【Part 1】

Health Benefits | October 08, 2012 | CFO.com | US

“Private Exchanges” Could Trigger Health-Benefits Revolution

To what extent Corporate America will embrace this emerging method of delivering employee health care is not yet clear — but a vast transformation appears quite possible.

This is the first installment in a three-part series that introduces the just-burgeoning world of private health-insurance exchanges. Part 2 will flesh out the case for private exchanges and suggest some drawbacks.

Barely more than two years ago, the phrase “health-insurance exchange” had just poked its toe into the waters of the corporate lexicon. Just now the issue is hot — and not only because of the state and federal exchanges to be created under the Affordable Care Act, a.k.a. Obamacare.

A fair number of small companies are using private health-insurance exchanges, and in some cases have been doing so for several years. The entities just weren’t called “exchanges” until after the ACA popularized the term. Now targeting large companies as well, the burgeoning field of private exchanges offers a look at what could become, within a few years, a common strategy for delivering health benefits to corporate employees. Rather suddenly, talk about these products has grown rampant and interest in using them is flowering.

“We’ve been doing this for eight years, and [before Obamacare] we marketed ourselves as an online insurance marketplace,” says Bill Hanis, a vice president at eHealthInsurance, which offers a technology platform enabling exchanges for small businesses and individuals. “But in the corporate health-insurance industry now, the validating word in marketing collateral and messaging is ‘exchange.’ If you don’t say you’re a private exchange, you’re not going to get attention.”

For that reason, “exchange” is a loose term. Seemingly every service or technology company with an enrollment engine for health-benefit plans now calls it an exchange. Individual insurance carriers are starting to run their own so-called exchanges, populated solely with their own plans. Even some private companies are reportedly using the term when giving employees an expanded set of insurers to choose from.

When referring to exchanges, either private or public, most experts in the field describe them as online portals populated with a variety of easily comparable health-plan options. In essence, they are like shopping malls. Their operators build or license technology platforms to deliver the portals, and they solicit participation from and contract with insurers.

There are multicarrier plans that insurers join for the same reason stores locate in malls: to get the foot traffic from people shopping at all the other stores. Far more prevalent, presently, are single-carrier plans, which insurers join because it is another distribution channel, with the exchange’s corporate client a captive audience. A greater choice of carriers seems at first blush to be better for customers, but some observers say the single-carrier approach offers similar value (see the third installment of this series, to be published later this week).

Most private exchanges generate revenue through a per-employee fee to client organizations. All exchanges have unique elements and idiosyncrasies. Aside from pricing, however, the key differentiating element among private exchanges is the number of carriers and plans included.

Companies generally aren’t eager to adopt new health-insurance schemes because of the cost and organizational pain such shifts can produce. But exchanges could help employers in several ways:

• Plan sponsors shift to a defined-contribution model, offering employees a predetermined chunk of cash with which to buy health insurance themselves through the exchange. That means a company’s health-benefits costs will be almost entirely predictable (as is the case with the many companies that have replaced defined-benefit pension plans with 401(k) plans and other defined-contribution plans).

• Workers get a range of easy-to-compare health plans to choose from. Displaying pricing and other key plan details in a way that allows for apples-to-apples comparisons between plans is central to the exchange concept. That could help keep their costs in check, because the exchange may offer plans that are more affordable than the limited options their employers had been offering previously.

• Plan sponsors are in many cases spared much of the administrative burden associated with insured or self-insured plans.

One difference between public and private exchanges is that the latter typically offer more decision-support tools and personalized help for users than state and federal government exchanges are likely to. But several private exchanges are in talks with states about providing such services to them.

Another difference is that while only lower-income individuals and families will be eligible for federal subsidies to help pay for insurance bought through a public exchange, on the private side all employees will typically get an employer contribution.

Giants on the March
Large employers generally have found it cheaper to self-insure their employees’ health-care needs than to buy insurance from carriers, and for most that mind set is likely to persist, at least in the near term. But while companies taking part in an exchange would no longer have self-insured status, they would have a cost advantage in that they would get to transfer to the insurer(s) participating in the plan the risk that claims will be higher than expected. A company can protect itself against such upward claims risk simply by buying insurance directly from a carrier, but in that case it must pay the full premium even for periods when claims are low.

