Private Exchanges Will Complement, Not Compete With, Public Ones

Featured Health Business Daily Story, Jan. 3, 2012

Private Exchanges Will Complement, Not Compete With, Public Ones

Reprinted from HEALTH PLAN WEEK

By Jonathan Block, Editor – December 19, 2011 – Volume 21 Issue 44

Private insurance exchanges will complement and provide an alternative to state exchanges and won’t be a competing force, according to three top executives who have developed private exchanges.

Bryce Williams, CEO of Extend Health, Inc., which operates the nation’s largest private Medicare exchange, said he believes the two exchange types “are going to be far more complementary than opposite of one another….There’s not a big cry out from the states that private exchanges are going to cannibalize or overlap with public exchanges.”

Speaking Dec. 13 at AIS’s webinar, “The Rise of Public Exchanges: Implications for Insurers, Employers and the Health Care Consumer,” he added that employers have incentives to continue to fund employee health benefits.

And while employer contributions under a defined-contribution model might be lower than under more traditional coverage options, “they are at high enough levels where private exchange coverage and options are going to be superior than what you can secure on the public side,” he told attendees. “The products, flexibility and choice are superior on the private side.”

Williams noted that from the 1980s until just a few years ago, the number of employers providing subsidies for retiree health benefits fell from the 60% range to around 20%. However, since the introduction of Extend’s exchange, that percentage has started to rebound.

“In an environment where employers are incentivized to cut and run — if you give them a sustainable, efficient model here they can look out to the future and see what their costs are going to be. We’re going to be able to keep employers in the game.”

Private exchanges provide an alternative to state exchanges because large employers can’t participate in state exchanges until 2017 at the earliest, said Ken Sperling, global health and benefits practice leader at Aon Hewitt, who is heading development of the firm’s corporate exchange.

“If private exchanges become stable and successful, we will extend [our solution] to the individual market, and not just the group. As we transition to an individual market, there is better risk and less viability than in state exchanges.”

Sperling added that in 2014, when the state exchanges are up and running, large employers will have the option of dropping coverage and letting employees get their health insurance through the public exchanges, but the penalties and other factors such as a reduction in tax benefits will deter many employers from doing so.

Sperling noted that if many employers drop coverage, the response will likely be to raise the $2,000-per-employee penalty since “the penalty will have to be what it needs to be to keep the employer-sponsored system intact.” He added that labor issues, political pressures and cost issues will keep the system in place for the foreseeable future.

Private exchanges also are more alluring than public ones because they can also offer ancillary benefits, said Abir Sen, CEO of Bloom Health Corp., which in September became majority owned by WellPoint, Inc., Health Care Service Corp. and Blue Cross and Blue Shield of Michigan (HPW 9/26/11, p. 1). All three firms’ platforms offer additional benefits, such as dental and vision.

“Where we want to position Bloom is the one place where employees can shop for all of their benefits,” he said. “For a lot of employers, the private exchange will be the right solution.”

A Win-Win for Employees and Employers

All three executives emphasized that the move to private exchanges — and the accompanying defined-contribution model — will be a win for both employers, who will end up saving money, and employees, who will have greater selection among health plans that can best suit their needs.

And the fact that group coverage costs have been increasing for years also could spur movement to private exchanges. Williams said employers can see health care savings of between 25% and 35% through a private exchange.

“We think that the exchange approach just makes sense in light of what is happening now, which is just a cost shift onto a plan recipient,” Williams noted. “If you are going to shift the cost, then why not also shift the ownership of the plan, and allow people to captain their own ship.”

“We find that employers want to continue to offer health benefits, but want to do it economically,” Sen added. “We ask employers how much they can afford to spend.…They say health care will be no more than 4% of our sales….Now their health care expenses are connected to a business metric that is relevant.”

Defined-Contribution Model Is Picking Up Steam

“The movement to defined contribution has begun and we expect it to accelerate,” said Sperling, who added that there is a strong value proposition in the private exchanges for employers, employees and carriers.

By going with a private exchange, an employer reduces administrative costs, as well as avoids involvement in vendor relationships and plan designs. That allows the company to “focus on things that matter [the most] to the organization,” he told attendees. And for carriers, the private exchanges offer better risk than will the individual and small-group markets in state exchanges.

And while Aon Hewitt’s exchange will be targeted to group customers, if employee benefits move to an individual-type model, then “that coverage becomes portable since you could then separate the employment relationship from coverage,” he added.

Another important advantage of shifting to the defined-contribution model, Sperling explained, is that it allows employers to jump off the health care trend curve. Assuming employer contributions are pegged to the compensation trend rate (3% annually), rather than the health care trend rate (7% annually), a company with 10,000 insured lives and an annual employee premium subsidy of $7,000 could save as much as $59 million over the course of five years.

Data from Bloom also demonstrates employer costs savings. Bloom found that employers using its exchange platform have annual per-employee health costs that are 19% less than the national average, while the average single and family premiums are, respectively, 18% and 22% less than the national average.

Bloom’s research also showed that annual payroll deductions for single coverage were an average of 7% lower than the national average, and 29% lower for family coverage. In addition, 15% of enrollees have money left over in their Bloom accounts, which can be used either for out-of-pocket expenses or rolled over to the following year.

Although Bloom now has 85 employers using its exchange, the company has found that the market demands different types of exchanges. For example, small and mid-sized employers will want to just use a general exchange platform with one or several insurers offering several plans, give their employees money and have them shop. However, larger employers tend to want Bloom to build them a customized exchange where they can determine plan designs.

Another exchange model gaining traction offers a menu of coverage options from a single carrier, which Sen said is analogous to having a supermarket where only store-brand goods are available. This last model, which is offered as an option to an insurer’s employer customers, is currently being used by the Michigan Blues plan and Medica, a Minnesota-based health plan (HPW 7/18/11, p. 1).

“It’s only the flip side to the defined-contribution approach,” said Sen, referring to private exchanges. “The entire model hinges on whether employers can limit their risk and is the employee happy [as well as] stocking the exchange with the right set of plans.”

Customer Satisfaction Is Key

In order for private exchanges to be successful, there has to be a strong emphasis on customer service to assist enrollees in making their plan selections and allow them to become savvy health care consumers. Another key is a large number of carriers and plans to drive competition in the marketplace, the executives agreed.

“We have a saying in our company: An exchange is never just a website and not just a one-carrier solution,” said Williams, adding that an exchange needs five or more carriers with up to 100 plans offered in order to truly drive competition.

Sperling agreed that the customer experience is critical to exchanges working well. This means investments in customer benefit advisors as well as designing exchanges that have appropriate tools to help people compare plans and make the right choice.

“When you move from an employer to a retail environment, the user experience is absolutely critical….It’s more of a shopping experience rather than an enrollment experience.”

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