yPart 1z
Health Benefits | October 08, 2012 | CFO.com | US
gPrivate Exchangesh 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.
David McCann
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 ghealth-insurance exchangeh 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 werenft called gexchangesh 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.
gWefve been doing this for eight years, and [before Obamacare] we marketed ourselves as an online insurance
marketplace,h says Bill Hanis, a vice president at eHealthInsurance, which
offers a technology platform enabling exchanges for small businesses and
individuals. gBut in the corporate health-insurance industry now, the validating
word in marketing collateral and messaging is eexchange.f If you donft say
youfre a private exchange, youfre not going to get attention.h
For that reason, gexchangeh 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 exchangefs 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 arenft 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 companyfs
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 employeesf 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.
gWe 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,h says
Danielle Kirgan, senior vice president of total rewards for Darden, which
operates seven full-service restaurant chains including Olive Garden and Red
Lobster. gWefre excited about the possibilities of the Aon Hewitt exchange
model: they created it, they own the administrative platform associated with it,
and theyfre doing the carrier contracts and the plan design.h
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, gI like to think about it more as being an innovator. Wefre taking
the opportunity to jump on this first. We wholeheartedly believe this is going
to be mainstream within two or three years.h
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 lawfs $2,000-per-employee annual penalty for not offering a qualified
plan, also scheduled to take effect in 2014.
Nineteen of Aon Hewittfs 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 firmfs health-care
exchanges strategy leader.
Sears said in a statement that gthe Corporate Exchange creates a competitive
market in health-care benefits, and wefre optimistic that it will drive
efficiency and have a positive impact on quality and costs.h
Aon Hewittfs 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 Watsonfs managing director of exchange solutions. gThe
world of how benefits are delivered is going to change,h 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. gThe 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,h he says. gThatfs 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?h
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. gIf you had asked me about that six months ago, you
probably would have gotten a different answer,h Waldron says. gThatfs how
quickly things are changing.h
yPart 2z
Health Benefits | October 09, 2012 | CFO.com | US
The Case for Private Insurance Exchanges
CFOs love predictable costs almost as much as lower costs. Thatfs a key
selling point for private exchanges, which enable a defined-contribution
approach to funding employee health benefits.
David McCann
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. Thatfs 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.
gWefre trying to establish a competitive market for health-care benefits,h
says Ken Sperling, Aon Hewittfs health-care-exchanges strategy leader. gThat
does not exist today, partly because of the cost and disruption involved in
moving to a different insurer. But itfs 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.h
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 employerfs 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,
gexperience 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,h says Thomas
Mangan, CEO of United Benefits Advisors. gIn America, when given a choice, we
choose with our money.h (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 firmfs CEO, Abir Sen, gWhen 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.h
Even benefits consultants like Mangan are talking up the advantages of
private exchanges to their corporate clients. gThere is a clear value
proposition. Ifm thrilled by whatfs happening,h he says. gIfm even cautiously
optimistic that this last paper-based industry will come into the
21st century. Ifve 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.h
On the Other Hand
Not that Mangan doesnft see some
potential drawbacks. For one, he says, gpioneering companies have a chance to
get slaughteredh 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 insurerfs retiree health plan in a cost-cutting move were to
get help in finding new coverage from Aon Hewittfs 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.
gThe effect on plan sponsors could be that [their] own underwriting pool
would go into a edeath spiralf as healthy young people leave the plan,h 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 latterfs costs would
spike.
Martin Graf, a vice president with global management-consulting firm L.E.K.,
opines that there really arenft any other significant reasons for companies,
large or small, to avoid private exchanges. Indeed, contrary to the spirit of
Manganfs 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 thatfs 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
insuredfs risk factors — for medical-insurance products included in the public
exchanges. gWhen 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,h Graf says. gOur numbers say
there will be anywhere from a 15% to 35% increase across the board.h
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. gWe 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,h 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 ga stretch.h) 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 Liazonfs 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 Exostarfs 401(k) and payroll systems operated by Fidelity.
Fidelity introduced Addi to Liazon, with which it had recently created a
linkage. gIt was not a traditional route for getting health benefitsh for the
companyfs 120 employees, he says. Most of them were young and single, gso 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.h
At HookLogic, an 80-employee provider of e-commerce solutions, Ajay Singh
undertook an examination of all processes and systems after becoming the
companyfs 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 HookLogicfs 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 HookLogicfs
technology-savvy employees.
yPart 3z
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.
David
McCann
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 vendorsf 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 Liazonfs 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. gUntil now wefve seen mostly the
one-carrier option,h says Thomas Mangan, CEO of United Benefits Advisors. gThe
carriers are not yet sure how to price this for a multiple-carrier exchange, and
anyway, they donft want to compete with each other on that platform for an
average group. To do that, they want Fortune 1,000 companies.h
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 Hewittfs 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 itfs 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 employeesf 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 Watsonfs managing director of exchange solutions. He calls the
single-carrier products gfaux exchanges.h
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 gis more
perception than anything else,h he says. Even with their traditional
health-benefits offerings, most large companies make available plans from
multiple carriers, but they are largely noncompeting. gYou donft see two similar
products competing at different price points, or two similar price points with
differing benefits structures,h Graf says. gThat will very likely also be the
case with a multicarrier exchange.h
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, gboth
single and multicarrier exchanges can be successful if there is sufficient
variation of these criteria.h
Graf further notes that gthe 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.h
Still, he believes, private exchanges, of both the single- and multicarrier
variety, are destined to develop into ga major pieceh of the company-sponsored
health-insurance arena. gIt wonft happen overnight,h he says, gbut when it does,
it will do away with a good portion of what benefit consultants and brokers do
today.h