The Growing Case for Private Health Exchanges
FEW COSTS RISE AS RELENTLESSLY AS U.S. HEALTH CARE COSTS. From 1970 to 2016, healthcare expenditures in the U.S. soared from just under $400 billion to nearly $3.4 trillion. And no, none of that was attributable to inflation—that’s in constant 2016 dollars.1
For CFOs tending their organization’s bottom line, those are tear-your-hair-out numbers. True, annual spending per capita has been going up less rapidly since 2010 than it did in the prior four decades.2 And yes, organizations that sponsor healthcare plans have been able to shift some of the growing costs onto employees, softening some of the burden on the bottom line.
Still, controlling the cost of healthcare remains a priority for most CFOs. And for a slowly but persistently growing number, private health exchanges have become one of the key mechanisms for doing it.
How Private Health Exchanges Work
First introduced in 2012, private health exchanges are loosely similar to the public health exchanges created by the Affordable Care Act of 2010. At a high level, they function like an online health insurance marketplace for an organization’s employees, offering a wide variety of insurance plans from which to choose. Under one common model, employers give each employee a fixed amount of money to purchase the plan that makes the most sense for them. Employees who choose lower-cost plans may find that this “defined contribution” amount covers most or all of their health insurance costs, while those who choose plans with more features or benefits may find that it covers a lower percentage. Either way, employees pay for whatever amount isn’t covered by the employer’s contribution. The employer retains the ability to increase or decrease its contribution each year as costs change, competition for workforce talent ebbs and flows, or its own business strategy evolves.
Private exchanges are offered by a number of outsourcing firms, insurers, and professional services firms, which manage the exchanges on behalf of the employers who join them. Proponents argue that the exchanges deliver several important benefits for employers. Beyond lifting some of the administrative burden from employers, they also can reduce costs relative to traditional best-practice plans. And they can reduce the employer’s financial risk by reducing the cash flow volatility associated with traditional plans. Private exchanges also can deliver better benefits for employees, starting with a wider array of choices for health insurance coverage, which tends to lead to higher levels of employee satisfaction. Aon, which operates two private health exchanges, says that about 90 percent of the participants in its exchange for active employees report being satisfied with their plans. That compares with commonly found satisfaction rates in the 60s and low 70s for well-managed plans providing comparable levels of benefits.
Direct uptake of private exchanges by employers hasn’t been as rapid as was initially anticipated. In 2015, an estimated 3 percent of employers participated in private exchanges, according to the 2015 Aon Health Care Survey, but 22 percent were expecting to take advantage of them over the ensuing three to five years. Industry experts say the percentage hasn’t reached that level yet; indeed, they estimate that it may be just slightly higher than it was in 2015. But, they say, the percentage of employers that have adopted some of the concepts associated with exchanges— like offering their employees a choice of multiple health insurance plans rather than just one—has far exceeded that 22 percent figure (78% of employers now offer between 3 and 5 plan options3). What those employers miss by not joining an exchange, Aon’s John Caldarella says, is the integration of intense market competition, the professional management services provided by the exchange operators, who oversee the process of soliciting and reviewing new bids from health insurers each year, and the technology-anchored tools the operators provide to employees to help them decide which plans make most sense for them.
Meanwhile, proponents note, the exchanges themselves have only become more sophisticated since their debut six years ago—especially in terms of the educational tools offered to end users—and now offer even more value. In addition to medical insurance, many exchanges now also make available vision, dental, life, and disability insurance plans, and even non-insurance products like prepaid legal plans. Some of the benefits are offered on a voluntary basis; employees who see value in them can purchase them; those that do not can take a pass.
Aon estimate on-going cost savings in its active employee exchange, after initial first year savings of 3%-10%, ata couple tenths of a percentage pointannually relative to a well-run traditional plan.
Controlling Costs, Mitigating Risk
The cost savings that private health exchanges deliver for employers derive primarily from competition. Each year, the exchanges put their clients’ business out for bid at every plan level, and in every geography where the employers operate. That forces insurers to deploy strategies to make themselves more competitive (e.g., performance networks, clinical programs, higher engagement service models) and to bid aggressively to maintain market share.
To be sure, private exchanges can’t defy market forces. If an employer’s claims costs consistently go up, so, too, ultimately, will its health insurance costs. But they may go up less in an exchange than they would outside of one. Aon estimates on-going cost savings in its active employee exchange, after initial first year savings of 3%-10%, at “a couple tenths of a percentage point” annually relative to a well-run traditional plan.
Still, saving money is not the only rationale for participating in a private health exchange. Employers who fully insure their plans in an exchange insulate themselves against the cash fl ow volatility that can crop up when a few large claims come in midway through the year and threaten to bust the health plan budget. By working with multiple insurers, employers also get the benefit of diversification; it leaves them at less at risk of having any one insurer’s rate hikes impact their own costs. In short, insuring through an exchange largely eliminates surprises that might have to be addressed during the course of the year or in accruals for future expenses.
