The public exchanges (Health Insurance Marketplaces) established by the Affordable Care Act (ACA) have dominated headlines and news feeds. But private healthcare exchanges have been gaining significant traction, partly because they’re less prone to political controversy and technological glitches.
In fact, private healthcare exchanges have existed in some form for a decade. But the early birds were used primarily by larger employers to help pre-Medicare-eligible retirees connect with private health plans and by Medicare-eligible retirees to buy supplementary “Medigap” policies.
Like their public cousins, private healthcare exchanges offer the promise of consumer choice and a restraint on rapid premium increases because of enhanced head-to-head competition among carriers and related service providers.
Unlike public exchanges, however, private healthcare exchanges exist for employees whose employers still want to oversee and pay the lion’s share of their health benefit costs.
The Cadillac Effect
Consider some recent survey data. One conducted last year by the Private Exchange Evaluation Collaborative, with responses from 723 employers from 34 industry sectors and all sizes, found the following:
- 45 percent have implemented or plan to implement a private exchange for their full-time active employees before 2018 — the year the 40% “Cadillac plan” excise tax kicks in on health insurance benefits exceeding certain thresholds
- 69 percent don’t want their advisors to have any professional ties to any of the exchanges they’re considering
- More than 80 percent seek a broad variety of features — they want more than just basic access to health plans
- Smaller employers are more interested in exchanges featuring fully insured health plans than larger employers are
The significance of the 2018 Cadillac plan excise tax is that, for fully insured health plans, the insurer — not the employer — pays the excise tax. In turn, insurers will more than likely pass on as much of that tax as they can via higher premiums.
To remain competitive, however, insurers will also probably pull out all the stops on cost-saving strategies to avoid the tax — particularly for their top-tier plans. So, in a competitive private exchange, employees may have access to cheaper plans that don’t stray into Cadillac territory.
Employers with self-insured plans that exceed the value thresholds (generally $10,200 for individual plans and $27,500 for family coverage) will be directly subject to the tax.
Many employers don’t think they have the leverage to keep plan costs from rising and exceeding those thresholds — which won’t begin being inflation-indexed until 2019.
Another recent study of note is the 2014 Employer Survey on Purchasing Value in Healthcare, which was conducted jointly by Towers Watson and the National Business Group on Health. Respondents revealed five key reasons they’re taking a hard look at the private exchange option:
- Evidence that private exchanges can deliver greater value than their current self-managed models
- The actions of other companies in their industries
- An inability to stay below the Cadillac plan excise tax using their current approaches
- The desire to reduce spending on healthcare benefits within their total rewards mixes
- To provide additional healthcare plan choices to employees
Data from another study, Aon Hewitt’s latest Healthcare Survey, tells a similar story. It found that, while only 5 percent of its survey base currently uses the private exchange model, that percentage will rise to one-third within three to five years. (Aon Hewitt is a player in the private exchange business.)
Likewise, a recent report by the consulting and contracting firm Accenture predicted that private health insurance exchanges “will rapidly upend insurance purchasing for many of the 170 million people who receive benefits through their employer.”
No Slam Dunk
Time will tell whether private healthcare exchanges proliferate as rapidly as survey results seem to predict — and whether they’ll really deliver the hoped-for advantages. Choosing to link up to a private exchange isn’t a slam-dunk decision for any employer. You’ll need to consider a wide variety of factors.
For starters, is your geographic market currently served by one or more private exchanges that offer competitive, attractively priced plans with a full menu of plan designs? And do you have a choice of fully insured plans or, if you prefer to self-insure, comprehensive administrative packages?
The relative merits of fully insured plans versus self-insurance may change for your organization if a private exchange brings down the cost of fully insured plans. Then again, ceding control to an insurance carrier with a fully insured plan may not appeal to you, with or without an exchange mechanism.
If you traditionally have been generous with your health benefits and limited employees’ choices, you’ll also need to look into whether you’ve laid adequate groundwork to prepare them for this paradigm shift. A recent Accenture consumer survey found that 83 percent were “entirely unfamiliar with the private exchange concept.”
Are you ready to tell employees you’re setting a fixed limit on how much you’ll contribute to their health benefits? And will the private exchange truly reduce demands on the time of your human resource or benefits department?
Another big factor — unknowable today — is how the traditional health plan services industry will evolve in response to the ACA’s ongoing evolution and implementation.
Many employers are indeed warming up to the idea of having employees secure their health benefits via a private exchange. But private exchanges aren’t for every organization.
As opportunities to use them grow along with the general concept of the “defined contribution” health plan, you’d be well advised to learn as much as you can about the private exchange model to determine whether it might meet your needs.
Your first challenge will be finding a private exchange. As noted earlier, they may not be available in all geographic areas, and rural states like Montana will be hard pressed to participate in private exchanges.