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What Are We Exchanging in a Health Insurance Exchange?

oswaldcompanies March 13, 2013

With every paradigm shift, disruptions occur. We are in the midst of employee benefit landscape changes so vast that they rival the passage of ERISA in 1974. Simultaneous with PPACA provisions that affect employers (the tip of the iceberg), there is a massive restructuring of the U.S. healthcare system (the below water part of the iceberg) prompted by changes in Medicare reimbursement and other aspects of the law.

So while employers are vexed about new taxes and new compliance, disaster looms. Or does it?

Employers of all sizes are now reconsidering their commitment to provide healthcare to employees and dependents. For smaller employers, the state public exchanges may provide an answer, but their preliminary implementations have not engendered confidence.

Even for large self-insured plan sponsors, healthcare reform implications, added to escalating costs are challenging long-held values.

For some, private exchanges provide the answer. But, employers considering this route should ask, “What are we exchanging in an exchange?”

Why this growth in private exchanges? 

Some point to the sluggish development of the public exchanges in many states. A sales push by consulting firms and other exchange sponsors describes powerful demand- and supply-side forces are driving their creation:

Continued increases in healthcare costs are reaching a tipping point, forcing employers to consider shifting from defined health benefits to a defined contribution model as a way to cap current expenses and future liabilities. Proponents also say that multiple carrier exchanges create a competitive marketplace, mitigating long-term cost increases.

Wary that the availability of public exchanges may prompt some employers to terminate coverage, and that these exchanges will drive product commoditization, insurance companies are devising strategies to preserve the value proposition of their group-based insurance business.

Some benefits consultants, to remain relevant and devise a revenue stream post-PPACA, are helping to establish and promote private exchanges.

Employees increasingly want more choices, but they crave guidance and support during the process. Private exchanges offer one-on-one counselors, or advocates, and sophisticated web tools that facilitate “best buy” choices, including high-deductible plans, narrow networks and other approaches that have been harder for employers to impose.

Reviewing the advantages and trade-offs

But realistically, what are we exchanging in an exchange? Employers need to clearly evaluate the advantages and understand what they are compromising.

1      Better cost management through fixed subsidies –The defined contribution approach has been used by employers for years, especially with retiree populations, and surely does not depend on an exchange.  While limiting the employer contribution is effective for expense budgeting, it does nothing to address the overall population risk.

2      Predictability of expenses by transference of risk to insurance companies – Employers have self-insured risk because there is a cost to transfer it, either through offering insured options or purchasing stop loss insurance.  These risk charges are built into exchange option pricing, although some have limited ways in which employers can preserve self-insurance.

3      Improving access to quality health plans – Certainly the scale of the exchanges does make possible a broader range of choices, something that may be attractive to employees.  With choice comes the necessity to provide enhanced support for employees to navigate them.  And what of innovation?  Will national private exchanges, led by large health plans, spur the market-by-market geographic provider innovation intended by PPACA through ACOs?

4      Reducing administrative overhead—The allure of less compliance and vendor management looms large for employers, despite the fact that most have done this well.  Employer scrutiny through bid processes and negotiations has reduced costs and improved service from health plans over the years. Who will provide oversight when employers step back? Will health plan marketing campaigns fill the airwaves, as they already do for Medicare plans, to influence employee choice?

5      Reinvesting the expected savings and refocusing staff into health and productivity – Certainly savings would be welcome, but with risk charges, margins for health plans and for exchange sponsors, the cost of stepped up counseling, where will they come from? Making health and productivity a priority is also a good idea, but will require different skills than most benefits management staff possess, and importantly, a management commitment to succeed.

Important questions remain

Again, what are we exchanging in an exchange? What if employers are not part of the picture?

Accidents of history have put U.S. employers on the hook to pay for employee healthcare. This is a critical time, if you look at the part of the iceberg that is hidden below the water. Hospitals and doctors are making big changes driven by PPACA and Medicare payment incentives. Readmission rates are falling. Evidence is now available comparing treatment alternatives. Specialty groups are nobly stepping forward to challenge peers who over treat.

Encouraged by Medicare subsidies and formation of PPACA Accountable Care Organizations, groups of physicians and hospitals are working to build a strong primary care system. A nascent patient engagement movement is shifting the power balance with providers. One-fifth of our U.S. economy is undergoing massive restructuring.

Should employers (business) wait for politicians (government) or health plans (financial intermediaries) to solve the problems that remain?

Will exchanges encourage employees to pick options that drive consumer behavior? High deductible plans? Narrow networks?

Will exchanges finally force price transparency? Will employers jettison leverage – carrots and sticks – linking employee actions and outcomes to consequences, in building a culture of health?

Finally, what are we exchanging in an exchange? What if employers are not part of the picture? These are questions worth asking.

Contact me to continue the conversation on Health Insurance Exchanges.