Private exchanges are shifting the employer benefits paradigm
Employer sponsored health insurance – the once-stable bedrock of employee sponsored benefit programs – is cracking under the pressures of the emerging New Health Economy. As healthcare becomes more consumer centric and individuals assume more financial responsibility for their healthcare choices, health insurance programs are feeling the impact. Rising costs and regulatory demands are driving many of the nation’s 5.7 million employer firms to consider alternatives to the traditional employer-sponsored benefits that have been offered to millions of Americans for the past 70 years. Looking among alternatives, employers are increasingly considering private insurance exchanges as an option for active and retired employees.
PwC Health Research Institute’s new report, The rise of retail health coverage, explores how retail insurance marketplaces, also known as exchanges, are changing both the employer benefits environment and the insurance business. This new retail model, which includes both public and private exchanges, enables consumers to comparison shop for coverage based on benefits, price, doctor network and other factors.
Employers seeking better cost control, enhanced employee experience and freedom from the day-to-day burdens of managing plan benefits are paying attention. In fact, 32 percent of employers told PwC’s 2014 Health and Well-being Touchstone Survey that they are considering moving their active employees to a private exchange in the next three years. Many employers already offer online tools similar to exchanges for other benefits such as retirement, which could boost uptake. Private exchanges also represent an opportunity for businesses to move more easily from a defined benefit contribution strategy to a defined contribution approach, thereby limiting the employer subsidy to a fixed dollar amount.
A shifting landscape
Private health exchanges have existed for years in the individual market via large insurance brokers such as eHealth, in the Medicare retiree insurance market and in the group insurance market.
Currently, employers with fewer than 50 full-time employees and companies with many low-wage, high-turnover workers, have the option to consider public exchanges as an alternative to directly providing health benefits. Such employers could drop coverage and direct employees to the varied state and federal exchanges, letting them pick a plan and potentially qualify for government subsidies. Companies may provide their own limited, post-tax subsidies to offset employee out-of-pocket costs.
But employers taking that path need to weigh the potential benefits of reduced costs and human resources burden against possible drawbacks such as reputational risk and recruitment/retention challenges. While small employers aren’t subject to the ACA’s employer mandate, larger companies need to weigh the cost of fines with potential savings.
Alternatively, the more than 5.6 million small and mid-sized companies in the U.S. could consider private exchanges as an Affordable Care Act (ACA)-compliant vehicle that may offer more affordable insurance than companies could obtain on their own.
For many companies, transitioning to a retail marketplace may alleviate staff constraints and free up time for other critical, more strategic initiatives. Private exchanges typically offer more employee choice and additional benefits such as consumer decision support, integrated wellness programs and online benefit sites that would otherwise require too much time and money for employers to implement on their own.
On the other hand, employees may find that high-deductible plans are manageable and cost effective with the right guidance and the availability of supplemental products. So-called “buy-downs” to lesser coverage can save employers significant amounts of money by better educating employees on how to optimize insurance coverage. Providing employees with the tools they need to become health care consumers and encouraging employees to comparison shop and use healthcare services more efficiently also drives employer savings.
Ultimately, exchanges will be most attractive to employers looking to shift some of the healthcare decision-making to their employees. While companies need to consider the possible drawbacks outlined earlier, exchanges can be viewed as a win-win, as employers can often save money because of the buy-downs while gaining more stability in their health budgets by utilizing a defined contribution approach. Simultaneously employees can select the benefit options that best meet their needs, and have access to tools that will enable them to be better consumers. Some employers may even decide to maintain the current structure for active employees and move retirees to a private exchange. Many large public companies have already made the move for their Medicare eligible groups. Forty-three percent of Touchstone Survey respondents said they are considering moving their pre-65 retirees to a private exchange with a subsidy in the next three years.
What do private exchanges look like?
Four types of private exchanges currently dominate the employer market – broker/consultant; insurer-sponsored; technology model; and “pure-play”:
- Broker/consultant — companies with expertise in the benefits business offer exchanges that are often coupled with consulting services for employers. These exchanges typically provide a fixed shopping storefront and are funded by employer fees, commissions from health insurers, or a combination of both.
- Insurer-sponsored — most health insurance companies are participating in the state and federal exchanges, but many have or are launching their own private exchanges for their employer clients as well. These are often built on technology licensed from other companies.
- Technology model — typically considered the most flexible and is geared to several stakeholders including employers, states, insurers, and brokers/consultants. Employers that choose this route typically purchase more than exchange services, but add the components of benefit administration outsourcing.
- “Pure-play” – some of the more mature exchanges, known for a focus on consumer decision support, customer storefronts and product offerings on the exchanges. Some pure-play exchanges also “power” the broker and insurer exchanges, and often have robust decision support tools and offer ancillary product offerings such as life, disability and other insurance.
There is some overlap in the models, and new entrants are still emerging, including payroll companies and other benefit administrators. Many exchanges are still trying to establish their value propositions and as the market becomes more competitive, private exchanges will look for ways to differentiate themselves.
The future of exchanges
In the next decade, enrollment in health insurance marketplaces — public, private or some hybrid — is expected to grow significantly as employers move away from components of the benefit business and individual consumers take on new responsibility. Several major insurers are rapidly recasting their business models to succeed in the business-to-consumer environment.
What this means for employers
As retail becomes a prevalent model for purchasing insurance, employers contemplating the move to an exchange model should consider three key steps:
- Conduct a feasibility analysis. Compare what can be and/or is already done effectively in-house against what an exchange offers. Beyond obvious elements such as the potential for cost savings and administrative fees, evaluate whether an exchange fits within your culture, and consider the potential impact on employee retention and other indirect costs.
- Recognize you’re buying into a benefit delivery platform, not a product. Partner with an exchange that has a strategy for long-term cost control, shape the user experience and provide the flexibility you require around financing (insurance funding and contribution approaches) and design decisions.
- Deploy a sophisticated communications strategy. While many exchanges have good educational materials, employers should evaluate what communication and change resources are available and create a media and internal communications plan before announcing a change. Be prepared to answer tough questions.
(Additional insights into the role of private exchanges in the employee health insurance marketplace can be found in PwC Health Research Institute’s newly released report The Rise of Retail Health Coverage)
Barbara Gniewek is a principal at PwC’s Human Resource Services practice.
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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.