By 2017, about one in five Americans will buy health insurance on exchanges that are not run by the government.
Private health insurance exchanges are expected to fundamentally change how insurance is purchased by the 170 million U.S. employees who have employer-sponsored coverage. Yet, more than eight out of 10 Americans have no idea what private exchanges are or how they work, according to a survey by Accenture Research. However, once the concept was explained, 85 percent of respondents reacted positively.
Companies have for years used private exchanges for their Medicare-eligible retirees. About 10 percent of large companies do so now, and about half are considering shifting them to the exchanges in the near future. However, spreading the approach to active employees is relatively recent. Another emerging market for private exchanges is younger retirees under age 65 who are not eligible for subsidies on the public exchanges.
Like its counterpart created by the Affordable Care Act, a private health-insurance exchange is an online marketplace where people can shop for benefits. The employer typically makes a defined contribution toward the insurance an employee selects that best fits his or her needs.
Many health policy analysts say the move to private exchanges will have the same impact when companies years ago shifted employees from defined-benefit pensions to defined-contribution plans such as 401(k)s. Employers continued to shape employee investment choices and make matching contributions, but the investment risk remained with employees.
As the cost of healthcare continues to rise, the companies increasingly consider the expense unsustainable and are more likely to consider caps on employer contributions.
Insurers, brokers, and benefit consultants run most of the private-exchange websites. Unlike the government exchanges, there is no federal government premium assistance. Private exchanges typically offer employees a wider range of coverage options and prices than a traditional employer benefits plan. One of the exchange’s goals is to encourage competition among the participating plans to lower prices and improve benefits.
A survey by consultant PwC found that two out of three employees want their employers to offer between three and five health-plan choices, which is a strength of a private exchange. According to one study, 80 percent of employees chose a plan less rich than what their employers had chosen for them, indicating companies historically have misread what their employees really want.
There are generally two kinds of private exchanges. One allows the employee to choose from a variety of plans offered by one insurance company. Another offers a choice of plans from several companies.
Employers can outsource traditional plan management to the private exchange, including renewals, program administration, and customer service. Private-exchange operators tend to target large employers, although Chicago-based Aon Hewitt has begun a private exchange for mid-size companies. IBM and Walgreens sent their employees to private exchanges this year.
Private exchanges are not a new idea. In 1998, 60 percent of human-resource executives at midsized firms said they wished they could empower employees to make their own benefit decisions.
Research from the Dallas consulting firm Towers Watson has found that more than one out of three employers saw private exchanges as a viable alternative to traditional self-managed employer coverage for full-time employees in 2014. However, three out of four want more evidence that private exchanges can deliver value and most are uncertain whether to move full-time employees to those exchanges in 2015. Many employers are uncomfortable with losing day-to-day control over benefits.
According to consultant Oliver Wyman, about 60 percent of employers said they are willing to participate in private exchanges if it saved them at least 10 percent of healthcare costs. Another 20 percent said they were interested in the concept regardless.
Although some companies view the defined-contribution approach attractive, that is not the primary motivation for others. For example, about half of the employers in consultant Mercer’s exchanges have shifted to paying a fixed contribution toward health insurance. For employers, the advantage of defined contribution is that they can budget the same amount for benefits and potentially have employees pay for the annual increases. They can also pick cheaper plans.
Bruce Sammis, chief executive officer of Lockton Dunning Benefits in Dallas, said there is a myth that private-exchange participation will create significantly better discounts on health insurance.
“Because Blue Cross Blue Shield of Texas has millions of lives, Baylor already gives them a deal (on rates). Baylor will not give an even better deal because of the exchange. Ninety percent of the squeeze has already taken place,” he said.
Steve Jacob is founding editor of D Healthcare Daily and author of the book Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us. He can be reached at [email protected]