In late September, Sears and Darden Restaurants, both currently self-insured employers that together have a combined 100,000 workers, became perhaps the largest companies to publicly acknowledge they would use a private exchange. Starting January 1, they will be the first customers of the Aon Hewitt Corporate Exchange, a new venture of Aon, the large human-capital consulting firm.

“We were looking for ways to deliver more choice and variety to employees. But we knew it would be difficult, if not impossible, to create [an exchange] on our own because of the infrastructure and resources it would take,” says Danielle Kirgan, senior vice president of total rewards for Darden, which operates seven full-service restaurant chains including Olive Garden and Red Lobster. “We’re excited about the possibilities of the Aon Hewitt exchange model: they created it, they own the administrative platform associated with it, and they’re doing the carrier contracts and the plan design.”

For Darden, the move is also a nod to the future. Asked whether she sees Darden as a guinea pig for how private exchanges will fare at large companies, Kirgan says, “I like to think about it more as being an innovator. We’re taking the opportunity to jump on this first. We wholeheartedly believe this is going to be mainstream within two or three years.”

That is the time frame during which the ACA provision that health insurers may not reject applicants because of preexisting conditions will take effect. The law calls for a January 1, 2014, effective date, but it could be pushed back if regulations for carrying out the provision are not issued by mid-2013.

Private-exchange vendors may then be well positioned, affording companies the option to send employees to an exchange while still technically offering a qualified health plan as defined under the ACA. That would allow employers to avoid the law’s $2,000-per-employee annual penalty for not offering a qualified plan, also scheduled to take effect in 2014.

Nineteen of Aon Hewitt’s large-company clients were interested enough in the private-exchange model to submit requests for proposal to the firm for their 2013 health-benefit plans, says Ken Sperling, the consulting firm’s health-care exchanges strategy leader.

Sears said in a statement that “the Corporate Exchange creates a competitive market in health-care benefits, and we’re optimistic that it will drive efficiency and have a positive impact on quality and costs.”

Aon Hewitt’s competitors are diving into the private-exchange market, too. In May, Towers Watson bought Extend Health, among the largest providers (in a crowded field) of exchanges for Medicare-eligible retirees. Extend currently does not serve active employees for its clients but expects it will by 2014, says Bryce Williams, a former eHealthInsurance executive who co-founded Extend in 2004 and is now Towers Watson’s managing director of exchange solutions. “The world of how benefits are delivered is going to change,” he says.

Mercer, another benefits-consulting giant, recently began offering health-benefits services through vehicles it calls exchanges. The firm declined to comment for this article.

The big human-capital consultants had no choice but to get into the exchange game, according to Martin Graf, a vice president with global management-consulting firm L.E.K. and a specialist in the health-services industry. “The only ones that would get hurt (if private exchanges grow large and powerful) will be the benefits consultants, who gain from having a lot of complex things to sort through,” he says. “That’s why Aon Hewitt and the others are jumping in. There is a threat to their business. If you can easily compare plans with one another, what do you need a consultant for?”

Private exchanges could well develop into the dominant way of delivering health-care benefits, suggests Gregg Waldron, CFO of 130-employee RedBrick Health, a supplier of wellness programs to employers and a customer of exchange provider Bloom Health. “If you had asked me about that six months ago, you probably would have gotten a different answer,” Waldron says. “That’s how quickly things are changing.”

【Part 2】

Health Benefits | October 09, 2012 | CFO.com | US

The Case for Private Insurance Exchanges

CFOs love predictable costs almost as much as lower costs. That’s a key selling point for private exchanges, which enable a defined-contribution approach to funding employee health benefits.

This second installment in a three-part series on private health-insurance exchanges describes their value proposition, drawbacks, and some CFO points of view. Part 1 introduced the private-exchange concept. Part 3 will address the vendors in the market and their products.

Employee health benefits may not be a favorite topic for CFOs. Historically, they preferred leaving human-resources stuff to HR folks. That’s been gradually changing over the past decade, but partly because that period has been marked by soaring health costs. Now, many finance chiefs are experiencing budgeting paralysis instilled by the uncertain future of the Affordable Care Act (ACA, or Obamacare) and the volatile health-care industry generally.

