This second installment in a three-part series on private health-insurance exchanges describes their value proposition, drawbacks, and some CFO points of view. Part 1 introduced the private-exchange concept. Part 3 will address the vendors in the market and their products.
Employee health benefits may not be a favorite topic for CFOs. Historically, they preferred leaving human-resources stuff to HR folks. That’s been gradually changing over the past decade, but partly because that period has been marked by soaring health costs. Now, many finance chiefs are experiencing budgeting paralysis instilled by the uncertain future of the Affordable Care Act (ACA, or Obamacare) and the volatile health-care industry generally.
Enter private health-insurance exchanges. These online portals are populated with a variety of health-plan options from either a single or multiple carriers, displayed to enable users to compare those choices in apples-to-apples fashion. Typically, they are funded in part by defined contributions supplied by the employer.
Companies that opt for a private exchange will be looking for a budgeting benefit. In traditional health-benefit plans, self-insured employers risk swings in claims volumes from year to year. And fully insured ones are subject to possible double-digit premium increases, which have been the norm in recent years.
When they use private exchanges, companies set their contribution amounts at the beginning of the plan year. No matter how much insurers raise rates for the following year, a company can control how much it contributes to the plan.
Of course companies have been able all along to pass on to employees as much of the annual cost increases as they cared to (although most, wary of damaging their ability to attract and retain talent, have absorbed a majority of the hit). But if enough companies choose it, the private-exchange model could bring long-needed price stability to the health-benefits arena.
The new exchange that consulting firm Aon Hewitt is offering to its large corporate clients offers an example of why that could happen, at least with respect to multiple-carrier exchanges. Employees of Sears and Darden, which will be the first two customers for the exchange starting January 1, can choose from among five medical, three dental, and three vision insurance carriers. Each carrier must provide plans at five quality levels: platinum, gold, silver, bronze plus, and bronze. (While an individual client company must offer the gold and silver levels, it can choose to suppress up to two of the other three.)
But while the carriers can price their plans however they wish, the actual benefits provided by each carrier must be identical — each gold plan, for example, has the same physician and pharmacy networks; coverage for the same drugs, treatments, and procedures; and so on. If one carrier were to charge more than the others, employees making their insurer elections would easily see the disparity and presumably have no motivation to select the more expensive option.
“We’re trying to establish a competitive market for health-care benefits,” says Ken Sperling, Aon Hewitt’s health-care-exchanges strategy leader. “That does not exist today, partly because of the cost and disruption involved in moving to a different insurer. But it’s one of the reasons health-care costs are going up 7% to 10% a year. We have commoditized our product so that costs are in check and there is freedom of movement on an individual-employee level.”
Another reason employees of companies that contract with private exchanges may feel less bite from annual cost increases is that, as with consumer-directed health plans (CDHPs), they are likely to spend their own money more wisely than they spend their employer’s money. For example, young, healthy workers will have more options to choose plans that are cheaper because they carry high deductibles and co-payments.
Employees who want to pay more for richer plans can do so. However, “experience shows that a majority of employees will choose less-rich plans than they get when an employer tries to build a plan to serve everyone,” says Thomas Mangan, CEO of United Benefits Advisors. “In America, when given a choice, we choose with our money.” (However, critics have long argued that an overabundance of cost-cutting incentives in such plan types as CDHPs and health savings accounts could move employees to delay medical care that they really need, only to incur greater costs when their conditions worsen.)
That effect will apply as well to single-carrier exchanges like most of those offered by Bloom Health. Notes that firm’s CEO, Abir Sen, “When HR gives the employees two choices, you have a bunch of people who would have been plenty happy if the plan were cheaper but who are essentially forced to overinsure themselves. And there are a bunch of people who would have been happy to pay more to get a richer plan.”
Even benefits consultants like Mangan are talking up the advantages of private exchanges to their corporate clients. “There is a clear value proposition. I’m thrilled by what’s happening,” he says. “I’m even cautiously optimistic that this last paper-based industry will come into the 21st century. I’ve never seen an insurance company with a robust IT department — some of them still print everything out once it gets to them and then rekey it in — but I can see a time coming when all carriers will be able to take data feeds from all the exchanges.”
On the Other Hand
Not that Mangan doesn’t see some potential drawbacks. For one, he says, “pioneering companies have a chance to get slaughtered” by unfamiliar technology tools.
