This is the second article in a three-part series about private exchanges. Part 1 documented growing interest in the products among large companies. Next: a profile of an exchange provider with a model unlike most others.
Just what, exactly, is a “private exchange”?
Almost everyone agrees that it’s an online marketplace for purchasing health insurance where employees select from a menu of plans, usually with more pricing and plan-quality tiers than employers otherwise typically provide. Beyond that, there’s little agreement on anything.
Should a private exchange have multiple insurance carriers, or is it still an exchange if there’s just one carrier that offers a number of different plan designs?
Does it matter if plans offered through the exchange are fully insured or self-insured?
Do employers gain an advantage by making defined contributions to employees that may or may not cover their insurance costs, depending on what plan they choose? Or do the dollars come out about the same when employers take the normal route, funding a portion of their overall health costs with payroll deductions?
For each of those questions, it depends on who you ask. There aren’t just different opinions on what works best for a private exchange. A commonly expressed notion is that if, for any particular entity calling itself an exchange, the answers to the questions aren’t “yes, no, yes, no,” or some other particular collation of yesses and nos, then it isn’t actually an exchange at all.
The points of contention converge into a more fundamental question: Are private exchanges actually beneficial to companies, beyond providing what seems to be a decent employee benefit? Or are they more like a mirage, simply a repository of health-benefits plans with financial implications that, at the end of the day, aren’t so different from what employers have been used to all along in the health-benefits arena?
Among the more visible proponents of private exchanges, apart from exchange vendors, is Christopher Condeluci, an attorney with law firm Venable LLP who, as tax counsel to the Senate Finance Committee from 2007 to 2010, helped draft early versions of what became the Affordable Care Act. He counts multiple exchange vendors as clients and says he envisions himself, a few years down the road when the niche is more mature, organizing and leading a private-exchange trade association.
“I believe in the concept,” Condeluci says. Health-care reform initially was a bipartisan effort, and the Republican idea, which he subscribed to, envisioned privately run commercial exchanges taking over as a main source of access to health care and acting to drive cost out of the system. “In my opinion, the manner in which the public exchanges are structured under the Affordable Care Act is the wrong way to go,” he says. “It’s bureaucratic, it costs a lot of money and the exchanges actually have the ability to regulate the market,” because they can kick out insurance carriers whose products don’t adhere to minimum affordability standards.
What Makes a Market Competitive?
The countering idea is that a private exchange is a competitive marketplace. The presence of multiple carriers creates competition which, in combination with tools enabling apples-to-apples comparison of health plans, reins in pricing. “Competition is the very essence of an exchange,” says Ken Sperling, national health exchange strategy leader at Aon Hewitt.
But some of the private exchanges operating today offer employer customers a choice of multiple-carrier and single-carrier options. Price is still reined in with the latter, they say, because experience shows that when given expanded choice end users will, on average, choose lower-cost options rather than paying for richer plans with higher benefit levels. The key is not expanded choice of carriers but rather expanded choice of plan types, this thinking goes.
Several exchange vendors, including Liazon, Bloom Health and Aon Hewitt, have released research results purporting to prove that employees generally will go down-market if they can. There is a paucity of similar research from unbiased sources that is particular to private exchanges, but there is a wealth of evidence that health-care consumers lean toward lower-cost coverage.
For example, a 2011 study by Rand Corporation, the nonprofit policy research and analysis organization, concluded that if 25 percent of people with employer-based health insurance were able to elect a consumer-driven health plan and did so, cost savings in the nonelderly population would be 1 to 2 percent of overall health-care spending. At 75 percent penetration, savings would range from 5 to 9 percent.
“An exchange can right-size employees’ medical coverage,” says Eric Grossman, exchange business leader at Mercer. “At most companies, a majority of employees are overinsured.”
One private-exchange vendor, Buck Consultants, goes further than offering a choice between single and multiple carriers. That is, the single-carrier model is all that it offers. Carriers compete for the right to Buck’s business in each geography, and the winner provides a slate of plans employees can choose from.
“The carriers and pharmacy benefit managers are very aggressive in their contracting with us, because if they have all of our business in a certain geography there won’t be any adverse risk selection,” says Sherri Bockhorst, leader of Buck Consultants’ health exchange solutions division, referring to a scenario where people with high-cost medical profiles may comprise a disproportionately large segment of a carrier’s insured population.
Pay Now or Pay Later?
Until fairly recently, most discussion of private exchanges has assumed they work only with fully insured health plans. Now it’s becoming common for exchanges to accept business from employers with self-insured plans as well.
