Healthy Choices

The rise of private health-insurance exchanges will enable companies to provide a greater choice of health benefits for their workers.
David McCannDecember 15, 2012

Barely more than two years ago, the term “health-insurance exchange” was just nudging into the corporate lexicon. Today, it’s hot — and not just because of the state and federal exchanges to be created under the Affordable Care Act (ACA).

Slated to come online in 2014, the public exchanges will allow individuals and small businesses to shop online for health-insurance plans, the details of which will be displayed in a way that will make it easier to compare benefits and costs. (Companies with more than 100 employees will have to wait until at least 2017, though they could opt to discontinue health benefits and encourage workers to use the public exchanges.)

But employers don’t have to wait to buy health insurance through public exchanges. A number of private exchanges are up and running; some of them have been for years. Primarily used by small companies so far, private health-insurance exchanges are now targeting large companies as well.

In September, Sears Holdings and Darden Restaurants became perhaps the largest companies so far to announce that they would use a private exchange. Starting on January 1, the two companies, along with Aon Hewitt, will be the first customers of the Aon Hewitt Corporate Exchange, a new offering from the human-capital consulting firm. The exchange lists nine health-insurance carriers, including Cigna, UnitedHealth Group, and Health Care Service, which operates Blue Cross and Blue Shield plans.

“We were looking for ways to deliver more choice and variety to employees,” says Danielle Kirgan, senior vice president of total rewards for Darden. “But we knew it would be difficult to create [an exchange] on our own because of the infrastructure and resources it would take.” Darden’s move is also a nod to the future. “We wholeheartedly believe this is going to be mainstream within two or three years,” Kirgan says.

Indeed, private exchanges could well develop into the dominant way of delivering health-care benefits, suggests Gregg Waldon, CFO of RedBrick Health, a supplier of wellness programs and a customer of exchange provider Bloom Health. “If you had asked me about that six months ago, you probably would have gotten a different answer,” Waldon says. “That’s how quickly things are changing.”

The ACA provision that health insurers may not reject applicants because of preexisting conditions is scheduled to take effect January 1, 2014. Private-exchange vendors may then be well positioned, affording companies the option to send employees to an exchange while still technically offering a qualified health plan as defined under the ACA. That would allow employers to avoid the law’s $2,000-per-employee annual penalty for not offering a qualified plan, which also takes effect in 2014.

How They Work
Most experts in the field describe health-insurance exchanges as online portals populated with a variety of easily comparable health-plan options, from either a single carrier or multiple ones; in both cases they offer more plan options than health-benefit plan members typically get to choose from. Exchange operators build or license technology platforms to deliver the portals, and they solicit participation from and contract with insurers. Most exchanges generate revenue from a per-employee fee levied on client organizations, as well as from commissions from the insurers.

An exchange can help employers manage their health-care costs in several ways:

Plan sponsors can shift to a defined-contribution model, offering employees a predetermined chunk of cash for buying health insurance through the exchange. That means a company’s health-benefit costs will be mostly predictable.

Workers can choose from a range of easy-to-compare plans. Displaying pricing and other key plan details in a way that allows for apples-to-apples comparisons between plans is central to the exchange concept.

With many exchanges, plan sponsors can offload much of the administrative burden associated with fully insured or self-insured plans.

Perhaps the oldest significant private health-insurance exchange is eHealthInsurance, which was founded in 1997. Before the ACA, “we marketed ourselves as an online insurance marketplace,” says Bill Hanis, a vice president at eHealthInsurance. “But in the corporate health-insurance industry now, the validating word in marketing collateral and messaging is exchange. If you don’t say you’re a private exchange, you’re not going to get attention.”

Indeed, seemingly every service provider or technology company with an enrollment engine for health-benefit plans now bills itself as an exchange. Individual insurance carriers and brokers are also starting to offer their own so-called exchanges, although they are populated solely with their own plans. Such single-carrier exchanges, where the corporate client is a captive audience, are currently the most common type of private exchange.