Enter private health-insurance exchanges. These online portals are populated with a variety of health-plan options from either a single or multiple carriers, displayed to enable users to compare those choices in apples-to-apples fashion. Typically, they are funded in part by defined contributions supplied by the employer.

Companies that opt for a private exchange will be looking for a budgeting benefit. In traditional health-benefit plans, self-insured employers risk swings in claims volumes from year to year. And fully insured ones are subject to possible double-digit premium increases, which have been the norm in recent years.

When they use private exchanges, companies set their contribution amounts at the beginning of the plan year. No matter how much insurers raise rates for the following year, a company can control how much it contributes to the plan.

Of course companies have been able all along to pass on to employees as much of the annual cost increases as they cared to (although most, wary of damaging their ability to attract and retain talent, have absorbed a majority of the hit). But if enough companies choose it, the private-exchange model could bring long-needed price stability to the health-benefits arena.

The new exchange that consulting firm Aon Hewitt is offering to its large corporate clients offers an example of why that could happen, at least with respect to multiple-carrier exchanges. Employees of Sears and Darden, which will be the first two customers for the exchange starting January 1, can choose from among five medical, three dental, and three vision insurance carriers. Each carrier must provide plans at five quality levels: platinum, gold, silver, bronze plus, and bronze. (While an individual client company must offer the gold and silver levels, it can choose to suppress up to two of the other three.)

But while the carriers can price their plans however they wish, the actual benefits provided by each carrier must be identical — each gold plan, for example, has the same physician and pharmacy networks; coverage for the same drugs, treatments, and procedures; and so on. If one carrier were to charge more than the others, employees making their insurer elections would easily see the disparity and presumably have no motivation to select the more expensive option.

“We’re trying to establish a competitive market for health-care benefits,” says Ken Sperling, Aon Hewitt’s health-care-exchanges strategy leader. “That does not exist today, partly because of the cost and disruption involved in moving to a different insurer. But it’s one of the reasons health-care costs are going up 7% to 10% a year. We have commoditized our product so that costs are in check and there is freedom of movement on an individual-employee level.”

Another reason employees of companies that contract with private exchanges may feel less bite from annual cost increases is that, as with consumer-directed health plans (CDHPs), they are likely to spend their own money more wisely than they spend their employer’s money. For example, young, healthy workers will have more options to choose plans that are cheaper because they carry high deductibles and co-payments.

Employees who want to pay more for richer plans can do so. However, “experience shows that a majority of employees will choose less-rich plans than they get when an employer tries to build a plan to serve everyone,” says Thomas Mangan, CEO of United Benefits Advisors. “In America, when given a choice, we choose with our money.” (However, critics have long argued that an overabundance of cost-cutting incentives in such plan types as CDHPs and health savings accounts could move employees to delay medical care that they really need, only to incur greater costs when their conditions worsen.)

That effect will apply as well to single-carrier exchanges like most of those offered by Bloom Health. Notes that firm’s CEO, Abir Sen, “When HR gives the employees two choices, you have a bunch of people who would have been plenty happy if the plan were cheaper but who are essentially forced to overinsure themselves. And there are a bunch of people who would have been happy to pay more to get a richer plan.”

Even benefits consultants like Mangan are talking up the advantages of private exchanges to their corporate clients. “There is a clear value proposition. I’m thrilled by what’s happening,” he says. “I’m even cautiously optimistic that this last paper-based industry will come into the 21^st century. I’ve never seen an insurance company with a robust IT department — some of them still print everything out once it gets to them and then rekey it in — but I can see a time coming when all carriers will be able to take data feeds from all the exchanges.”

On the Other Hand
Not that Mangan doesn’t see some potential drawbacks. For one, he says, “pioneering companies have a chance to get slaughtered” by unfamiliar technology tools.

The pioneers in the retiree exchange market planted their stakes in the ground years ago. But in a high-profile incident late last year, State Farm Insurance temporarily suspended a program under which 24,000 retirees who were removed from the insurer’s retiree health plan in a cost-cutting move were to get help in finding new coverage from Aon Hewitt’s Navigators retiree exchange platform. State Farm cited technical glitches in the program as the reason for the suspension.

