This is the first installment in a three-part series that introduces the just-burgeoning world of private health-insurance exchanges. Part 2 fleshes out the case for private exchanges and suggests some drawbacks. Part 3 examines the vendors in the market and their products.
Barely more than two years ago, the phrase “health-insurance exchange” had just poked its toe into the waters of the corporate lexicon. Just now the issue is hot — and not only because of the state and federal exchanges to be created under the Affordable Care Act, a.k.a. Obamacare.
A fair number of small companies are using private health-insurance exchanges, and in some cases have been doing so for several years. The entities just weren’t called “exchanges” until after the ACA popularized the term. Now targeting large companies as well, the burgeoning field of private exchanges offers a look at what could become, within a few years, a common strategy for delivering health benefits to corporate employees. Rather suddenly, talk about these products has grown rampant and interest in using them is flowering.
“We’ve been doing this for eight years, and [before Obamacare] we marketed ourselves as an online insurance marketplace,” says Bill Hanis, a vice president at eHealthInsurance, which offers a technology platform enabling exchanges for small businesses and individuals. “But in the corporate health-insurance industry now, the validating word in marketing collateral and messaging is ‘exchange.’ If you don’t say you’re a private exchange, you’re not going to get attention.”
For that reason, “exchange” is a loose term. Seemingly every service or technology company with an enrollment engine for health-benefit plans now calls it an exchange. Individual insurance carriers are starting to run their own so-called exchanges, populated solely with their own plans. Even some private companies are reportedly using the term when giving employees an expanded set of insurers to choose from.
When referring to exchanges, either private or public, most experts in the field describe them as online portals populated with a variety of easily comparable health-plan options. In essence, they are like shopping malls. Their operators build or license technology platforms to deliver the portals, and they solicit participation from and contract with insurers.
There are multicarrier plans that insurers join for the same reason stores locate in malls: to get the foot traffic from people shopping at all the other stores. Far more prevalent, presently, are single-carrier plans, which insurers join because it is another distribution channel, with the exchange’s corporate client a captive audience. A greater choice of carriers seems at first blush to be better for customers, but some observers say the single-carrier approach offers similar value (see the third installment of this series, to be published later this week).
Most private exchanges generate revenue through a per-employee fee to client organizations. All exchanges have unique elements and idiosyncrasies. Aside from pricing, however, the key differentiating element among private exchanges is the number of carriers and plans included.
Companies generally aren’t eager to adopt new health-insurance schemes because of the cost and organizational pain such shifts can produce. But exchanges could help employers in several ways:
• Plan sponsors shift to a defined-contribution model, offering employees a predetermined chunk of cash with which to buy health insurance themselves through the exchange. That means a company’s health-benefits costs will be almost entirely predictable (as is the case with the many companies that have replaced defined-benefit pension plans with 401(k) plans and other defined-contribution plans).
• Workers get a range of easy-to-compare health plans to choose from. Displaying pricing and other key plan details in a way that allows for apples-to-apples comparisons between plans is central to the exchange concept. That could help keep their costs in check, because the exchange may offer plans that are more affordable than the limited options their employers had been offering previously.
• Plan sponsors are in many cases spared much of the administrative burden associated with insured or self-insured plans.
One difference between public and private exchanges is that the latter typically offer more decision-support tools and personalized help for users than state and federal government exchanges are likely to. But several private exchanges are in talks with states about providing such services to them.
Another difference is that while only lower-income individuals and families will be eligible for federal subsidies to help pay for insurance bought through a public exchange, on the private side all employees will typically get an employer contribution.
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Large employers generally have found it cheaper to self-insure their employees’ health-care needs than to buy insurance from carriers, and for most that mind set is likely to persist, at least in the near term. But while companies taking part in an exchange would no longer have self-insured status, they would have a cost advantage in that they would get to transfer to the insurer(s) participating in the exchange the risk that claims will be higher than expected. A company can protect itself against such upward claims risk simply by buying insurance directly from a carrier, but in that case it must pay the full premium even for periods when claims are low.
In late September, Sears and Darden Restaurants, both currently self-insured employers that together have a combined 100,000 workers, became perhaps the largest companies to publicly acknowledge they would use a private exchange. Starting January 1, they will be the first customers of the Aon Hewitt Corporate Exchange, a new venture of the large human-capital consulting firm.
“We were looking for ways to deliver more choice and variety to employees. But we knew it would be difficult, if not impossible, to create [an exchange] on our own because of the infrastructure and resources it would take,” says Danielle Kirgan, senior vice president of total rewards for Darden, which operates seven full-service restaurant chains including Olive Garden and Red Lobster. “We’re excited about the possibilities of the Aon Hewitt exchange model: they created it, they own the administrative platform associated with it, and they’re doing the carrier contracts and the plan design.”
For Darden, the move is also a nod to the future. Asked whether she sees Darden as a guinea pig for how private exchanges will fare at large companies, Kirgan says, “I like to think about it more as being an innovator. We’re taking the opportunity to jump on this first. We wholeheartedly believe this is going to be mainstream within two or three years.”
That is the time frame during which the ACA provision that health insurers may not reject applicants because of preexisting conditions will take effect. The law calls for a January 1, 2014, effective date, but it could be pushed back if regulations for carrying out the provision are not issued by mid-2013.
Private-exchange vendors may then be well positioned, affording companies the option to send employees to an exchange while still technically offering a qualified health plan as defined under the ACA. That would allow employers to avoid the law’s $2,000-per-employee annual penalty for not offering a qualified plan, also scheduled to take effect in 2014.
Nineteen of Aon Hewitt’s large-company clients were interested enough in the private-exchange model to submit requests for proposal to the firm for their 2013 health-benefit plans, says Ken Sperling, the consulting firm’s health-care exchanges strategy leader.
Sears said in a statement that “the Corporate Exchange creates a competitive market in health-care benefits, and we’re optimistic that it will drive efficiency and have a positive impact on quality and costs.”
Aon Hewitt’s competitors are diving into the private-exchange market, too. In May, Towers Watson bought Extend Health, among the largest providers (in a crowded field) of exchanges for Medicare-eligible retirees. Extend currently does not serve active employees for its clients but expects it will by 2014, says Bryce Williams, a former eHealthInsurance executive who co-founded Extend in 2004 and is now Towers Watson’s managing director of exchange solutions. “The world of how benefits are delivered is going to change,” he says.
Mercer, another benefits-consulting giant, recently began offering health-benefits services through vehicles it calls exchanges. The firm declined to comment for this article.
The big human-capital consultants had no choice but to get into the exchange game, according to Martin Graf, a vice president with global management-consulting firm L.E.K. and a specialist in the health-services industry. “The only ones that would get hurt (if private exchanges grow large and powerful) will be the benefits consultants, who gain from having a lot of complex things to sort through,” he says. “That’s why Aon Hewitt and the others are jumping in. There is a threat to their business. If you can easily compare plans with one another, what do you need a consultant for?”
Private exchanges could well develop into the dominant way of delivering health-care benefits, suggests Gregg Waldron, CFO of 130-employee RedBrick Health, a supplier of wellness programs to employers and a customer of exchange provider Bloom Health. “If you had asked me about that six months ago, you probably would have gotten a different answer,” Waldron says. “That’s how quickly things are changing.”