Four Reasons Why Private Exchanges Will Grow

Defined contributions, the Cadillac tax and more factor into why these platforms are expected to take off.

February 16, 2016 - H&HN Daily

Private exchanges are on the up and up. Here are four causes for their development:

1. Savings. Employers who jumped early to private exchanges appear to be saving money. Mercer Marketplace says medical plan savings in the first year can be as much as 15 percent; in the second year, Mercer’s employer clients saw an average increase of 1.5 percent, compared with the 4.6 percent increase reported by companies responding to Mercer’s national survey of employer-sponsored health plans.

2. Defined contribution. Weary of ever-increasing health insurance costs, some employers are moving away from the defined-benefit approach to health coverage for their workers. Using an exchange facilitates that because it gives employees freedom to use their benefit dollars in the way they see fit.

But nothing about the exchange itself requires employers to make that change. “Some have yet to move to a defined-contribution environment because they feel such a change overnight might be too much for employees to adjust to,” says Dard Hunter, a senior partner at Mercer. “So, they will come aboard the exchange with their traditional defined-benefit structure and, in the next few years, move to a defined contribution.”

3. Cadillac tax. The controversial 40 percent tax on high-cost plans, which could affect a third of large employers, goes into effect in 2018, though it is being heavily debated by members of Congress. Employers who move to a defined contribution and then point their workers to a private exchange to spend the money is an easy way to avoid the tax. “And since I can’t find anybody who says they’re going to pay the Cadillac tax willingly, I suspect [the exchanges are] going to grow,” says Jim Bonnette, M.D., executive vice president at the Advisory Board Co.

4 Choice. Employers benefit if their workers become savvy shoppers and engaged consumers of health care services, and giving them more choices for coverage is a good starting point.