Second, notes Mangan, if a corporate plan sponsor decides not to increase its defined contribution so that it keeps pace with medical-cost inflation, there is a large risk that lower-paid employees will go to the public exchanges to be created under the ACA in order to take advantage of government subsidies. Individuals earning up to $44,000 and families of four who make $88,000 or less will be eligible for subsidies, so most companies will have some eligible employees.

“The effect on plan sponsors could be that [their] own underwriting pool would go into a ‘death spiral’ as healthy young people leave the plan,” Mangan says, referring to the fact that health-insurance payroll deductions from such workers in effect subsidize the typically higher medical costs for older employees. Were the former to pull out of the plan, the latter’s costs would spike.

Martin Graf, a vice president with global management-consulting firm L.E.K., opines that there really aren’t any other significant reasons for companies, large or small, to avoid private exchanges. Indeed, contrary to the spirit of Mangan’s observation, he predicts that the costs of using private exchanges will be dramatically lower for workers compared with the public exchanges.

The ban on insurers rejecting new insurance applicants with preexisting conditions that’s to take effect in 2014 will be accompanied by a near-total ban on underwriting — the process by which insurers adjust rates based on an insured’s risk factors — for medical-insurance products included in the public exchanges. “When insurers have to take all comers [without risk adjustment], there is going to be a huge increase in price, which goes against everything that legislators and regulators have been saying,” Graf says. “Our numbers say there will be anywhere from a 15% to 35% increase across the board.”

But the ACA is silent on underwriting for products included in private exchanges. That should make private exchanges far more appealing than most companies currently perceive them to be, Graf notes.

Cost Neutrality?
Cost savings, though, are not necessarily the primary driver of corporate interest in private exchanges. Aon Hewitt analyzed how the 19 companies that sent requests for proposal for its new exchange would have fared cost-wise by providing employees the same benefits through the exchange they had been providing on a self-insured basis. The exchange rates in aggregate were just 1% less, Sperling says, but there was wide variability. Some companies would have paid more than 5% extra to switch to the exchange.

Sen, of Bloom Health, says the rates insurers set are about the same for private exchanges as for traditional corporate health insurance. “We just see that individuals who make insurance decisions for themselves tend to be more satisfied with the outcome than when [their employer] makes the decisions for them,” he says.

Another exchange provider, Liazon, claims that, on average, its clients see a 10% savings in the first contract year. (Some sources for this article raised an eyebrow at that figure; one called it “a stretch.”) Then, says Liazon CEO Ashok Subramanian, they peg annual increases in their defined contributions to the inflation rate or the Consumer Price Index. That would amount to about a 3% hike, far below the typical 10%-plus bounce that small companies offering traditional health benefits have been getting hammered with.

Some of Liazon’s customers cite criteria other than cost as major factors in selecting the vendor. Richard Addi, who was CFO of aerospace-technology company Exostar for four years before being promoted to CEO in 2011, says he contracted with Liazon three years ago primarily because its technology platform integrated well with Exostar’s 401(k) and payroll systems operated by Fidelity.

Fidelity introduced Addi to Liazon, with which it had recently created a linkage. “It was not a traditional route for getting health benefits” for the company’s 120 employees, he says. Most of them were young and single, “so costs were not the driver for us that they are for some companies. It was about convenience and efficiency, though there have been some cost benefits.”

At HookLogic, an 80-employee provider of e-commerce solutions, Ajay Singh undertook an examination of all processes and systems after becoming the company’s first CFO in October 2011. One goal was to get the quality of health benefits for employees in New York, where high costs kept quality levels down, on par with what workers in HookLogic’s Michigan and Atlanta offices were getting.

Singh says he was able to accomplish that by scrapping the disparate insurance policies that had been used in the different states and consolidating all health benefits through Liazon. But what he likes most is the functionality of the portal, which is easy to navigate, he says, and appealing to HookLogic’s technology-savvy employees.

【Part 3】

Health Benefits | October 10, 2012 | CFO.com | US

Private Exchange Vendors Stake Out Market Niches

Their competitive battleground is defined by the size of their clients and the number of insurance carriers participating in their exchanges.

This is the final installment of a three-part series on the burgeoning field of private health-insurance exchanges.

