Getting a ‘private exchange’ health plan
Will online insurance markets help older workers save money?
By Elizabeth O'Brien
Much of the hubbub in health care these days centers on the creation of public health insurance exchanges in compliance with the Affordable Care Act. But another, potentially groundbreaking shift is under way in the private sector, with the formation of so-called private exchanges.
As more companies move their workers over to this model, traditional, employer-provided health coverage could eventually go the way of pensions, some experts say. And for workers in their 50s and 60s who are able to hang on to employer-based coverage, the exchanges could provide a way to get coverage tailored to their needs—for example, to find a plan that includes their favorite doctors in-network.
On a private exchange, a company gives its workers a fixed amount of money per month to use for health insurance costs. Each year at open enrollment, employees go to an online marketplace—some have compared the shopping experience to that of using a travel website to book a plane reservation—and select a plan from a menu of options. (The public exchanges will also function as an online marketplace when they launch this October for open enrollment, but they’re designed for individuals and small businesses.) This system might sound familiar to some retirees, since some companies currently provide retiree health-care coverage through private Medicare exchanges.
One of the most high-profile exchanges began operating this January, covering about 100,000 U.S.-based employees of Sears SHLD -0.78% ; Darden Restaurants, parent company of the Olive Garden and other chains; and Aon AON +0.54% , a financial-services company. Aon is also the parent company of Aon Hewitt, a global human resources solutions business that’s operating the exchange.
Mercer and Towers Watson, two other large human-resources firms, have also recently announced that they’re creating private exchanges. While the number of companies using a private exchange remains small, the interest level is high, experts say. “It’s a hot topic right now, no doubt about it,” said Helen Darling, president of the National Business Group on Health, a membership group of large employers.
Private exchanges are being pitched as a way for employers to rein in their share of health-care spending and to make it more predictable. From 2006 to 2012, employers saw their health-care spending increase by 40%, to an average of $8,000 per employee, according to a survey by Aon Hewitt of nearly 2,000 mid- to large-size employers. At the same time, employee out-of-pocket and payroll costs for health care increased 82%, to an average of $5,000 per year.
Cost trade-offs for workers
This fixed contribution makes employers’ health-care outlay more predictable, but what does the shift mean for employees? First things first: most private exchanges are providing group health benefits. This means older people will pay no more for coverage than their younger colleagues. Insurers on the individual public exchanges provided under the Affordable Care Act will be able charge older people no more than three times as much as they charge younger ones, and starting next January no one anywhere in the insurance market will be denied coverage for pre-existing conditions.
Employees will likely have more choices on an exchange system. Traditional, employer-sponsored coverage typically offers a couple of plan options from one carrier. Aon Hewitt’s exchange, by contrast, includes nine unique carriers—five medical, three dental and two vision—and each medical plan offers a few options. Towers Watson and Mercer will also offer multicarrier exchanges, although neither has announced the details yet.
All these options mean it’s hard to predict how employees’ out-of-pocket costs will change under private exchanges. Proponents say competition among insurers on the exchange will drive down costs for employees. The amount an employee will pay out of pocket—typically through a payroll deduction—will depend on the level of coverage he or she wants, and how much its cost exceeds the monthly allotment.
Employers will generally require some kind of employee contribution; in other words, a worker won’t be able to choose a cheaper plan than his monthly lump and pocket the difference. Workers with families will get a larger monthly allotment than single workers.
The real question, experts say, is how much employers will raise their contribution levels over time. Health care costs in recent years have risen about 6 % per year, at least double the current rate of inflation. Employers may start out giving employees a lump sum that’s similar to what they currently spend on each worker’s coverage, but they may raise those contribution levels more slowly than they did in the traditional model, which allowed for less control over their spending.
That’s been the experience at HealthPass New York, a pioneering private exchange that’s served small businesses in parts of New York state since 1999, according to Vincent C. Ashton, president and CEO. Back when the exchange started, employers typically covered the full cost of their employees’ health insurance. Employer contributions as a share of premiums topped out in the early 2000s, Ashton said, and since then they’ve risen over time but at a lower rate than the 6% of health-care inflation.
A 401(k) analogy
It’s no coincidence that experts are using the term “defined contribution” to refer to the private exchange system. That’s the same industry lingo that’s used to describe 401(k) plans. With the exchanges, “You’re being given more responsibility for your health insurance choice,” said Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute (EBRI). Similarly, when companies shifted from pensions to 401(k) plans, employees assumed more responsibility for their retirements.
Benefits firms say they will provide robust support, including call centers, to guide employees in making their health insurance choices. That said, there are few resources for employees who want to use independent sources to research their options, Fronstin said.
It remains to be seen how quickly employers will embrace private exchanges for their workers. Eric Grossman, senior partner in Mercer’s health and benefits business, predicts that in just a few years, between 20% and 25% of employer-sponsored coverage will be provided through private exchanges. Others say the shift may take longer, closer to the couple of decades it took for most employers to complete the shift away from pensions to 401(k) plans.
Private marketplaces change the delivery model for health coverage, but they don’t address the root causes of the country’s runaway health-care spending. Regardless of which system employers choose, said Darling of the National Business Group on Health, “Everybody will keep paying more for health care, because no one’s really containing the costs.”