The Rapid Expansion of Private Healthcare Exchanges

Private Healthcare ExchangesA great deal of focus has been placed recently on the public healthcare exchanges - federal and state - created as part of the Accountable Care Act (ACA).  But while most of the media attention has been placed on the challenges, costs and enrollment statistics of these government-controlled exchanges; private exchanges where employers offer healthcare options to their employees have quietly enrolled 3 million people.  That is more than most industry analysts expected.

In a recent report by Accenture consulting, that growth was driven primarily by small to mid-size employers following the lead of national employers such as Walgreens, Petco, Kinder Morgan and Sears Holdings.  The same report estimates that total enrollment in private exchanges could reach 40 million by 2018 as employers seek to control costs, give employees more choice and reduce administrative burdens.  While details may differ, generally employers will allocate a specific amount for employees to spend on health insurance and then employees visit the exchange to assess options and select an option.  Exchanges can be built around the plan offerings of a single insurance company (Medica is an example) or be multi-carrier and administered by a third-party such as AonHewitt, Mercer or TowersWatson.

Employees will generally have a variety of options to choose from when shopping on an exchange - lowering monthly premiums by increasing deductibles or trading off some health coverage for other forms of insurance that may be offered by their employer - such as disability or life insurance.  Private exchanges are not open to individuals but can only be accessed through sponsoring employers.

The shift to exchanges or marketplace is usually accompanied by a shift from defined benefit to defined contribution model.  In a defined benefit plan, the employer defines the benefit and then negotiates and contracts with insurance companies to deliver the coverage.  When shifting to an exchange model, an employer will generally give employees a specific dollar amount toward health coverage.  Employees will act as consumers and compare plan benefits and prices to determine what health plan option to select with their dollars.  The employee will also likely have the option to contribute more for additional coverage or other health options - usually paying the difference in pre-tax dollars.

Employees using a private exchange may not be available to take advantage of federal subsidies because participation in employer-sponsored group health plans with pre-tax dollars will actually disqualify them from receiving federal subsidies.  However, in instances where an employer makes a post-tax contribution to an exchange that sells individual medical policies, the employee is still eligible for a federal subsidy if they meet income requirements.

Benefits for Employers

  • Reduced Costs - many companies are replacing their traditional defined benefits healthcare plan with a defined contribution plan - getting better control and predictability over costs
  • Offering More Options for Employees - The exchanges provide a marketplace for people to shop from a menu of employer-sponsored plans giving them the ability to select the best plan for their situation
  • Simplified Administration - Many private exchange administrators help ensure compliance with regulations, manage enrollment, provide customer support and integrated billing

Benefits for Employees

  • Choice - 90% of employees participating in a survey by Bright Choices Exchange want more choice when making their benefit selections and would use the flexibility to choose the plan that was the “best fit” with the “right” level of coverage
  • Information - Private exchanges often provide the sort of information required for consumers to improve their understanding of healthcare benefits, utilization and costs

Although the particulars of the private exchange model may shift over time, private exchanges have the potential to reshape how consumers access and select health insurance coverage.  It shifts the model of health insurers from putting together standard plans that are sold to large groups (employers) to a consumer driven model where enrollment is done one person at a time in a retail environment - effectively turning the Aetna, United and Cigna’s of the world into consumer product companies.

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