All eyes are on the hullaballoo created by the challenges at Healthcare.gov and several of the states’ public insurance exchanges. Yet all the while, like in a magic show, attention has been diverted from the real action going on elsewhere. Quietly and in a relatively drama-free way, the private health insurance exchanges are busily taking over the world of insurance and, in my opinion, portend a radical set of changes in how our health insurance system operates.
Several years back, a number of companies began building private health insurance exchanges to initially help companies offload the incredible burden of retiree benefits. Companies such as Extend Health (now owned by Towers Watson), Senior Educators (now owned by Aon), and several others provided a way for large employers to get themselves out of the business (and balance sheet liability) of providing group benefits for retirees, instead providing them with money to purchase their own individual health policies through then small, now large companies. The private exchanges went about the business of building websites that work, call centers that buzz and a wide array of insurance product offerings at various prices. Now, several years later, hundreds of thousands and possibly millions of individuals are out there shopping their little hearts out, choosing their own plans, and dealing with the consequences of high deductibles and the like.
These various private exchanges are now poised and ready to begin serving active employees in 2014 as guaranteed issue (the requirement that all can be insured and no one turned away) goes into effect as a result of the Affordable Care Act. And lest you think this is a small marketplace, you are wrong. In 2008 there were about 120 million total employed workers and just over half of these worked for companies of 500 employees and above (39 million worked for companies with 5000 employees or more). In other words, we are talking about nearly half of American adults and that doesn’t even include the dependents they bring along into their insurance plan.
Interestingly, such large US employers as Walgreens and Petco and DineEquity (parent company of Applebee’s Neighborhood Grill & Bar® and IHOP® restaurants) are all-in on the private exchange program, committing to transfer all of their employees from group plans to the exchange to purchase individual plans come January 2014. The exchanges of Towers, Aon, Mercer, Buck Consultants and a plethora of others are alive and well and open for business at exactly the time when employers are trying to figure out how fast they can reasonably get out of the middle of health insurance administration and run for the hills.
Yes, there is much discussion (I think it may actually be wishing) about how companies will never do this en masse—that employee group benefits are too important a tool for employee recruitment and retention. But I don’t really believe this is a lasting consideration for most companies. A study from consulting firm Oliver Wyman suggested that “20 percent to 30 percent of the marketplace would gravitate to a private exchange over the next three to five years without any bias by size of employer.” They also found that around 50 percent of all employers would switch to private health insurance exchanges if they could realize 10 percent savings; more than 20 percent of employers would move employees to exchanges even if there were zero savings. If that last statistic doesn’t suggest that HR departments are putting on their track shoes and getting ready to run, I don’t know what does.
I have to believe that while the mass migration to private exchanges may start slowly, it will pick up speed faster than Apolo Ono in winter. There are a few reasons why I believe this to be the case, including the giant hassle and expense of being the health benefits administrator of record. Being out of the benefits administration business means less overhead cost, less drama as employees come to you when they want something covered, less lawyers to keep up with HR regulation. On a positive note, transitioning to an exchange can also be a real positive for employees, opening up far more plan choices to them, enabling plan customization for special populations (e.g., disease-focused plans or regional-focused plans), even creating overall cost-savings in some cases.
But most importantly, transitioning to the private exchange means employers have the ability to fix their annual health benefit costs at a known and predictable amount that they control. They will give employees an allowance to purchase health plans and each year can choose to raise the contribution by a fixed, amount. If they are smart they will peg that increase at or near the consumer price index (CPI). CPI has been rising a few percentage points a year (e.g., it rose 1.7 percent in 2012) while health insurance costs have been rising 3-5 times faster.
When you transfer your employees to an exchange, this basically becomes not your problem, thus marking the end of sucking up unpredictable rate increases for years and watching it eat into profits. By fixing healthcare costs at a lower rate of growth than in the past, employers realize real savings to their bottom line, particularly when they have challenging growth years. WalMart, for instance, as I wrote about here, went through
