their employer's plan would welcome the opportunity to shop for insurance through a state exchange if they had the opportunity. The same survey found a similarly sized contingent of workers at the opposite end of the spectrum—37 percent—who said they would prefer to keep getting coverage through their employer. That represents a steep decline from 2011, when 50 percent of workers said they would prefer to keep their employer-sponsored plan.
Aon's Sperling notes that survey results aside, health exchanges certainly aren't for every employer. Those that are considering the exchange option must be:
- comfortable stepping away from active management of plan design and vendor management to focus on other things, like wellness, for example;
- confident their relationship with employees is not dependent on plan design; and
- able to commit to a defined-contribution approach to health benefits.
Asked if that typically means smaller employers, Sperling says no. "At this point interest is not confined to employers of a particular size, industry, or geographic location. The appeal of knowing how much you're going to spend on health benefits going into your budget cycle cuts across all borders."
Waiting to Move Forward
Writing late last year about what he views as the near-certain shift to defined-contribution plans, former Congressional Budget Office director Peter Orszag notes that simply putting employees in charge of their benefits and giving them more skin in the game will not substantially help curb overall health care costs.1 Others have speculated on the possibility that the exchanges, both public and private, may disproportionately attract sicker workers which would ultimately push costs higher, thus undermining the exchanges altogether.2 Still others worry that health care quality may suffer should employers relinquish en masse their traditional role of driving the health care quality agenda.3
These and other concerns have left most employers on the sidelines for now, watching and waiting for the early adopters to start talking about results. It's an area where no one seems to want to be first to take the plunge, but many are pondering second or third.
1. http://www.bloomberg.com/news/2011-12-07/defined-contributions-define-health-care-ahead-commentary-by-peter-orszag.html
2. http://capitolweekly.net/article.php?xid=zeebf3gpwal1k3
3. http://www.academyhealth.org/files/nhcpi/meyertillmann.pdf
