For all the hoopla in the past year about private health-care exchanges for active employees, relatively few companies with more than 50 workers have taken the plunge. But the market is certainly expecting that to change, with most of the large benefits-consulting firms having launched their own private exchanges and aggressively promoting them.
Because the concept of private exchanges is relatively new to most employers, some may be harboring misconceptions. Following is a discussion of four fairly common assumptions that Don Garlitz, head of exchange solutions at bswift, characterizes as myths.
Garlitz can’t be considered an unbiased source, as bswift provides technology platforms for private exchanges as well as for benefits administration generally. But CFO has looked extensively at the private-exchange field and believes the items listed below to be, in fact, myths.
Myth 1: Private exchanges will fix an employer’s rate of health-care cost increases year after year.
What drives CFOs mad about health care is the unpredictability of cost from year to year. But it’s expected that coverage offered through private exchanges will typically be funded by defined contributions, much like 401(k) plans. For many CFOs, the predictability that defined contributions afford would be the chief appeal of a private exchange.
But fixing the cost outlay for years into the future may not be realistic in the labor market, Garlitz points out. Let’s say a company plans an annual increase of its contribution in line with the consumer price index, or perhaps a fixed amount of, say, 3 percent per year. If the cost of healthcare continues to escalate at a rate higher than the defined contribution increase, employees will simply bear most of the inflation burden.
“It’s cost shifting, really, and a competitive labor market will demand more from the employer sooner or later,” Garlitz says.
Myth 2: Offering a private exchange will equate to offering nongroup medical coverage.
This is of particular relevance to small businesses, some of which have used health reimbursement arrangements (HRAs) to provide employees with funds to buy individual insurance policies. Doing so is appealing because the company reduces both its liability and its compliance responsibility.
But a recent Department of Labor ruling suggests that employers probably won’t be permitted to use HRAs to fund nongroup coverage through private exchanges. The only other way companies could pay part of employees’ insurance cost without offering group coverage would be to raise their wages commensurately. But that would not be practical. “I don’t see employers doing that and just hoping the employees actually use that money for health insurance rather than take the money and run,” says Garlitz.
Besides, in at least 40 states, employer-sponsored nongroup plans are not guaranteed-issue plans (i.e., bound to cover all participants under the same terms regardless of their risk factors).
Myth 3: Employers using private exchanges will offer a single pot of benefits money to each employee.
That would be the simplest approach, with the employee able to spend the money however he or she chooses on medical, dental, disability or life-insurance coverage.
But that approach probably wouldn’t meet the needs of many companies. If they did that, employees generally would spend most of it on medical coverage. If participation in the other, ancillary benefits dropped significantly, the company likely would be charged dramatically more for them or possibly even lose its contracts with the benefit providers.
“Companies buy those things because they get such wonderful deals on them,” Garlitz says. “We think many companies that move to private exchanges will use them for certain but not all benefits.”
Myth 4: While private exchanges may fix an employer’s costs, they won’t affect the overall costs of the health-care system.
Much discussion of the Affordable Care Act is about whether it actually drives cost out of the health-care system. Many believe that will be only a long-term effect, if it happens at all.
Similarly, some believe that while a private exchange may help a company control its own health-care expense, overall health-system costs will remain the same.
Garlitz disagrees. Fixing the company’s cost will have practical limits as described in Myth 1, but consumers vote with their feet. “I think with private exchanges you’ll see a movement to lower-cost coverage options, driven in part by the narrower [doctor, hospital and pharmacy] networks that some of those options will offer as well as the availability of health plans with innovative payment models. That’s where private exchanges can drive cost out of the system.”
He acknowledges, though, that choosing a low-cost health plan with high deductibles and low coverage limits could lead some people to delay or avoid needed care and thereby risk costly health consequences.