A Budgeting Benefit
Many companies that opt for a private exchange will be looking for a budgeting benefit. With traditional health-benefit plans, self-insured employers risk swings in claims volumes from year to year, while fully insured ones are subject to double-digit premium increases, the norm in recent years.

With private exchanges, companies set contribution amounts at the start of the plan year. No matter how high insurers raise rates for the following year, a company can control how much it contributes to the plan. All along, off course, companies have been able 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.

Aon Hewitt’s exchange offers an example of why that could happen, at least with respect to multiple-carrier exchanges. Sears and Darden employees 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 levels.)

But while the carriers can price their plans however they wish, the actual benefits provided by each carrier are identical. Each gold plan, for example, must provide essentially the same benefits. If one carrier were to charge more than the others, employees making insurer elections would easily see the disparity and presumably would have no reason to select that 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 the employee level.”

Another reason employees could feel less bite from annual cost increases is that, as with consumer-directed health plans, they are likely to spend their own money more wisely than they spend employer money. Experience shows that a majority of employees will choose less-rich plans than they get when an employer tries to build one to serve everybody, says Thomas Mangan, CEO of United Benefits Advisors.

Glitches and Death Spirals
Mangan, for one, sees potential drawbacks to the new exchanges. First, the technology is untested, he says, and “pioneering companies have a chance to get slaughtered” by technical problems. Last year, for example, State Farm Insurance temporarily suspended a program under which 24,000 retirees were to get coverage through Aon Hewitt’s Navigators retiree exchange platform. State Farm cited technical glitches as the reason for the suspension.

Second, says Mangan, if a plan sponsor decides not to increase its defined contribution to keep pace with medical-cost inflation, lower-paid employees could go to the public exchanges to take advantage of the government subsidies. (Individuals earning up to $44,000 and families of four earning up to $88,000 will be eligible for subsidies, so most companies will have some eligible employees.) Should that happen, “a plan sponsor’s own underwriting pool would go into a ‘death spiral’ as healthy young people leave the plan,” says Mangan, since health-care payroll deductions from such workers subsidize higher medical costs for older employees. Were the former to leave the plan, costs for the latter would spike.

But Martin Graf, a vice president with global management consulting firm L.E.K., doesn’t see any other significant reasons for companies large or small to avoid private exchanges. Indeed, contrary to Mangan’s warning, Graf predicts the cost of using private exchanges will be dramatically lower for workers than the cost of public exchanges. That’s because starting in 2014, along with the ban on denying coverage based on preexisting conditions, there will be severe restrictions 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, Graf points out.

“When insurers have to take all comers [with little risk adjustment], there is going to be a huge increase in price, which goes against everything that legislators and regulators have been saying,” says Graf. “Our numbers say it will be anywhere from 15% to 35%.” But the ACA is silent on underwriting for products included in private exchanges. That should make them more appealing than many companies currently perceive them to be, says Graf.

Convenience and Functionality
But cost savings aren’t necessarily the primary driver of corporate interest in exchanges. Aon Hewitt analyzed how the 19 companies that sent RFPs for its new exchange would have fared by providing employees the same benefits through the exchange that they had been providing on a self-insured basis. The exchange costs in aggregate were 1% lower, Sperling says, but there was wide variability. Some companies would have paid more than 5% extra to make the switch.

For some exchange customers, convenience is a drawing card. Richard Addi, CEO of Exostar, an aerospace technology company, says he contracted with exchange operator Liazon three years ago primarily because its technology platform integrated well with Exostar’s 401(k) and payroll systems, which are operated by Fidelity Investments. Fidelity introduced Addi to Liazon, with which it had recently created a linkage.

“It was not a traditional route for getting health benefits,” says Addi, who was Exostar’s CFO until his promotion in 2011. “Most of our employees are young and single, so costs were not the driver for us that they are for some companies. There were some cost benefits, but it was about convenience and efficiency.”