The differences between the two kinds of plans within the exchange context are the same ones that exist outside that context, says Grossman – that is, fully insured plans cost more. “With insurance, one thing that’s certain is that employers have to pay their claims,” says Grossman. “It’s just a matter of when you pay them. Do you want to pay them with a 5 to 6 percent administrative load on top, which you get with a self-insured plan? Or would you rather pay them with a 10 to 15 percent load? We’re talking with very few self-funded clients that have any interest in moving away from that model, even though they may have significant interest in a private exchange.”
Among five large-company customers Mercer has signed up for its exchange for their 2014 benefits-plan years, three are self-funded. Buck also has five such clients on board for next year, and all five are self-funded.
That makes no sense to Sperling of Aon Hewitt, which is sticking with a fully insured-only strategy. “With a self-insured model, there is no price accountability,” he says. That is, a carrier can set the price for its administrative services and use of its health-provider network at an artificially low price in a market-share grab, but it’s the employer that’s on the hook if claims volume is unexpectedly high. “If the employer is comfortable taking that risk, fine, but it doesn’t work in an exchange environment where you’re trying to drive a different outcome through competition,” Sperling says.
In 2012, Aon Hewitt submitted to the carrier market data on 19 large employers that were evaluating the firm’s private-exchange solution. Rate quotes for its fully insured product were actually 1.2 percent lower than the market average self-insured costs for comparable plans, Sperling contends.
Still, one point of view is that companies using either model could save money by using an exchange. Lower-priced health plans typically come with high deductibles and co-payments, which tends to suppress the utilization of medical services. That means a self-insured employer will pay out less to cover claims, and a fully insured one will be able to negotiate better pricing terms with carriers for the next plan year.
“What really drives up the cost of insurance is how people use health-benefits plans once they’re in them,” says Bockhorst. That, she says, is exactly why the self-insured model does work well for a private exchange. Self-insured employers simply have greater access to data on their workers’ benefits usage than do fully insured ones, with insurers never eager to share information that can influence pricing. “You can see whether there’s a bump in the utilization of emergency-room services in Omaha and do a targeted campaign there. We can run reporting on the data to drive strategies around wellness incentives, for example.”
The defined-contribution approach to funding insurance purchases through private exchanges – which some view as going hand in hand with the self-insured model – is often said to make employer health costs more predictable.
Large companies overwhelmingly see enhanced cost predictability of as the thing they most like about the private-exchange concept, according to a survey by Benfield Research, which helps health-care suppliers tailor their approach to employers. Among the survey’s 114 participants, all with at least 5,000 employees, 41 percent cited it as the most attractive feature. Less appealing were the opportunity to reduce costs (20 percent), reducing administrative burden (10 percent) and providing employees with additional health-plan options. Eighty-three percent put cost predictability among their top three most appealing features, 35 points more than any of six other answer options.
But costs are predictable with fully insured plans too – at least, if you’re talking about the current year. “Each year you’re going to have different premiums and cost inflation,” notes Benfield co-owner Scott Thompson. “The predictability doesn’t last too long. Yet it’s a major selling feature for the exchanges.” Self-insured costs similarly vary from year to year.
Mercer’s Grossman doesn’t disagree, but he says defined contributions do provide value for employers. “It makes it easier to get over the hurdle of increasing your annual contribution to health benefits by only 2 or 3 percent when the [cost-increase] trend is running at 7 percent,” he says.
But that could also be viewed as an illusory gain. Even without an exchange, companies have been shifting more of the cost burden to employees for 20 years, points out Condeluci. And Grossman doesn’t disagree. In fact, he says, only half of the companies interested in Mercer’s exchange product expect to use the defined-contribution strategy, he says.
Proceed with Caution
Despite all the arguments around the variable elements of private exchanges, they have few unique characteristics. Even Condeluci concedes the differences between them and traditional group benefits delivery aren’t great. “The same laws apply, the same tax treatment applies.”
Not only that, regardless whether a company uses an exchange, it must choose how much choice to give employees and whether to be fully or self-insured. It doesn’t need to have a private exchange in order to shift to a defined-contribution funding strategy.
Thompson advises caution for companies thinking of contracting with a private exchange. In addition to the quantitative aspects of Benfield’s research, it did extensive qualitative interviews with employers, insurance brokers and the benefits consultants. “Many employers told us that they can increase their options internally, create a defined contribution plan, and cap what they’re paying, and they don’t need an exchange to do it,” he says. “The question becomes, how much is the reduction in administration worth and, if you’re moving from a self insured to a fully funded model as with Aon Hewitt, how much is the transferral of risk back to the insurer worth? Because right now we don’t know whether [using a private exchange] is going to save money or cost money.”
Benfield tries to stay neutral in making recommendations to its customers and is not purposely trying to sound negative about private exchanges. “Research is research,” he says, “and some of our research results are different from what we’re hearing from those who stand to gain from private exchanges. Most of the discussion is being driven by the benefits consultants that are offering them. Someone in the market has to be concerned about making sure people have the right information to make the right decision.”