By Bill Henry
Private exchanges have received a great deal of attention recently. The jury is still out on whether private exchanges will significantly impact the cost of health insurance, as much is yet to be played out with respect to forthcoming regulations, public exchanges, private exchange structure and functionality, and marketplace dynamics. It is certain that private exchanges will play a role with some employers who want to explore a defined contribution model for their benefits programs. Employers will need to strategically evaluate their organization’s long term benefits strategy in conjunction with their overall business plan in determining whether private exchanges are the right solution. Private exchanges may be an answer for some plan sponsors; however, they will not be the right fit for everyone, nor will they always be the most cost effective alternative.
A private health insurance exchange is run by a private sector company, as opposed to a state or federal governmental entity. The private exchange concept arose as an alternative to the public exchanges (now renamed as “marketplaces”) as defined by the Patient Protection & Affordable Care Act (PPACA). Unlike participants in the public exchanges/marketplaces, participants in private exchanges are not eligible for federal subsidies. Private exchanges are intended to offer other advantages that some employers may find attractive, including a defined benefit model, transfer of administrative/enrollment functions, participant choice among multiple plan designs, etc.
Private exchanges represent a defined contribution strategy where the primary benefits focus is to limit expenditures and turn benefits administration and plan selection over to the exchange and the employees. This may, at first, seem attractive to many employers and employees. But over the longer term, unless employers are prepared to increase their financial participation in proportion with increases in health care costs, there is great potential for significant cost shifting from employer to employee, resulting in higher premiums, lower benefits and dissatisfaction among employees. The need for cost shifting and maintaining strict defined contribution levels may be essential and/or desirable for some employers. For those employers, private exchanges or an alternative defined contribution strategy may be a fit. Early adopters of the private exchange/defined contribution model have, to a large degree, been companies in low margin businesses relying largely on unskilled workers. Employers in higher margin businesses whose benefits strategies include robust benefits programs in order to attract and retain employees in competitive environments and/or who desire flexible/customized benefit plan designs and funding arrangements may find the private exchange model not to be the best solution. In all cases, due diligence should be paid to exploring all potential vehicles, including self-funding and partial self-funding along with other creative approaches to plan design, wellness, disease management, pharmacy management, medical transparency and other tools tailored to address the challenge of providing the best possible benefit value.
Cost Savings Impact is Unproven
Beyond the defined contribution model, other cost savings mechanisms within private exchanges are unproven. Private exchanges have not established their ability to improve the health of participants or manage medical spending other than via options like consumer driven plans, wellness programs, disease management programs, and pharmacy management plans that are readily available in the open market outside of exchanges today. Private exchanges will likely have higher expense factors, especially in comparison to self-funded programs. In theory, competition and volume within exchanges would drive more competitive pricing and perhaps more liberal underwriting among participating carriers. At this time, insurance carriers are not aggressively supporting this concept and fear adverse selection within exchanges.
Fully Insured Plans Face New Challenges
Regulations guiding the ongoing management of insurance exchanges, whether public or private, are still largely unwritten. Underwriters are proceeding with caution as they evaluate risks and develop premium rates. The insurance carriers must also prepare for increased plan liabilities due to expanded essential benefits coverage requirements and new insured premium taxation.
Don’t Lose Control of Benefit Strategy, Plan Design and Funding Options
There is a significant and likely unintended consequence of adopting an exchange approach to benefits. Organizations utilizing any exchange, whether private, state-based, multi-carrier or single-carrier will inherently yield the ability to adjust plan design outside of what has been filed with the departments of insurance. This lack of flexibility could impede the growing trend of integrating incentives, wellness programs and other special programs specifically designed to impact a population’s positive well-being and mitigate claims expenditures. Creating a culture of health within organizations is the best tool to bend trend and combat long term cost increases.
Healthcare Reform and Affordability Discussions are Creating Definitive Industry Trends
In addition to the emergence of private exchanges, other significant trends are evolving as companies work to comply with health care reform and maximize the value of their benefits expenditures.
The Big Picture
The bottom line is that private exchanges will be a significant factor within the benefits marketplace and may be a good fit for certain employers. Time is needed to determine the degree to which private exchanges will be effective in mitigating medical premium escalation. For an employer, determining whether a private exchange is the right solution requires thorough due diligence and a comprehensive understanding and analysis of the full range of options available in the marketplace. A defined contribution strategy can be established and leveraged outside of exchanges. An increasing number of employers will and should evaluate and explore self–funded or partially self-funded programs enabling custom plan designs and programs targeted specifically to their needs and offering multiple financial and tax advantages.
Everyone will need to remain vigilant and attentive as additional PPACA and state regulations are released to best navigate the benefits options available in the marketplace, determine the right benefits strategies for organizations, and maximize the value delivered to employees through benefits programs.
Bill Henry is Chairman and CEO of MHBT Inc., based in Dallas.
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