When Ajay Singh became the first CFO at e-commerce solutions provider HookLogic in October 2011, an early goal of his was to boost the quality of health benefits for employees in New York. High costs there had kept quality levels below what workers in the company’s Michigan and Atlanta offices were getting. Singh says he achieved his goal by scrapping the disparate insurance policies used in the different states and consolidating with Liazon. But what he likes most, he says, is the functionality of the portal, which is easy to navigate and appealing to HookLogic’s tech-savvy employees.

Bloom Health CEO Abir Sen says costs are about the same with private exchanges and traditional corporate health insurance. “We just see that those who make insurance decisions for themselves tend to be more satisfied with the outcome than when [their employer] makes the decision for them,” he says.

Making a Choice
The number of credible private exchanges available to active employees is still relatively small, observers agree. Aon Hewitt, Bloom, Liazon, and eHealthInsurance are among the major players (see “Exchange Directory,” above). There are also a few long-established regional exchanges, like Healthy NY and CaliforniaChoice. Individual insurance carriers that are dabbling in the space are mostly just getting started.

Client bases differ widely. Most of Liazon’s corporate customers, for example, have fewer than 50 employees (although one has 3,000, says CEO Ashok Subramanian), as do most of eHealthInsurance’s employer customers. Bloom has 140 customers with a total of 106,000 covered lives, or an average of 757 per customer; one has more than 20,000 workers, according to CEO Sen. At Aon Hewitt, the focus will be on Fortune 1,000 companies for now.

The number of carriers provided varies, too. Liazon and Bloom mostly offer single-carrier plans, compared with Aon Hewitt’s five carriers. “Some of the carriers are not yet sure how to price this for a multiple-carrier exchange,” comments Mangan, “and anyway, they don’t want to compete with each other on that platform for an average group. To do that, they want Fortune 1,000 companies.”

eHealthInsurance has a different business model: it gives companies, not employees, a choice. Each corporate client evaluates multiple plans from multiple insurers, then chooses one plan for its workers. Also unlike the direction the exchange market is taking generally, most of eHealthInsurance’s exchanges are still based on a defined-benefit model, in which benefits for doctor visits, hospitalization, prescription drugs, and so on are predefined, but employees’ costs are uncertain.

In May, Towers Watson bought Extend Health, among the largest providers in a crowded field of exchanges for Medicare-eligible retirees. Within each zip code, Extend lets customers choose from three to five carriers collectively offering about 15 to 50 plans, depending on the local population and demographics. It expects to launch an active-employee exchange by 2014 with the same multicarrier approach, says Bryce Williams, who founded the company and is now its managing director for Towers Watson. He calls the single-carrier platforms “faux exchanges.”

Others feel differently. Small companies may not be able to afford a multicarrier exchange, and for large ones the difference between single-carrier and multiple-carrier exchanges “is more perception than anything else,” argues Graf. Even with their traditional health plans, most large companies offer insurance plans from multiple carriers, but Graf contends they are largely noncompeting. “You don’t see two similar products competing at different price points, or two similar price points with differing benefits structures,” he says. “That will likely also be the case with a multicarrier exchange.”

Subramanian adds that the range of plan types available in an exchange, with variations in provider network, covered services, deductible amount, and maximum out-of-pocket expenses, is what provides meaningful choice. “Both single- and multicarrier exchanges can be successful if there is sufficient variation of these criteria,” he says.

Graf further notes that “the economics are often better with one carrier. Single carriers tend to do a better job of integrating all the elements of the exchange and managing it.”

Whether they offer one or several insurance carriers, private exchanges are destined to develop into “a major piece” of the company-sponsored health-insurance arena, Graf predicts. “It won’t happen overnight,” he says, “but when it does, it will do away with a good portion of what benefit consultants and brokers do today.”

David McCann is a deputy editor, online/mobile, at CFO.