Might a private health benefits exchange be right for your company’s active employees? In all likelihood you have no idea, even if you have a decent working knowledge of what private exchanges are.
Some confusion is understandable. For one thing, each private exchange differs from the others, often in quite fundamental ways. “If you’ve seen one, you’ve seen one,” says Michael Thompson, a principal in the health-care practice at PricewaterhouseCoopers, of private exchanges.
Also, the roster of exchanges includes several offered by the very consulting firms that large companies look to for advice on human-capital matters, including health benefits. PwC was a co-sponsor of research released on Dec. 12 finding that 69 percent of 723 employers, across an expansive range of sizes and industries, believe it is “very important” that their human-capital adviser be independent of any exchange they’re considering.
To be sure, PwC has skin in the game. It doesn’t offer an exchange, but it competes with the consulting firms that do — Aon Hewitt, Buck Consultants, Mercer and Towers Watson — for human-capital advisory business. On the other hand, the other research sponsors are four health-care-focused employer coalitions. “Certainly our members rate the value of having independent evaluation on private exchanges as very helpful,” says Emma Hoo, a director at one of the coalitions, the Pacific Business Group on Health (PBGH).
PwC, the PBGH, its counterpart organizations the Northeast Business Group on Health and the Midwest Business Group on Health, and the Employers Health Coalition (composed of Ohio employers) recently formed the Private Exchange Evaluation Collaborative (PEEC) to give much-needed, objective assessments of the private-exchange marketplace. The regional coalitions have somewhat differing menus of services but are generally focused on educating member employers on health-care issues and helping them arrange for better, lower-cost health insurance and services.
“A variety of brokers, consultants, payers and other intermediaries are offering private exchanges, creating a mix of potential vested interests among these service providers,” the PEEC noted in its research report. “As a result, employers are seeking an objective source of information and advice as they evaluate potential private exchange strategies and the vendors that could support them.”
The consulting firms know they can’t credibly be independent when it comes to private-exchange evaluation, Thompson says, “so they’re already sharing lots of information with us — they know we will play a role in helping employers understand these products.” The PEEC is preparing a request for information that it plans to distribute to private exchanges shortly after the new year begins.
The Cost Arrow Points… Where?
Among the chief things companies want to know, naturally, is whether they can expect to save money by going with a private exchange. At present the majority are skeptical: only 25 percent of survey respondents said they believe the move would lower their health-care costs. Still, 45 percent of the participants expect to consider using a private exchange for active employees by 2017 or have already implemented one.
“Just considering it is a very low bar,” Thompson observes. “It’s unlikely that 45 percent will implement. But what we are hearing from our clients is that everything is on the table. The private exchanges, not to mention the public exchanges, are very new, and when companies are thinking about their strategies, they’re not discounting those options.”
Indeed, if anything, companies are eyeing the public exchanges as a more likely long-term path. A surprising 58 percent of survey respondents said that if they’re permitted to contribute money toward employees’ coverage on public exchanges in 2017 or after, they would consider doing so. (At present, the public exchanges are available only to individuals and employers with fewer than 50 full-time workers or equivalents, but a provision of the Affordable Care Act will let states give access to larger companies starting in 2017.)
“Exchanges are the talk of the town,” notes Tim Prichard, head of the national employee benefits practice at insurance broker Wells Fargo Insurance Services USA, explaining employers’ high level of interest in them. But Prichard is skeptical that moving to a private exchange will result in a long-term cost benefit.
That’s especially so, he says, for companies that switch from self-insurance to fully insured plans, which for larger employers are generally considered about 6 percent to 8 percent more expensive. Virtually all private exchanges accommodate fully insured plans, while only some are also set up for self-insured plans. (Aon Hewitt representatives, whose exchange is for insured plans only, have insisted that its model can save money even for clients that were formerly self-insured.)
But, says Prichard, “Almost any company could see a cost decrease in the first year” of using a private exchange, because carriers are subsidizing initial plan costs with low pricing on administrative services and on dental, vision and non-medical insurance products offered through the exchanges. With fully insured plans they are subsidizing premiums in some instances as well, he adds. “The question is, what will happen in years two, three and four? Depending on the geographic location where the health plan is offered and the competition there, the carriers are making subsidized bets that if they get people on the platform, in future years those people will stay on the platform even while prices rise.”