Private health-insurance exchanges offer a plethora of potential benefits to corporate plan sponsors, as discussed in the first and second installments of this series. The number of credible ones that offer plans for use by active employees (as opposed to retirees) is not yet large. But that is likely to change as 2014 approaches.

Many companies, especially smaller ones, are now thinking about whether to continue offering health benefits as of that year — when the state and federal exchanges to be created under the Affordable Care Act are expected to become available — or 2015. For companies engaged in that thought process, private exchanges could emerge as a key complementary source of employee health benefits.

But for now, Bloom Health, Liazon, eHealthInsurance, and, most recently, Aon Hewitt make up a big portion of the field that targets active employees. There are also some long-established regional exchanges, such as HealthPass New York and California Choice. Individual insurance carriers are dabbling in the space, too, but many only recently licensed technology platforms to deliver the service or are still building one themselves.

The vendors’ client bases differ markedly. Bloom has 140 corporate clients with an aggregate 106,000 employees, or an average of 757 per company, and one with more than 20,000 workers, according to CEO Abir Sen, who declined to identify the big client. Aon Hewitt, which recently signed up Sears and Darden Restaurants as the first customers of its new exchange for large companies, plans to stay focused on Fortune 1,000 companies for the time being, though it expects eventually to move down-market.

The bulk of Liazon’s 2,000 corporate customers have fewer than 50 employees (although one has 3,000, CEO Ashok Subramanian says), and the same is true for clients of eHealthInsurance (which is the only publicly held company whose main business relates to exchanges; its market capitalization is $385 million and present annual revenue is $151 million, although a majority of that comes from products for the individual market).

A perhaps more interesting competitive battleground involves the breadth of choice the vendors provide for users. “Until now we’ve seen mostly the one-carrier option,” says Thomas Mangan, CEO of United Benefits Advisors. “The carriers are not yet sure how to price this for a multiple-carrier exchange, and anyway, they don’t want to compete with each other on that platform for an average group. To do that, they want Fortune 1,000 companies.”

Liazon and Bloom mostly or exclusively offer single-carrier plans. Bloom provides clients a single Blue Cross Blue Shield carrier, but sometimes adds plans from Medica, a Midwestern regional insurer. Aon Hewitt’s exchange includes five carriers.

eHealthInsurance has a different business model than the other vendors. Each corporate client evaluates multiple plans from multiple insurers but picks one plan for its employees, so it’s the company, not the employees, who have a broad choice. And unlike the others, the eHealthInsurance exchanges are based on a traditional defined-benefit model, in which benefits for doctor visits, hospitalization, prescription drugs, etc., are predefined but employees’ total annual out-of-pocket costs are uncertain. The others facilitate a defined-contribution model, in which the employer contributes a certain amount of money that employees can use to buy the type of insurance that best suits their needs.

An exchange for retirees called Extend Health, recently acquired by human-resources consulting firm Towers Watson, offers 80 carriers. Towers Watson plans to launch an exchange for active employees over the next couple of years, and it will have the same massively multicarrier approach, insists Bryce Williams, Towers Watson’s managing director of exchange solutions. He calls the single-carrier products “faux exchanges.”

Others feel differently. For small companies, a multicarrier exchange could add significant value, says Martin Graf, a vice president with global management-consulting firm L.E.K. But when it comes to large companies, the difference between single-carrier and multiple-carrier exchanges “is more perception than anything else,” he says. Even with their traditional health-benefits offerings, most large companies make available plans from multiple carriers, but they are largely noncompeting. “You don’t see two similar products competing at different price points, or two similar price points with differing benefits structures,” Graf says. “That will very likely also be the case with a multicarrier exchange.”

Subramanian adds that the range of plan types available in an exchange, with variations in provider network, covered services, deductible amount, and maximum out-of-pocket expenses, is what provides meaningful choice. And, he says, “both single and multicarrier exchanges can be successful if there is sufficient variation of these criteria.”

Graf further notes that “the economics are often better with one carrier. Single carriers tend to do a better job of integrating all the elements of the health-benefits plan and managing it.”

Still, he believes, private exchanges, of both the single- and multicarrier variety, are destined to develop into “a major piece” of the company-sponsored health-insurance arena. “It won’t happen overnight,” he says, “but when it does, it will do away with a good portion of what benefit consultants and brokers do today.”