Private insurance exchanges attract more employers

After years of facing rising health benefit costs, household products manufacturer Church & Dwight in 2012 switched its 3,200 employees from a health benefit program with three plan choices into a single, high-deductible health plan. But this year the publicly traded Ewing, N.J.-based company switched them again.

Working through a so-called private insurance exchange established by Buck Consultants, Church & Dwight gave its employees three coverage choices with a range of benefits, premiums and out-of-pocket costs. The exchange offers plan options from multiple insurers. The company says it anticipates the exchange will reduce its health benefit costs 6% to 8%.

“We were able to put plan choice back in,” said Jim Levine, Church & Dwight's director of compensation and benefits. The employees “loved that.”

Private exchanges run by benefit management companies and insurers are not new, but lately they have generated significant new interest among employers. A survey of more than 700 businesses conducted last year by the Private Exchange Evaluation Collaborative, a business-backed group, found that 45% of employers have implemented or are considering using a private exchange for active employees before 2018.

“Obamacare with public exchanges has been sort of the green light for employers to look at all their options,” said Lori Dustin, chief marketing officer for HighRoads, a Burlington, Mass.-based benefits plan management company.

“There's no doubt the interest is there,” said Paul Fronstin, director of the Employee Benefit Research Institute's health research and education program.

He cautioned, though, that any shift toward private exchanges will be gradual.

Proponents of the private marketplaces argue they offer employees a wider range of choices that better align with their personal healthcare and financial needs, while holding down premium growth by sharpening direct competition between insurers for customers. If the exchanges succeed, it will be a godsend to employers and employees because premiums for the roughly 150 million U.S. workers and their family members who get coverage through work have increased by 80% over the last decade, according to the Kaiser Family Foundation.

“A lot of employers have become increasingly concerned that the status quo is no longer sustainable and they need new approaches,” said Eric Grossman, senior partner and exchange business leader with Mercer, which started offering a private exchange option to employers for coverage this year.

But some experts are concerned that private exchanges simply offer a convenient way for companies to move from paying a set percentage of each employee's premium cost to a fixed-dollar premium contribution, shifting more costs onto employees as premiums rise. They warn that employers could antagonize their workers if the workers see it that way. “If you're going to stick your employees with the risk of unusually high premiums, they're not going to want to work for you,” said Mark Pauly, a healthcare finance expert at the University of Pennsylvania.

Pharmacy chain operator Walgreen Co. switched this year to a private exchange run by Aon Hewitt. Previously, the company offered two health plan options to its nearly 250,000 employees. Now Walgreen is offering 25 different plans from five different insurers, although not all plans are available in all parts of the country. Aetna, UnitedHealth Group and Kaiser Permanente are among the insurers competing for Walgreen workers.

According to Walgreen, roughly 75% of eligible employees working at least 30 hours per week signed up for coverage, a rate consistent with prior years. Roughly one-third of employees opted for plans with lower premiums than they previously were paying, while one-fourth chose plans with higher premiums.

The concept of employees browsing multiple plan options with the aid of consumer-support tools has been discussed in benefits management circles for at least a decade. But only fairly recently have information technology tools made this model possible.

The movement toward private exchanges is being driven by aggressive marketing from companies like Buck Consultants, Aon Hewitt, Towers Watson and Mercer that operate these marketplaces. “Every consulting firm was sending out invitations to come hear about their private exchange,” Church & Dwight's Levine said.

Still, evidence on whether employers are moving to private exchanges in significant numbers is murky. An analysis by Moody's Investors Service released in March estimated that fewer than 1 million active workers with job-based coverage at the start of 2014 were enrolled through private exchanges.

Those numbers are likely to grow, according to market observers and companies running exchanges. Aon Hewitt reports that the number of people covered through health plans sold on its exchange increased to more than 600,000 in 2014, up from about 150,000 the prior year. That was spurred by the number of employers using its marketplace increasing from three to 18. Mercer says it has 67 companies participating in its private exchange in 2014, its first year of operations, covering nearly 300,000 workers and retirees. Moody's concluded that enrollment in private exchanges could grow to “tens of millions of active employees” by the end of the decade.

The structure of private exchanges is similar in many ways to the Obamacare public exchanges, but there is no single template. In most private exchanges, multiple insurers offer a variety of plans for workers to choose from. They can range from low-premium, high-deductible plans to high-premium plans with more comprehensive coverage.

In most private exchange arrangements, insurers pay the exchange operator a percentage of premiums for plans sold on the exchange, said Robert Laszewski, a Washington-based consultant who works with insurers. In some private exchanges, the operator can receive a straight fee for its services. “It's all over the place,” he said.

Exchange operators sometimes earn compensation through “success sharing” arrangements, whereby they're rewarded for reducing benefit costs. “Employers want to see the exchange operators have some skin in the game,” said Dave Osterndorf, Towers Watson's chief actuary for health exchanges.

As in traditional employer-based plans, all employees of a company have access to the same plan choices on the exchange and pay the same premium for a particular plan, regardless of their health status. But because insurers face the risk of adverse selection with multiple carriers competing for customers, some private exchanges have established risk-adjustment mechanisms to provide financial protection to participating insurers.

Several large insurers, including Aetna and Cigna Corp., offer their own private marketplaces to employers, featuring more plan choices than traditional employer benefit programs offer. Michael Thompson, a principal with PricewaterhouseCooper, said insurers have launched these exchanges because they realized benefits management firms with exchanges are threatening to steal some of their business by providing employers with administrative services. “The lines between a private exchange and a health plan are starting to blur,” Thompson said.

But single-insurer marketplaces raise questions about how different private exchanges are from traditional employer health-benefit programs. “If it's just one carrier offering (its) plans in one location, it probably isn't going to be a whole lot different from the current experience that large employers have,” HighRoads' Dustin said.

A selling point for private exchanges is they make it easier for companies to switch to a defined-contribution model, allowing firms to more accurately anticipate and control their spending. This is similar to the transformation in retirement-benefit plans over the last four decades, from defined-benefit pension plans to defined-contribution 401(k) plans.

A survey of more than 800 employers released by Aon Hewitt last year found that just 2% were currently using a defined-contribution model for healthcare benefits. But 28% of respondents indicated that they intended to adopt such a plan in the next three to five years. The survey of businesses conducted by the Private Exchange Evaluation Collaborative found somewhat less interest in making that switch. Just 13% of respondents said they have already adopted or are likely to adopt this approach in the next two years.

PwC's Thompson argues that most employers aren't looking at private exchanges solely as a way to shift costs. They're also trying to better meet employee needs through health plans that more precisely fit their healthcare utilization, as well as drive down costs by spurring competition between insurers.

Indeed, Mercer says its data show the private exchange model is effective in nudging employees into less expensive plans. It found that for employees in its exchanges, the average actuarial value of plans they selected dropped from 80.4% under their prior coverage—meaning 80.4% of total medical costs covered—to 71.9% on plans purchased through the exchange. That resulted in an average per-employee reduction of $800 in the total cost of benefits.

Some experts caution, however, that giving employees a wide range of coverage options through private exchanges—rather than having their employer's HR department guide them through a more limited set of choices—is not necessarily a good thing. Research shows that many Americans lack the knowledge needed to make smart choices and don't understand basic insurance concepts such as deductibles, co-insurance, co-pays, and out-of-pocket maximums. In addition, the current state of decisionmaking tools to help consumers select plans is not particularly good.

“The future is going to be selling directly to consumers,” said Katherine Hempstead, a senior program officer with the Robert Wood Johnson Foundation. “It will make the issue of having a really good plan choice tool for consumers more important than ever.”

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