The Case for Private Insurance Exchanges
(full article here)
Employee health benefits may not be a favorite topic for CFOs. Historically, they preferred leaving human-resources stuff to HR folks. That’s been gradually changing over the past decade, but partly because that period has been marked by soaring health costs. Now, many finance chiefs are experiencing budgeting paralysis instilled by the uncertain future of the Affordable Care Act (ACA, or Obamacare) and the volatile health-care industry generally.
Enter private health-insurance exchanges. These online portals are populated with a variety of health-plan options from either a single or multiple carriers, displayed to enable users to compare those choices in apples-to-apples fashion. Typically, they are funded in part by defined contributions supplied by the employer.
Companies that opt for a private exchange will be looking for a budgeting benefit. In traditional health-benefit plans, self-insured employers risk swings in claims volumes from year to year. And fully insured ones are subject to possible double-digit premium increases, which have been the norm in recent years.
When they use private exchanges, companies set their contribution amounts at the beginning of the plan year. No matter how much insurers raise rates for the following year, a company can control how much it contributes to the plan.
Of course companies have been able all along to pass on to employees as much of the annual cost increases as they cared to (although most, wary of damaging their ability to attract and retain talent, have absorbed a majority of the hit). But if enough companies choose it, the private-exchange model could bring long-needed price stability to the health-benefits arena.
The new exchange that consulting firm Aon Hewitt is offering to its large corporate clients offers an example of why that could happen, at least with respect to multiple-carrier exchanges. Employees of Sears and Darden, which will be the first two customers for the exchange starting January 1, can choose from among five medical, three dental, and three vision insurance carriers. Each carrier must provide plans at five quality levels: platinum, gold, silver, bronze plus, and bronze. (While an individual client company must offer the gold and silver levels, it can choose to suppress up to two of the other three.)
But while the carriers can price their plans however they wish, the actual benefits provided by each carrier must be identical — each gold plan, for example, has the same physician and pharmacy networks; coverage for the same drugs, treatments, and procedures; and so on. If one carrier were to charge more than the others, employees making their insurer elections would easily see the disparity and presumably have no motivation to select the more expensive option.
“We’re trying to establish a competitive market for health-care benefits,” says Ken Sperling, Aon Hewitt’s health-care-exchanges strategy leader. “That does not exist today, partly because of the cost and disruption involved in moving to a different insurer. But it’s one of the reasons health-care costs are going up 7% to 10% a year. We have commoditized our product so that costs are in check and there is freedom of movement on an individual-employee level.”
Another reason employees of companies that contract with private exchanges may feel less bite from annual cost increases is that, as with consumer-directed health plans (CDHPs), they are likely to spend their own money more wisely than they spend their employer’s money. For example, young, healthy workers will have more options to choose plans that are cheaper because they carry high deductibles and co-payments.
Employees who want to pay more for richer plans can do so. However, “experience shows that a majority of employees will choose less-rich plans than they get when an employer tries to build a plan to serve everyone,” says Thomas Mangan, CEO of United Benefits Advisors. “In America, when given a choice, we choose with our money.” (However, critics have long argued that an overabundance of cost-cutting incentives in such plan types as CDHPs and health savings accounts could move employees to delay medical care that they really need, only to incur greater costs when their conditions worsen.)
Eight Tips for Assessing Private Health Exchanges
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1. Administrative Complexity
How much will the employer have to do to ensure smooth interaction between the exchange and the company’s human-resources and payroll systems? Will you literally just have to send a check every month for X number of employees times the amount of employer contribution?
2. Compliance with Affordable Care Act Requirements
When an employer signs up with a private exchange, will there be any difference in how ACA rules apply to the employer? Most notably, says Calvert, it is not yet settled whether a company using an exchange means it will be deemed as providing a “qualified health plan,” as defined by the act.
3. Ability to Offer Access to the Public Exchanges
Does the private exchange allow lower-income workers and families eligible for the public subsidies to access public exchanges from the private-exchange portal? At least one private-exchange vendor, eHealthInsurance, is vocal about its plan to offer that service.
4. Flexibility on Plan Design and Coverage Tiers
The greater the number of plans and tiers offered in an exchange, the more difficult it may be for an employee to compare all of them with one another. “Do you want flexibility, which brings complexity, or do [you] want to keep it simple where everybody knows exactly what they’re looking at?” asks Calvert.
5. Cost to Employer
Private exchanges typically assess a per-employee administration fee to the employer, which may vary from exchange to exchange.
6. Cost to Employee or Retiree
There are new complexities around the underwriting of insurance products offered in private exchanges, according to Calvert. There could be large rate swings from one year to the next if big employers join an exchange and radically alter the demographics of the enrolled population, he says.
7. Relationships among Exchange Managers, Coverage Providers, and Corporate Plan Sponsors
In today’s world, most large and many midsize companies work directly with the health carriers when there are claims issues or problems with plan administration. You know whom to call to get such issues addressed. “Companies feel like they understand the chain of command to ensure the plan is being administered and their employees are being treated fairly,” Calvert says.
8. Ease of Navigation Within the Exchange
“I think there will be more private-exchange players, and I hope there will be more clarity on some of these issues,” says Calvert.