In what is believed by some to signal a shift in the employer-driven health benefits model, employees at two companies, Sears Holdings Corp. and Darden Restaurants, will now be able to purchase health benefits through a private insurance exchange.
Similar to the shift from defined benefit to defined contribution plans that has overtaken most corporate 401(k) plans, around 90,000 Sears employees and 45,000 Darden employees will be eligible to receive a lump sum of money—a defined contribution—in order to select a medical plan and provider from the exchange.
The Patient Protection and Affordable Care Act (PPACA) of 2010—the federal health reform law— included a provision requiring each state to establish a Health Insurance Exchange by 2014. States have the option of creating their own exchange or deferring to the federal government, which will provide one for them.
Private health insurance exchanges are managed by private sector companies or nonprofits who act as intermediaries, working directly with insurance carriers to provide employers with the ability to offer subsidies to their employees. Combining technology and personal support, private exchanges are designed to include more choices, offering plans that address specific health conditions, preferred doctors/hospital networks and cost considerations.
But the rightness of this approach really depends on the strategic considerations of the employer in relation to the costs, benefits, and risks of the private exchange under consideration; that is, what’s the actuarial impact of offering a greater choice of products on an exchange compared to traditional benefits plans? says Executive Vice President Ross Reda of the Lockton National Benefits Group.
1. Underlying Cost Considerations
“The decision-making support tools are designed to provide a product that best suits employees’ needs and reduces employers’ administrative burden in managing their employee benefits plan. But while I believe private exchanges will bring some positive innovation and change to the market, nothing will really change until we change the underlying cost of health care,” Reda adds.
“Health reform has raised expectations regarding increased access to health care at a reduced cost, but the principles underlying the operation of insurance are still the same: Insurance companies still need to compete for our business, they’re still on the hook for risk and they’re still not going to write business at a loss,” Reda says.
2. Defining “Defined” Contribution
Reda discusses the value of five-year projections, urging employers drill down on the definition of defined contribution:
“Employers see private exchanges as a way to limit liability and control costs through a defined contribution or fixed lump sum of money they provide each year. But if the cost of health care continues to climb and this burden is passed on to employees through increased premiums, then it’s not really a fixed contribution and doesn’t meet the expectation that most employees will have. Will the employer’s fixed contribution go up each year and, if so, by how much? Additionally, increasing health care costs may make public exchanges more cost effective for employees at some point, and this needs to be factored in,” he adds.
“Public exchanges will have to pick up the less-healthy individuals, who are a much poorer risk. Restaurant and hospitality, health care, big box retailers and those with seasonal employees are feeling the pinch to as health reform approaches. But when it comes to a more transient work force—let’s say a family of four at poverty level that’s being 90% subsidized—they may actually be better off in the public exchange.”
“What’s more, employers can limit their liability through defined contributions right now through their existing benefit plans—they don’t need to wait for private exchanges to do so,” he adds.
3. Value as an Interim Solution
Reda does see value in private exchanges as a kind of stepping stone or interim solution before full health reform implementation in 2014, where a decided shift to a more employee-driven model will occur.
“We’re about 90 percent clear right now concerning what public exchanges are supposed to do, but there’s still a kind of Wild West element. We don’t want to drop employees into this environment before everything’s nailed down, telling them on Jan. 1, 2014, in essence, ‘you’re on your own with health benefit choices.’ So it could make sense to implement private exchanges as a kind of interim solution,” he adds.
Reda concludes: “Again, if the employer’s objective is to offer more choice, and create an environment of choice the way Amazon does when you’re buying a book; e.g., ‘people like you bought this,’ and ‘my special drug is covered better by another plan,’ then private exchanges might be an option. The private exchange decision-making tree helps bring these personalized options into better focus.”
“But private exchanges won’t necessarily fix employer rates from year to year. As with any insurance product, rates can go up, and this must be factored into the decision, along with other complicating factors such as the chosen funding mechanism, the difficulty of administering a private exchange plan with multiple carriers, and the effects of losing control of claims experience.”
What’s your thoughts? Please feel free to contact me for more information at RRuotolo@Lockton.com.