Go­ing pri­vate

Em­ploy­ers see ben­e­fits in choice of in­sur­ance ex­changes

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Carl Cud­worth, di­rec­tor of ben­e­fits at Houghton Mif­flin Har­court Pub­lish­ing in Austin, Texas, was fac­ing steeply ris­ing health in­sur­ance costs for his com­pany’s 700 re­tirees. In 2010, he shifted away from of­fer­ing them a menu of sev­eral health plans cho­sen by the com­pany, with the com­pany pay­ing a fixed per­cent­age of the pre­mium for each plan. In­stead, Houghton Mif­flin gave them a fixed dol­lar amount and re­ferred them to a pri­vate health in­sur­ance ex­change op­er­ated by San Ma­teo, Calif.-based Ex­tend Health, which sub­se­quently was ac­quired by con­sult­ing firm Tow­ers Wat­son.

The re­tirees took the com­pany’s pre­mium con­tri­bu­tion and picked from nearly 200 plans of­fered by 35 car­ri­ers on the ex­change, pay­ing out of pocket if the pre­mium for their cho­sen plan ex­ceeded the com­pany’s con­tri­bu­tion. This ap­proach has en­abled Houghton Mif­flin to hold its re­tiree health costs flat since 2010, be­cause it sets a fixed bud­get for its pre­mium con­tri­bu­tions.

Such pri­vate ex­changes are grow­ing across the coun­try and in­creas­ingly are be­ing pitched to small em­ploy­ers as a way for com­pa­nies to shift to de­fined con­tri­bu­tions, of­fer em­ploy­ees and re­tirees a mul­ti­ple choice of plans, and free the firms from the ad­min­is­tra­tive bur­dens of run- ning their own health ben­e­fit pro­grams. They are geared to­ward em­ploy­ers that buy fully in­sured prod­ucts as well as self-in­sured com­pa­nies. Th­ese ex­changes are be­ing of­fered by some of the largest ben­e­fits con­sult­ing firms in the coun­try. The con­sult­ing firm Ac­cen­ture projects that health plan en­roll­ment through pri­vate ex­changes will sky­rocket from 1 mil­lion in 2014 to 40 mil­lion in 2018.

Pri­vate ex­changes have been wel­comed by the small busi­ness com­mu­nity as a way to in­crease health plan choices for em­ploy­ers and their work­ers and foster greater com­pe­ti­tion be­tween plans that could curb pre­mium costs. Tra­di­tion­ally, small em­ploy­ers have bought health cov­er­age through bro­kers, who typ­i­cally of­fer them only one or two plan op­tions.

In ad­di­tion, the pri­vate ex­change op­er­a­tor takes over the re­spon­si­bil­ity for help­ing a com­pany’s em­ploy­ees with plan se­lec­tion and other health in­sur­ance is­sues, sup­plant­ing the role of the com­pany hu­man re­sources depart­ment. And it’s thought that em­ploy­ees use health­care more cost-con­sciously when they are di­rectly ex­posed to the cost of in­sur­ance.

De­spite worries that the switch might rat­tle some Houghton Mif­flin re­tirees, Cud­worth says the move went over “rel­a­tively easy” once the re­tirees un­der­stood the con­cept.

In­ter­est in pri­vate ex­changes rep­re­sents a “gi­ant baby-step to­ward more choices and more trans­parency when it comes to the cost of the in­sur­ance,” says Paul Fron­stin, a se­nior re­search fel­low at the non­par­ti­san Em­ployee Ben­e­fit Re­search In­sti­tute in Wash­ing­ton.

But some ex­perts fear that the growth of pri­vate ex­changes could neg­a­tively af­fect the pub­lic

small busi­ness ex­changes that will start in each state this year un­der the Pa­tient Pro­tec­tion and Af­ford­able Care Act. There are con­cerns that pri­vate ex­change op­er­a­tors and health plans will find ways to lure younger, health­ier em­ployer groups away from the Small Busi­ness Health Op­tions Pro­gram, driv­ing up pre­mi­ums in the pub­lic ex­changes. One pos­si­bil­ity is that pri­vate ex­changes may of­fer plans with richer ben­e­fits and bet­ter out-of-net­work cov­er­age fea­tures, at­tract­ing more af­flu­ent em­ployer groups.

In ad­di­tion, pri­vate ex­change mar­ket­ing could con­fuse small em­ploy­ers and cause them to over­look the avail­abil­ity of the SHOP ex­change, the sole mech­a­nism through which they can re­ceive a fed­eral tax credit for buy­ing cov­er­age for their work­ers. Ac­cen­ture projects that the pub­lic ex­changes will trail be­hind pri­vate ex­changes in en­roll­ment, with 31 mil­lion en­rollees by 2018 (See chart).

