Going private

Carl Cudworth, director of benefits at Houghton Mifflin Harcourt Publishing in Austin, Texas, was facing steeply rising health insurance costs for his company's 700 retirees.

In 2010, he shifted away from offering them a menu of several health plans chosen by the company, with the company paying a fixed percentage of the premium for each plan. Instead, Houghton Mifflin gave them a fixed dollar amount and referred them to a private health insurance exchange operated by San Mateo, Calif.-based Extend Health, which subsequently was acquired by consulting firm Towers Watson.

The retirees took the company's premium contribution and picked from nearly 200 plans offered by 35 carriers on the exchange, paying out of pocket if the premium for their chosen plan exceeded the company's contribution. This approach has enabled Houghton Mifflin to hold its retiree health costs flat since 2010, because it sets a fixed budget for its premium contributions.

Such private exchanges are growing across the country and increasingly are being pitched to small employers as a way for companies to shift to defined contributions, offer employees and retirees a multiple choice of plans, and free the firms from the administrative burdens of running their own health benefit programs. They are geared toward employers that buy fully insured products as well as self-insured companies. These exchanges are being offered by some of the largest benefits consulting firms in the country. The consulting firm Accenture projects that health plan enrollment through private exchanges will skyrocket from 1 million in 2014 to 40 million in 2018.

Private exchanges have been welcomed by the small business community as a way to increase health plan choices for employers and their workers and foster greater competition between plans that could curb premium costs. Traditionally, small employers have bought health coverage through brokers, who typically offer them only one or two plan options.

In addition, the private exchange operator takes over the responsibility for helping a company's employees with plan selection and other health insurance issues, supplanting the role of the company human resources department. And it's thought that employees use healthcare more cost-consciously when they are directly exposed to the cost of insurance.

Despite worries that the switch might rattle some Houghton Mifflin retirees, Cudworth says the move went over “relatively easy” once the retirees understood the concept.

Interest in private exchanges represents a “giant baby-step toward more choices and more transparency when it comes to the cost of the insurance,” says Paul Fronstin, a senior research fellow at the nonpartisan Employee Benefit Research Institute in Washington.

But some experts fear that the growth of private exchanges could negatively affect the public small business exchanges that will start in each state this year under the Patient Protection and Affordable Care Act. There are concerns that private exchange operators and health plans will find ways to lure younger, healthier employer groups away from the Small Business Health Options Program, driving up premiums in the public exchanges. One possibility is that private exchanges may offer plans with richer benefits and better out-of-network coverage features, attracting more affluent employer groups.

In addition, private exchange marketing could confuse small employers and cause them to overlook the availability of the SHOP exchange, the sole mechanism through which they can receive a federal tax credit for buying coverage for their workers. Accenture projects that the public exchanges will trail behind private exchanges in enrollment, with 31 million enrollees by 2018 (See chart).

“There is a concern that small businesses will not be aware they are passing up the opportunity to get up to 50% of their premium cost back by enrolling in the public SHOP exchange,” says Elisabeth Benjamin, vice president of health initiatives for the Community Service Society of New York. “That's a big loss.”

Still, benefits consultants say a growing number of employers of all sizes are eyeing private exchanges for their workers. “Private exchanges, already up and running in a handful of markets, may serve as innovation models in this new purchasing environment—targeting employers and consumers seeking lower costs, greater transparency and convenience,” according to a recent PricewaterhouseCoopers Health Research Institute report on both public and private exchanges.

As employer interest grows, more companies are offering private exchange platforms. Towers Watson and Aon Hewitt have been in the private exchange business the longest. This year, they were joined by Willis North America, an insurance and reinsurance broker; Buck Consultants; and Mercer, a health consulting firm. These companies see private exchanges as a way to expand business with their existing customers and gain new customers. There are smaller regional exchange operators, such as HealthPass New York, that focus particularly on small businesses.

Insurers seem eager to participate in private exchanges, even though that entails competing head to head with other insurers. Some private exchanges offer 35 insurers to choose from, though employers generally narrow the choice for their employees. In April, Mercer announced it was adding more insurers to the private exchange it offers national clients, bringing the total of participating carriers to more than 20.

Ken Sperling, national healthcare exchange strategy leader for Aon Hewitt, says there are three main reasons insurers want to be active in private exchanges: market share opportunity, spreading risk among a larger pool, and the risk adjustment mechanism that protects them in case they enroll a disproportionate share of sicker people.

Here's how Aon's risk adjustment mechanism works: For each client, Aon assigns an aggregate risk score for each insurer's enrolled population based on the medical claims experience of that population. If Insurer A experiences a higher level of claims and Insurer B experiences a lower level, premium money is transferred from B to A. That discourages insurers from trying to

cherrypick healthier enrollees.

Sperling added that a private exchange gives insurers access to businesses they don't currently have as customers, giving them an opportunity to increase market share. This could be a boon for both insurers, who would be able to enroll at least a few employees from an employer group rather than having to enroll the entire group, as well as small-business employees who would be able to choose from a number of plans rather than just one plan typically offered.

One thing employers have to guard against if they choose the private exchange approach is offering too many plan choices, experts say. That can overwhelm employees, says Shawn Nowicki, director of regulatory affairs at Healthfirst and former director of health policy at HealthPass New York.

Follow Jonathan Block on Twitter: @MHjblock