Private Health Exchanges: Who's Buying It?

March 13th, 2014 - Marsh Consulting Group

In contrast to the less-than-successful launch of the federal Healthcare.gov Marketplace, private health exchanges have been in the news in a much more positive light. Large companies such as Sears and Walgreens promoted their move to private exchanges as a means to lower costs and offer better insurance options to their employees. Private health exchanges are operated by for-profit insurance brokers and consulting companies. These are the same companies releasing studies and press releases promising that most employers will provide health insurance this way in the not-too-distant future. Should your business consider using a private exchange?

Despite the attention private exchanges are getting in the news, only three percent of companies currently use a private exchange.1 These companies—most with fewer than 50 employees—are looking to escape the expensive and limited small group market. The few larger companies that are moving to private exchanges may have certain characteristics, such as high turnover, a lower-wage population, or undesirable health risk factors, that make administering their own health plan undesirable.

Let’s look at some of the drivers that make private exchanges sound appealing:

Limit Health Care Costs

One of the arguments for private exchanges is that this model offers employers the opportunity to stabilize their health care costs. It’s true that most companies who use private exchanges will likely fund employee health care with a fixed amount of money, known as a defined contribution. Since health care costs have been rising faster than inflation and wages, using the private exchange would shift the burden of rising costs from the employer to the employee. Workers will bear an increasing share of their insurance costs, leading to employee discontent and higher turnover. Employers who desire defined contribution have a better option—using a Full Flex or a Cafeteria Plan approach.

Reduce Costs and Administrative Burden

Another argument in favor of private exchanges is the potential to reduce costs and administrative burden. This is not a valid argument for most mid-size employers, who can save six-to-eight percent through self-funding their health plan instead of choosing a fully insured plan. A self-funded health plan saves directly by being exempt from state taxes and indirectly by being exempt from some mandated benefits set by states or the Affordable Care Act (ACA). Many health plans under private exchanges are fully insured and thus subject to these higher taxes and expanded regulations. Not to mention, if an employer switched from a self-funded plan to a fully insured plan through an exchange, its employees would pay premiums based on the health risks of others in the exchange. MCG has done the analysis, and none of MCG’s clients would see reduced health care costs via a private exchange.

Some private exchanges offer self-funded health plans, but by choosing this option the employer gives up its ability to customize its plan design. In essence, the employer switches from controlling the costs and results of its in-house administration to paying for the exchange’s administration. If the exchange offers multiple carriers and plan options, the employer may see increased costs from the added complexity of having employees with vastly different health plans.

Provide More Options

If you look at the current choices offered by many mid-size businesses, you’ll see a silver or gold-level plan (covering 70-89% of medical expenses) alongside a lower cost bronze plan (covering 60-69% of medical expenses).

Do employees really want more choices, and are they ready to purchase their own health insurance? A recent survey found that employees would spend more time deciding which car to buy than which health insurance plan to select.2

Employers would also need to decide how to communicate multiple benefit options with private exchanges. Employees are accustomed to going to Human Resources with their benefits questions—will the private exchange provider be able to provide this service? It has been well documented that employees greatly value their health benefits and correlate their quality of benefits with their employer’s benefits communication.3

The availability of voluntary benefits (such as critical illness insurance) via a private exchange is often cited as a positive benefit for employees. However, these voluntary products prey on employees’ fears while providing very little benefit. The reason these products are promoted so heavily is that they offer a high profit margin for the private exchange provider through commissions of up to 30 percent in the first year.

Private exchanges have other limitations. For instance, overseas employees may not be able to find comprehensive coverage via a private exchange. Employers may face significantly higher costs for electing overseas coverage separately versus pooled with all employees’ coverage.

Expand the Risk Pool

Insurance is a process whereby the lower costs of the healthy balance out the higher costs of the ill. Expanding the total number of people in that pool would seem to balance out the risk of incurring a large claim, but once an employer exceeds roughly 500 subscribers this is no longer true.

First, it’s worthwhile to examine an employer’s current risk pool. A selffunded employer with a healthier and/or younger workforce will have lower claim costs. Self-funded companies can also have a direct impact on their employees’ health, and in turn on their health plan performance, by promoting a corporate culture of wellness through incentives tied to their health care plan. The rates on the private exchanges, by contrast, are completely out of an employer’s control private exchange, rates for all will increase. Private exchanges don’t have an incentive to improve health, since they pass on any rate increases. In fact, since the exchange providers are often paid by commission, they earn more as rates increase.

Alternatives to Private Exchanges

As mentioned above, self-funding is the most common way for mid-size businesses to control their health care costs by exempting the plan from certain taxes and regulations. Self-funding also makes the employer whole in that the employer can customize its health plan to fit its overall corporate goals. Improvements in employee health and health care decisions will directly impact health costs.

Employers who wish to cap their health care liability have alternatives to private exchanges. Making health benefits a defined contribution, by using a Cafeteria Plan or Full Flex Plan, retains the employer’s responsibility and control of plan design and options, instead of transferring control to the third-party exchange provider. By retaining control of the health plan, employers protect their employees from the whims of the individual insurance market. Their premiums are bundled with their fellow employees, rather than based on the risks of those in the private exchange.

In sum, a private exchange may make sense for . . .

MCG recommends extreme caution if you are looking at a private health exchange. We see many potential downsides and not a lot of upside.

Does Your Organization Have a Plan for 2015?

ACA’s Employer Mandate goes into effect in 2015 for large employers (i.e., those with more than 100 employees). Does your company know how ACA will impact your health plan? It’s not too late. Contact us at 805-239-9242 or email info@MCGteam.com to find out how we can help you. Marsh Consulting Group works closely with mid-size employers throughout the U.S. to customize health care cost control strategies, and then successfully communicate, manage, and measure them.

1Toland, Bill. “In 2020, Workers Will Decide Health Benefits.” insurancenewsnet.com. Pittsburgh Post-Gazette, February 9, 2014. Web.

2Colonial Life-Harris Interactive Quick Query, September 3-5, 2013.

3Unum 4th Annual Employee Survey, 2013