Digging in to private exchanges

There is no question the Affordable Care Act is bringing transformational change in the way human resources departments need to think about employee benefits, with rising health care costs and increased compliance requirements.

Enter private exchanges, a catalyst toward this change. Consultants Booz & Co. describe exchanges as marketplaces of health insurance and other related products. Employers purchase health insurance through the private exchange, and employees choose a health plan supplied by the participating payers.

Accenture estimates that by 2017, private exchange participation will approach public exchange enrollment levels and surpass those levels shortly thereafter. In fact, by 2017, the consulting firm estimates about 18% of the American public will purchase insurance through a private exchange.

For 2014 open enrollment, Accenture estimates that more than 3 million individuals will be enrolled in private exchanges — that’s three times what the consultancy estimated in June 2013. Most of the growth, says Scott Brown, lead of Accenture’s private health insurance exchange offering, is still being driven from mid-market employers, those with about 1,000 employees.

The rapid growth has presented employees with important financial trade-off decisions, Accenture says. According to the company’s research, released mid-June, of those currently enrolled in private exchanges, 25% purchased less health coverage (measured in actuarial value) than they had previously. Accenture notes that while those choices may have been made to decrease monthly premiums, they will add out-of-pocket costs for patients with higher deductibles.

 The consultancy is sticking to its original estimate of 9 million enrollees in private exchanges in 2015. “We think we still are on track and will see how the year goes. We’re seeing even more [interest] from our clients, through employers, carriers, and exchange operators that we work with,” Brown says. “We are seeing increasing demand” for private exchanges, he adds.

Also see: 8 private exchange considerations

Employers are thus beginning to look at these exchanges as an attractive option. A survey from the Private Exchange Evaluation Consortium, a group formed by PricewaterhouseCoopers and several employer coalitions, estimates that by 2018, 45% of employers will have implemented or plan to consider utilizing a private exchange for their active, full-time employees.

“At its core, exchanges are about cost savings, but the direct and immediate savings may be moderate,” says Don Garlitz, executive director of Chicago-based private exchange operator bswift Exchange Solutions.

“Exchanges are really a vehicle for change, a tool to deepen consumerism and personal responsibility, both of which are keys to health care reform and cost savings,” Garlitz says. “The bet is that employers will mitigate some long-term cost pressure by empowering people with choices and allowing individuals to more fully feel the effects of those choices.”

Every year, employers are faced with the annual juggle of raising benefit costs, cutting benefits or passing increased costs on to employees, adds Alan Cohen, co-founder and chief strategy officer of Liazon, which operates the Bright Choices Exchange.  He says employers are considering private exchanges because they allow them “to set a predictable benefits budget and offer balanced coverage for diverse risks.”

Selecting the right exchange

Speakers at industry conferences frequently note that if you have seen one private exchange, you have seen just one private exchange. Every exchange is different, and that presents numerous choices to employers.

“Different private exchanges will work better for one employer over another,” says Michael Thompson, a principal with PwC in New York City and co-founder of the PEEC. “Some are more geared toward [one] insurer or multiple insurers, some look to shift the risk to the insurer. Others are self-insured. Some private exchanges offer differences in terms of the shopping experience. Oftentimes, employers are looking to offer broader choices and engage their employees more effectively in the shopping experience around health and other benefits.”

That shopping experience, he explains, can range from simply laying out options to a very guided approach that takes into account the values and preferences of the employers, and the needs of the employee and their family.

In her discussions with employer-clients, Nancy Scola Lombaer, partner at Laurus Strategies in Chicago and leader of their private exchange consulting practice, has found employers care about employee experience and want to make sure they will get at least as good an experience as they do today when purchasing benefits. “By offering more choice, employers then understand there needs to be more robust change management,” she says.

To make the decision, Cohen says benefit managers need to consider five key characteristics: 

1. Funding for coverage: A solution that helps employers decide on their funding and can handle a wide variety of ways a company may want to define their contribution.

2. Inventory of medical and nonmedical plans: Ability to choose from a meaningful selection of medical/health plans with varying plan designs as well as access to other critical insurance products such as dental, vision, disability, supplemental health coverage and wellness programs, giving employees a wider range of choice and potentially greater protection for their unique risks.

3. Transparent shopping experience: Employees are able to see full prices and, therefore, make value-based decisions on how best to spend their benefit dollars.

4. Decision support: Ability to provide the support employees need to determine the package that is right for them, including education and plan recommendation tools, and price transparency on products.

5. Comprehensive support services: Services provided at the front end of the purchasing process as well as the necessary services to ensure the employee gets coverage on the back end.

Mike Smith, director of exchange solutions at Lockton in Boston, agrees. He says HR needs to think holistically. Are there savings to be achieved? Integration needs to be taken into account, with integrated data into HR payroll systems. And cultural considerations also need to be considered.

Also see: Why benefits admin, private exchange capabilities should be merged

“Even if an employer goes to an exchange, employees are still your employees,” he says. “You still want them engaged and productive. … Employers have varying views about the ability to control costs, and benefits are an extension of company culture, so how willing are you to transfer that control?”

Making the switch

American Baptist Homes of the West, a Pleasanton, Calif.-based operator of continuing care retirement communities, rental communities and senior housing, moved the 2,500 members of its benefits plan to the Mercer Marketplace private exchange, beginning Jan. 1.

Charlotte Anderson, the company’s vice president of benefits and workers’ compensation, says the decision to go with the exchange came down to the financial aspect, the administration and the impact to her team members. With all the issues around ACA compliance, including tracking employee hours, “we needed a strong partner to help out,” she says. “Looking at our resources, our systems and all the requirements for the ACA, there is no way two people could manage that.”

As an early adopter to the exchanges, Anderson says that someone has to go out there and be the beta. “I’m not so much a follower as I am a leader and risk-taker,” she says. “Nothing ventured, nothing gained. Change is our friend, however no one likes change. You just have to deal with it.”

Another company that made the jump to a private exchange is New York City-based Tanteo Spirits, an international distributor of tequila. Neal Grosscup, the company’s chief executive, says that he didn’t want to pick benefits for all his employees and moved to Liazon’s Bright Choices Exchange in June 2013 to give his employees more choice, while controlling costs. “Every year, my medical was going up. [Now,] it is a fixed cost, and there’s transparency that employees know what we pay each year,” he says.

Grosscup admits he expected — and experienced — some pushback from employees, though most said they were thankful to have more options. “As long as we sell it the right way, it is a pretty easy transition,” he says.

Just like any major change in employee benefit strategy, it must be well-planned, well-communicated and well-executed to have success.

“Moving to a private exchange is a significant change from what employers have done historically,” PwC’s Thompson explains, “but they don’t have to go at it alone. Most of the private exchanges provide a very supportive framework for educating and engaging employees on how to make the transition to enrolling on a private exchange and selecting their benefits.”

Moving forward

With respect to active employees, private exchanges are in their infancy and employers are “wading through unchartered waters,” says Christopher V. Goff, chief executive and general counsel of Employers Health, a Canton, Ohio-based coalition of large self-insured employers.

Companies are making decisions to move to private exchanges for 2015, and others are thinking about them for 2016 or 2017. But even more are really focused on the excise tax in 2018, says Sharon Cunnighis, leader of Mercer’s Marketplace. She predicts that in the next two-to-three years, there will be an increase in participation in private exchanges.

Also see: EBN's private health care exchanges 2014 conference agenda

“As employers seek alternative methods for providing benefits, research shows many anticipate that the private exchange model is the answer they are looking for,” says Liazon’s Cohen. “Growth in the space will only continue, as private exchanges continue to establish themselves as a market-proven solution.