Private Exchanges Offer a Range of Insurance Options

Although not a new concept, the immense publicity surrounding the 2013 launch of federal and state-based exchanges shone a spotlight on the increasing consumerism in the health insurance marketplace.

The movement toward individuals taking a more active role in managing their healthcare plans … whether purchasing coverage on their own or accessing them as part of an employee benefit package … has been on the rise for a number of years. The changing landscape has been fueled by multiple factors including rising prices resulting in added cost sharing by employees, a call for individuals to take more control of their own health, and an increased emphasis on pricing transparency to assist consumers in purchasing healthcare and coverage in a similar manner to other goods and services.

Like the public insurance marketplace, private exchanges typically offer consumers a range of options and prices to meet a specific set of circumstances. However, said benefits expert Austin Madison, a principal and senior vice president for Middle Tennessee’s largest independent insurance agency The Crichton Group, the term ‘private exchange’ is a lot like the concept of ‘wellness.’ For some, he noted, a wellness initiative might mean answering a few quick questions; for others, it might denote a truly in-depth health management program. That same broad term use also occurs with private exchanges.

“At base level, a private exchange is a technology platform that allows an employer to use a defined contribution method and to offer up more choice,” said Madison. “The better private exchanges have the ability to be open and work with just about any funding mechanism or any carrier.”

Unlike the typical three plans that might be available in a traditional employee benefit package, a private exchange could offer 6, 8 or 10 options to allow employees to choose a plan that best addresses their individual or family needs. “You’re providing more choice for your employees,” Madison pointed out. “What a private exchange should also do is provide some decision support to help people figure out what’s best for them.”

The Crichton Group was the first agency in Tennessee to go live with a private health exchange for a client. However, Madison noted that … like consumerism in insurance … private exchanges are not brand new. “There is a company called Liazon that really pioneered private exchanges,” he said. Madison added the New York firm, which was founded in 2007, has primarily focused on small groups and employers. The concept is now moving to larger employers that have traditionally been self-insured. Walgreen’s, Sears, and Darden Restaurants have all recently made the move to a private exchange through Aon, a London-based global insurance broker.

Although private exchanges are viewed as a move away from defined benefits to defined contribution, Madison pointed out the switch is just a different way of thinking about offering coverage. “Defined contribution is what we do right now. All of our clients … whether they are in a private exchange or not … have some form of defined contribution,” he said. Madison added the difference is between agreeing to pay 80 percent of an employee’s cost in one of three offered plans or paying a flat rate for every employee and then allowing the individual to choose from a range of plans. Still, it is a paradigm shift that is often compared to the move from pension plans to 401(k) offerings.

With the Affordable Care Act, Madison said most every business with 50 or more employees has to offer insurance … and that insurance must meet essential benefit minimum requirements and meet minimum affordability standards. Those standards come into play for employees who would qualify for subsidies under the public marketplace (400 percent of the federal poverty level … roughly an individual making less than $47,000 per year in 2014).

In a private exchange, the base level plan would have to meet the minimum standards with other plans building upon that offering much like the public exchanges’ bronze, silver, gold, and platinum choices. Using a private exchange is, however, more difficult from an underwriting perspective. Madison noted that a company offering six plans might find that no one choses A & B, a lot of employees select C & D, and a handful of people prefer E & F.

Despite the headlines touting huge cost savings, Madison doesn’t believe that is the motivating factor behind the predictions that up to a third of American employers could switch to private exchanges over the next five years. “The reason why we’re seeing this transition to private exchanges is not because it’s going to save thousands of dollars,” he said. Instead, Madison continued, it is the combination of offering more choice while have a set allowance allocated per employee, which makes planning and budgeting easier by capping the per employee threshold.

Like traditional insurance benefits, employees have the ability to switch between offerings annually during the open enrollment period. The range of options in a private exchange allows employees to match plans to personal circumstances. An employee who selected an HSA for several years might switch to a plan with set office co-pays after marrying and having children. Employees using exchanges seem to be more satisfied with the flexibility, Madison added.

The Crichton Group anticipates a lot of smaller employers getting out of the insurance game, which Madison said is going to cause sticker shock as risk pools shrink. “We really believe that employers who continue to offer health insurance to their employees will be what we call employers of choice. They’re not going to do it because they have to but because it’s part of their culture, and they think it helps them attract and retain employees,” he stated.

Private exchanges can be set up as single-carrier or multi-carrier exchanges. Some use the ‘shopping mall’ approach with a wide range of insurers offering their products. “We don’t like the idea of shotgunning it out there. We think it takes away the value proposition the insurer brings,” Madison said of taking a more focused approach with a single carrier. However, he added, his company works with all major insurers so employers have a choice of which carrier and which products to feature.

Often with multi-carrier exchanges, the employer must be fully insured. “Ours allows an employer to be self-insured or fully insured so there’s a little bit more flexibility,” Madison said of utilizing the single-carrier approach.

For employers offering private insurance, he continued, there has been a migration from fully insured to self-insured plans. Madison said he expects to see that migration increase in the mid-market segment (companies with 100-1,000 employees) as pricing pressure due to community ratings increases over the next few years.

“This is why we think it is crucial that private exchanges have the flexibility to be agnostic toward funding levels,” Madison said. “It is important to note that employers that are making the transition from fully insured to self-insured … private exchange or off-private exchange … need to ensure that they are receiving actuarial guidance on the stop-loss levels, reserves and premium equivalencies needed for a self-funded plans. Employers that receive and implement proper actuarial guidance will see much more sustainable costs in regards to health insurance than if they were fully insured.”

He added, “We think a strong private exchange platform and strategy paired with a well designed, self-funded health plan offering provides a strong combination of employee benefit and employer risk management.”

Ultimately, Madison said the health insurance industry is undergoing sea change as carriers, brokers, employers and individuals search for ways to provide efficient, affordable coverage.

“There’s a lot of pessimism out there, but I think there is reason to be optimistic. There’s a huge opportunity to people who figure out how to provide value and information to several parties, and private exchanges are a small, small piece of that … but they kind of give a glimpse into how things are changing,” he concluded.

WEB: http://www.thecrichtongroup.com