The pioneers in the retiree exchange market planted their stakes in the ground years ago. But in a high-profile incident late last year, State Farm Insurance temporarily suspended a program under which 24,000 retirees who were removed from the insurer’s retiree health plan in a cost-cutting move were to get help in finding new coverage from Aon Hewitt’s Navigators retiree exchange platform. State Farm cited technical glitches in the program as the reason for the suspension.
Second, notes Mangan, if a corporate plan sponsor decides not to increase its defined contribution so that it keeps pace with medical-cost inflation, there is a large risk that lower-paid employees will go to the public exchanges to be created under the ACA in order to take advantage of government subsidies. Individuals earning up to $44,000 and families of four who make $88,000 or less will be eligible for subsidies, so most companies will have some eligible employees.
“The effect on plan sponsors could be that [their] own underwriting pool would go into a ‘death spiral’ as healthy young people leave the plan,” Mangan says, referring to the fact that health-insurance payroll deductions from such workers in effect subsidize the typically higher medical costs for older employees. Were the former to pull out of the plan, the latter’s costs would spike.
Martin Graf, a vice president with global management-consulting firm L.E.K., opines that there really aren’t any other significant reasons for companies, large or small, to avoid private exchanges. Indeed, contrary to the spirit of Mangan’s observation, he predicts that the costs of using private exchanges will be dramatically lower for workers compared with the public exchanges.
The ban on insurers rejecting new insurance applicants with preexisting conditions that’s to take effect in 2014 will be accompanied by a near-total ban on underwriting — the process by which insurers adjust rates based on an insured’s risk factors — for medical-insurance products included in the public exchanges. “When insurers have to take all comers [without risk adjustment], there is going to be a huge increase in price, which goes against everything that legislators and regulators have been saying,” Graf says. “Our numbers say there will be anywhere from a 15% to 35% increase across the board.”
But the ACA is silent on underwriting for products included in private exchanges. That should make private exchanges far more appealing than most companies currently perceive them to be, Graf notes.
Cost savings, though, are not necessarily the primary driver of corporate interest in private exchanges. Aon Hewitt analyzed how the 19 companies that sent requests for proposal for its new exchange would have fared cost-wise by providing employees the same benefits through the exchange they had been providing on a self-insured basis. The exchange rates in aggregate were just 1% less, Sperling says, but there was wide variability. Some companies would have paid more than 5% extra to switch to the exchange.
Sen, of Bloom Health, says the rates insurers set are about the same for private exchanges as for traditional corporate health insurance. “We just see that individuals who make insurance decisions for themselves tend to be more satisfied with the outcome than when [their employer] makes the decisions for them,” he says.
Another exchange provider, Liazon, claims that, on average, its clients see a 10% savings in the first contract year. (Some sources for this article raised an eyebrow at that figure; one called it “a stretch.”) Then, says Liazon CEO Ashok Subramanian, they peg annual increases in their defined contributions to the inflation rate or the Consumer Price Index. That would amount to about a 3% hike, far below the typical 10%-plus bounce that small companies offering traditional health benefits have been getting hammered with.
Some of Liazon’s customers cite criteria other than cost as major factors in selecting the vendor. Richard Addi, who was CFO of aerospace-technology company Exostar for four years before being promoted to CEO in 2011, says he contracted with Liazon three years ago primarily because its technology platform integrated well with Exostar’s 401(k) and payroll systems operated by Fidelity.
Fidelity introduced Addi to Liazon, with which it had recently created a linkage. “It was not a traditional route for getting health benefits” for the company’s 120 employees, he says. Most of them were young and single, “so costs were not the driver for us that they are for some companies. It was about convenience and efficiency, though there have been some cost benefits.”
At HookLogic, an 80-employee provider of e-commerce solutions, Ajay Singh undertook an examination of all processes and systems after becoming the company’s first CFO in October 2011. One goal was to get the quality of health benefits for employees in New York, where high costs kept quality levels down, on par with what workers in HookLogic’s Michigan and Atlanta offices were getting.
Singh says he was able to accomplish that by scrapping the disparate insurance policies that had been used in the different states and consolidating all health benefits through Liazon. But what he likes most is the functionality of the portal, which is easy to navigate, he says, and appealing to HookLogic’s technology-savvy employees.