“There is a con­cern that small busi­nesses will not be aware they are pass­ing up the op­por­tu­nity to get up to 50% of their pre­mium cost back by en­rolling in the pub­lic SHOP ex­change,” says Elis­a­beth Ben­jamin, vice pres­i­dent of health ini­tia­tives for the Com­mu­nity Ser­vice So­ci­ety of New York. “That’s a big loss.”

Still, ben­e­fits con­sul­tants say a grow­ing num­ber of em­ploy­ers of all sizes are eye­ing pri­vate ex­changes for their work­ers. “Pri­vate ex­changes, al­ready up and run­ning in a hand­ful of mar­kets, may serve as in­no­va­tion mod­els in this new pur­chas­ing en­vi­ron­ment—tar­get­ing em­ploy­ers and con­sumers seek­ing lower costs, greater trans­parency and con­ve­nience,” ac­cord­ing to a re­cent Price­wa­ter­house­Coop­ers Health Re­search In­sti­tute re­port on both pub­lic and pri­vate ex­changes.

As em­ployer in­ter­est grows, more com­pa­nies are of­fer­ing pri­vate ex­change plat­forms. Tow­ers Wat­son and Aon He­witt have been in the pri­vate ex­change busi­ness the long­est. This year, they were joined by Wil­lis North Amer­ica, an in­sur- ance and rein­sur­ance bro­ker; Buck Con­sul­tants; and Mercer, a health con­sult­ing firm. Th­ese com­pa­nies see pri­vate ex­changes as a way to ex­pand busi­ness with their ex­ist­ing cus­tomers and gain new cus­tomers. There are smaller re­gional ex­change op­er­a­tors, such as HealthPass New York, that fo­cus par­tic­u­larly on small busi­nesses.

In­sur­ers seem ea­ger to par­tic­i­pate in pri­vate ex­changes, even though that en­tails com­pet­ing head to head with other in­sur­ers. Some pri­vate ex­changes of­fer 35 in­sur­ers to choose from, though em­ploy­ers gen­er­ally nar­row the choice for their em­ploy­ees. In April, Mercer an­nounced it was adding more in­sur­ers to the pri­vate ex­change it of­fers national clients, bring­ing the to­tal of par­tic­i­pat­ing car­ri­ers to more than 20.

Ken Sper­ling, national health­care ex­change strat­egy leader for Aon He­witt, says there are three main rea­sons in­sur­ers want to be ac­tive in pri­vate ex­changes: mar­ket share op­por­tu­nity, spread­ing risk among a larger pool, and the risk ad­just­ment mech­a­nism that pro­tects them in case they en­roll a dis­pro­por­tion­ate share of sicker peo­ple.

Here’s how Aon’s risk ad­just­ment mech­a­nism works: For each client, Aon as­signs an ag­gre­gate risk score for each in­surer’s en­rolled pop­u­la­tion based on the med­i­cal claims ex­pe­ri­ence of that pop­u­la­tion. If In­surer A ex­pe­ri­ences a higher level of claims and In­surer B ex­pe­ri­ences a lower level, pre­mium money is trans­ferred from B to A. That dis­cour­ages in­sur­ers from try­ing to cher­ryp­ick health­ier en­rollees. Sper­ling added that a pri­vate ex­change gives in­sur­ers ac­cess to busi­nesses they don’t cur­rently have as cus­tomers, giv­ing them an op­por­tu­nity to in­crease mar­ket share. This could be a boon for both in­sur­ers, who would be able to en­roll at least a few em­ploy­ees from an em­ployer group rather than hav­ing to en­roll the en­tire group, as well as small-busi­ness em­ploy­ees who would be able to choose from a num­ber of plans rather than just one plan typ­i­cally of­fered.

One thing em­ploy­ers have to guard against if they choose the pri­vate ex­change ap­proach is of­fer­ing too many plan choices, ex­perts say. That can over­whelm em­ploy­ees, says Shawn Now­icki, di­rec­tor of reg­u­la­tory af­fairs at Health­first and for­mer di­rec­tor of health pol­icy at HealthPass New York.

In­ter­est in pri­vate ex­changes rep­re­sents a “gi­ant baby-step to­ward more choices and more trans­parency when it comes to the cost of the in­sur­ance.” —Paul Fron­stin, Em­ployee Ben­e­fit Re­search In­sti­tute

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