While interest in private health-insurance exchanges for active employees has recently been percolating more heatedly among large companies, an announcement today represents the strongest validation to date of the private-exchange concept.
Human-resources consulting firm Aon Hewitt said that it’s signed 15 new corporate clients, all with at least 5,000 employees, to provide employee health benefits through its private exchange in 2014. Only one of the companies was identified, but it was a whopper: Walgreens, which has about 160,000 benefits-eligible employees.
The new customers will join the exchange’s initial, 2013 users – Sears Holdings, Darden Restaurants and Aon Hewitt parent Aon plc, each of which chose to stay on for a second year.
“Everything’s been moving pretty fast already with private exchanges, but this is a very big deal,” says Ed Kaplan, senior vice president and national health practice leader at another human-capital consulting firm, The Segal Company, that does not offer a private exchange.
Exchanges being run by Aon Hewitt competitors Towers Watson, Mercer and Buck Consultants – none of which has yet said it will have more than five corporate clients in 2014 – allow customers to offer either self-insured or fully insured health plans through the exchanges. Outside the exchange environment large companies generally self insure, because paying claims directly is less expensive than using an insurance company to do that, provided the employer has enough workers to adequately spread its risk.
But although Aon Hewitt accommodates fully insured plans only, it still insists that its model will save money for most customers. Apparently there are at least 18 companies that agree, although Walgreens, because of its extreme size, may be an outlier.
“I think there’s been a big push to get a large entity like us involved in this exchange, and that’s probably reflected in the design” of health plans offered in the exchange, says Mark Englizian, the pharmacy giant’s vice president of compensation and benefits.
Walgreens size also allows it to take maximum advantage of Aon Hewitt’s strategy of dividing up the country into 21 geographic regions where carriers compete to get on the roster of those available to customers’ employees, which differs from region to region.
“We happen to be large enough that our risk is spread pretty well across all the 21 regions,” says Tom Sondergeld, senior director of health and well-being at Walgreens. “That allows the insurance carriers to offer very competitive rates.”
But the competition fostered by the regional strategy may be valuable to all of the customers. “It allows best-in-class plans and pricing to rise to the surface,” says Ken Sperling, national health-exchange strategy leader for Aon Hewitt. “The competitive dynamic here can’t be overstated.”
Another pricing factor is a mechanism to protect carriers from the risk of adverse selection – the risk that a high percentage of people with higher-risk health profiles will buy a particular carrier’s plan. Insurers typically assess risk charges to mitigate that risk. But under the Aon Hewitt model, each carrier participating in a regional exchange agrees to contribute money to a pool that would be used to compensate any one of them that’s hit hard by adverse selection. Given a guarantee that they won’t have to face that potentially very damaging scenario, insurers have reduced or eliminated their risk charges, Sperling says.
Finally, plans offered through the Aon Hewitt exchange are highly standardized. That, Sperling notes, drives efficiencies for the carriers in much the same way that standardization of financial processes and systems across decentralized operating units does.
According to Sperling, none of the firm’s exchange clients is planning to reduce its overall level of subsidies for employee health care. “They are maintaining or increasing it, but increasing it perhaps at a lower rate than they would have otherwise,” he says.
Asked whether that would be the case for Walgreens, Englizian says, “We’ll take that under advisement every year, but we’re committed to the cost-sharing ratio that we have.”
He says that a Walgreens employee in a low-cost region who chooses a high-deductible plan could wind up paying a premium of as little as $5 to $10 per month.
Walgreens, like Sears and Darden Restaurants, employs many lower-skilled, low-wage workers. Such companies, heavily represented in the retail, hospitality, restaurant and health-care industries, are the likeliest among large corporate employers to find private exchanges appealing, experts have said.
But Aon Hewitt says its exchange client list includes not only that sort of company but also representatives from the professional services, technology, communications, financial services and manufacturing industries.
For his part, Eglizian, noting that he’s held benefits leadership positions in the technology industry, among others, says, “I’m not sure that the fact that we have semi-skilled, low-wage workers influences this much at all. I’d be looking at it no matter what industry I was in. Every employer wants a benefits plan where costs are more predictable and employees get great value.”
To Kaplan, broad interest in private exchanges is a somewhat unsettling notion, and not just because Segal isn’t in the exchange business. “If the move to private exchanges were to become a long-term trend, it could make the group health-care market vulnerable,” he says. “The plans in Aon Hewitt’s exchange are group plans, but once a company has done this, how much of a stretch will it be to say, a few years from now, ‘Here’s some money in wages or bonus, now go out and buy insurance on your own’? There won’t be a group plan anymore.”
And, unlike a big company, “no individual will have any leverage with United Healthcare or Aetna,” Kaplan points out.