http://resilience.willis.com/articles/2014/04/08/how-private-exchanges-are-reshaping-us-healthcare/
WILLIS RESILIENCE
Written by Cyril Tuohy
ISSUE 04 / SPRING 2014
Private healthcare exchanges are allowing US employers to curtail healthcare costs and giving employees more choice and control over their healthcare provisions.
As pressure to reform the US’s healthcare system trickles down from the Patient Protection and Affordable Care Act, private exchanges have created an entirely new purchasing experience for employers and employees.
Long before the hoots and hollers flooded the nation’s airwaves deriding the rocky roll-out of Obamacare’s public health exchanges, private exchanges — sponsored by brokers, benefits consultants, specialty technology platforms and insurance carriers — began signing up thousands of employees working for many large and mid-size companies.
Backed by private equity, more exchanges are cropping up every month, with 40 million Americans predicted by Accenture to buy benefits through a private exchange by 2018.
“Almost every employer is looking at whether a private exchange is right for them,” says Laurel Pickering, president and CEO of the Northeast Business Group on Health, a 190-member business coalition.
Transferring risks
A tax on high-cost, employer-sponsored ‘Cadillac’ health plans and other employer mandates under the Affordable Care Act will put more pressure on companies to stop administering health benefits, a responsibility many would like to get rid of anyway. “More employers are considering simply giving their employees money to let them shop through the exchanges for healthcare,” Pickering says.
Pickering groups the exchanges into four categories: benefits consultants and brokers, health insurance plans, technology-driven intermediaries, and ‘pure-play’ benefits models.
The number and profile of the categories will almost certainly change in the next year, but they need to be watched carefully. For employers that have seen healthcare costs rise over the past 20 years to more than $10,000 per employee, differences in the exchange models have implications for the long-term health of employees and for the bottom line.
Breakdown of interest in private exchanges
With an estimated 170 million North American employees insured through employer-sponsored health plans, the market is large enough for robust competition and pricing transparency.
More than 28% of large employers plan to move to a private health exchange model in the next 3 to 5 years, according to the fourth quarter report of the International Society of Certified Employee Benefits Specialists. Exchanges will become a ‘permanent and significant avenue’ of the benefits purchasing landscape, predicts the article, as employers use the defined contribution model to transfer risk without shifting costs onto employees.
Meanwhile, 5–20% of mid-market firms will move to private exchanges by 2017, says James Blaney, CEO of the Human Capital Practice at Willis. The private exchange model will prove particularly appealing for employers with high concentrations of seasonal workforces and those in the retail and hospitality sectors, Blaney adds.
Make mine a jumbo
The exchange model for the largest corporate buyers relies on the largest possible employee population to work. Also known as a multi-employer, multi-carrier exchange, the ‘jumbo’ model brings together hundreds of thousands of employees from dozens, eventually hundreds, of companies. Employees can browse an online store and choose from a plethora of medical, dental or even supplemental insurance health plans.
“Jumbo exchanges are built on aggregating volume by signing up tens or hundreds of thousands of employees and dozens of carriers, to commoditise the risk and have multiple carriers compete on price,” says Blaney.
If an employee doesn’t like the plan for any reason, they are free to drop it and find another one on the exchange when their eligibility period comes around. The more employers that enter a jumbo exchange, the greater the pressure for the health insurers to compete for business and drive down prices. “Scale matters,” says Ashok Subramanian, CEO of the private exchange platform Liazon Corporation. “The more scale you have with different carriers the better deals and better products you can have for the employees.”
Companies like Sears Holding, Darden Restaurants and Walgreens, all with tens of thousands of employees, have joined jumbo exchanges. Huge companies, many of whom are self-insured with high retentions, like the risk transfer mechanism jumbo exchanges offer. Walgreens, for example, brought 120,000 of its 180,000 employees into the exchange for medical, dental, prescription drug and vision coverage last September. Depending on the employees’ location, they can choose from five different plan levels from as many as five different insurance carriers, according to a spokesperson at Walgreens.
Barriers to private exchange adoption
Driving down costs?
Some experts see the jumbo model as a ‘throw it against the wall and see what sticks’ approach, shifting medical costs from the employer to the employee and letting employees fend for themselves.
But proponents insist they’ve seen a drop in employers’ healthcare costs – caused by employees choosing to buy less healthcare coverage at competitive prices offered by the dozens of carriers: a process known as ‘buying down’. For instance, an employer that defines its healthcare contribution to the employee with a $500 monthly stipend could see its worker spend only $150 a month in health premiums on the exchange. Of what’s left, $300 a month could go towards boosting salary, and $50 a month might be redirected to the 401(k) defined contribution retirement plan.
Insurance carriers say the jumbo model carries more risk, however. “Carriers know which companies have signed up to join the exchange, but you don’t know who’s going to pick you,” cautions Todd Slawter, vice-president and head of national distribution strategy with Aetna.
For instance, an insurance carrier could have thousands of poultry workers with crushing workers’ compensation claims signing up for its health plan and driving up loss ratios. “For carriers, joining a jumbo exchange makes it more difficult to control the risk inherent in an employee population. If something is a bad risk in the past, joining an exchange doesn’t necessarily change that,” Slawter says.
No silver bullet
As employees sign up and the spending data trickles in, healthcare experts and employers will have a clearer idea of whether private exchanges have had any effect on price.
“More supply in the form of insurance carriers, and more demand through more employees, won’t necessarily mean lower prices for healthcare,” cautions Subramanian.
“Pricing gets really interesting when employees make choices with the help of good service and extensive analytics. That’s when workers find they can get robust coverage, or only take on a bit more risk but pay only half or 60% of the original insurance premium,” explains Subramanian.
However, the real dent in healthcare spending — an expression known as ‘bending the trend’ — comes through the lower use of healthcare, not through buy-downs, and exchanges aren’t designed to lower healthcare usage, says Rob Harkins, vice-president of private exchanges with Willis Group’s Human Capital Practice.
Exchanges are a shopping mechanism. Employees who save $200 a month in premium, because their employer uses an exchange model, haven’t addressed/lowered the utilisation of medical care if they still have to go to a hospital once a week, notes Harkins. “The exchange does nothing to control trend. That’s why wellness and health management programmes are also so important.”
http://resilience.willis.com/articles/2014/04/08/how-private-exchanges-are-reshaping-us-healthcare/