Partly for that reason, Wells Fargo Insurance Services — which is strictly a broker, not an insurer — is hedging its bets on the private-exchange market. It is helping small corporate customers enroll in public exchanges and providing consulting services for those looking into or implementing private exchanges. But it’s not yet creating its own exchange, as some other brokers are doing.
But private exchanges, which first targeted small companies, have landed many new midsized and large customers this year. Such employers didn’t do it so they could spend more money on health care, even if they also appreciated the enhanced employee benefit of more health-plan choices that most private exchanges offer. Some exchanges, for example, promise to deliver savings resulting from vigorous price competition among carriers.
Also, companies might be able to save money over time by making direct contributions to employees that the workers can use to buy insurance through the exchange. That differs from the longstanding prevalent model employers use to fund health benefits: paying for a fixed percentage of premiums (in the case of fully insured plans) or actual health-care costs (in the case of self-insured plans) and deducting the rest from employees’ pay.
Some say the difference between those two approaches is mostly illusory and amounts to little more than an elaborate shell game with an effectively net-zero result. But so far it has proved that when employees have greater choice of health plans and buy them with their own money, they tend to pick plans with lower premiums and higher cost-sharing through deductibles, co-pays and co-insurance.
Companies can benefit from that tendency by sharing in any savings associated with either behavioral changes by employees (e.g., consuming less health care because of the higher deductibles and co-pays) or higher-value consumption (e.g., using urgent-care facilities rather than emergency rooms, for the same reason), says Thompson. Less directly, employees with less-rich plans tend to be more engaged in staying healthy and to learn healthier habits over time, he adds.
“Until we acknowledge and address the fact that it’s the high degree of demand for and utilization of health-care resources that is driving costs, [there won’t be] a private-exchange strategy that is really meaningful,” says Jim Blaney, CEO of the human capital practice at Willis North America, a unit of insurance broker and risk adviser Willis Group Holdings.
Faulty Funding Mechanism?
Despite the potential savings, a defined-contribution strategy has some potentially steep pitfalls. “What gets really tricky is that to the extent the rates of plans in private exchanges vary by area or employee age, with a fixed contribution you’d be overcompensating people in low-cost areas and young people,” says Thompson.
Also, the simple fact that an employer’s health-care costs float along with the health experience of its population may be troublesome. “Say you go up by 20 percent, which can happen,” he says. “Would you shift that entire adverse fluctuation onto your employees so that you can maintain your fixed contribution, or would you cushion it the way you’ve always done? It’s not clear how sustainable a defined-contribution approach can be.”
But some other aspects of private-exchange product models may produce savings. For example, Buck Consultants conducts market-by-market negotiations with carriers and offers plans from one specific carrier to its exchange customers in each geographic market. And at least one exchange vendor reportedly is leveraging the volume of employees enrolled in its exchange across all customers so as to provide reduced rates for pharmacy-benefits-management and administrative services (rather than, as in the above example, individual carriers offering reduced administrative rates).
Still, Hoo says companies are being prudently cautious about diving into private exchanges. “None of our members are currently using private exchanges for active employees,” she says. “There’s been a lot of movement from insured products to self-funding over the past decade. It’s not clear that employers are ready to reverse themselves, and there’s insufficient understanding of the pros and cons of maintaining a self-funded approach within some of the private exchanges. There’s also not sufficient understanding of what’s behind the curtain in terms of risk adjustment in these purchasing arrangements.”
Meanwhile, the PEEC research found that respondents see a number of barriers to widespread adoption of private exchanges for active employees. More than 80 percent of the respondents cited each of the following as a potential barrier: immaturity of the private exchange market; stability of cost over time; stability or track record of exchange administrator; limited information regarding private exchanges; and employee readiness. And those factors are just the top portion of the iceberg. Ten other potential barriers were cited by between 38 and 78 percent of respondents.
But overall, says Prichard, the important thing to remember about private exchanges is that they are a fairly new idea and are evolving. “Who’s to say that some human resources cloud technology company, for example, won’t come out with something unique, a more innovative approach to private exchanges than we’re seeing now?” he asks.