If you go to a CFO and say, "Look, we have found a great way for you to save money,' that's not the end of the paragraph," he says. "We go on to say, 'And we're going to lift the satisfaction of your workforce for the benefits that they're receiving.'—John Caldarella, SVP National Practice Leader Active Health Exchange, Aon
Increasing Employee Satisfaction
As noted earlier, private exchanges also tend to drive higher levels of employee satisfaction with their health plans, an important consideration for CFOs who, just like the chief human resources officer and other members of the C-suite, recognizes that creating conditions that make it easier to attract and retain top talent is part of their mandate. Doing that is especially critical in environments like the current one, in which unemployment rates are low and job openings outnumber qualified candidates in some fields.
Private exchanges boost employee satisfaction levels because they give employees more options for managing their healthcare as well as more control over the process. Imagine a scenario in which an employer offering a traditional health plan arrangement finds that it’s plan costs are going up 2 percent in the year ahead—and budgetary restraints won’t allow it to cover the increase. In this common scenario, the employer will look for some way to make sure the increase doesn’t impact its bottom line. It may require employees to cover the rate hike, it might put its business out for bid and change plans—possibly moving to a plan employees like less—or it might reduce its existing plan’s benefit levels. None of those options are likely to sit well with its workforce.
Now consider how this might play out in a scenario in which the employer participates in a private health exchange, and it is the carrier covering the highest percentage of its employees that is raising its rates. The employer knows it can’t cover the increase, meaning it will have to be managed by its employees. But the employees have choices. They can choose to pay the increased cost to stay with their current plan. Alternatively, they can opt out of the plan and go with one of the many other plans available through the exchange—perhaps one offering a different level of benefits. Or maybe they choose to move to a high-deductible plan, and open Health Savings Accounts to help cover their out-of-pocket healthcare expenses. In short, the employees have an opportunity to do what works best for them with the money their employer has allotted for healthcare insurance.
For Aon’s John Caldarella, this illustrates the great appeal of private health exchanges. “If you go to a CFO and say, ‘Look, we have found a great way for you to save money,’ that’s not the end of the paragraph,” he says. “We go on to say, ‘and we’re going to lift the satisfaction of your workforce for the benefits that they’re receiving.’”
A Private Exchange For Your Company?
While circumstances can vary, most private health exchanges are designed to work for mid-market and larger employers who can benefi t high levels of competition across many insurance carriers, both national and regional. The more carriers there are competing for business, the better the odds that the employer will receive good pricing, and that employees will be able to find a plan in which their doctors and other healthcare providers participate. It also improves the chances of being able to offer plans that are distinctly different, which employees tend to appreciate. Simply offering multiple plans in which many are highly similar can actually make it harder, not easier, for employees to know which plan to choose.
Executives at one of the oldest private exchanges say that you need both scale and workforce diversification to drive value. In general, the more distributed a workforce is geographically, and the more diversified its workforce is demographically, the more valuable choice is in plan selection—and the more value a private health exchange will provide.
While a private exchange is not a good fit for everyone, there is tremendous potential value for organizations with 5,000 or more employees and both geographic and demographic diversity.
Strategies for Successfully Participating in a Private Health Exchange
Industry experts say organizations contemplating participation in a private health exchange can take a number of measures to ensure a successful implementation, including these best practices:
Take time to understand what you’re buying. The least successful migrations to a private health exchange tend to be those where the employer didn’t take time to understand the nuances of what they were getting. They may have realized they had access to plans offering varying levels of benefits, for example, but failed to register that they might not be able to keep their current plan. Or they may not have recognized that employees in some regions of the country might pay more—or less—for their coverage than their colleagues in other parts of the country, depending upon regional differences in healthcare costs.
Include key decision-makers in the exchange selection process. Certainly the CFO and the CHRO need to be involved in deciding whether to participate in a private health exchange, but so should anybody else in the organization who has profit-and-loss responsibilities or plays a meaningful role in talent management. While the CEO may not be involved in the exchange selection process, he or she will need to be kept apprised of what’s happening, and as the person with ultimate responsibility for the organization must be prepared to sign off on it.
Start communicating with your employees, including business leaders, early in the process. Once they’ve selected a private health exchange, companies that enjoy smooth switchovers typically do a good job of explaining to employees what is going to happen before it happens. Importantly, they also make sure to bring in business unit leaders and other managers so that everyone understands the implementation plan and what it will mean for employees. In particular, employees and managers need to understand how and why their health plan coverage may differ from their current arrangements. This involves more than making sure that website changes have been made in time for open enrollment, that the call center is stood up, or that written materials are printed and distributed. It involves consistent and persistent communication, both in writing and in person.
In the end, much of this work boils down to fundamental change management: knowing what’s changing, and explaining it in a way that stakeholders not only understand the changes but buy into them. Many organizations have discovered that in the case of private health exchanges, the benefits are worth the effort.
For more insight into the topics discussed in this piece, please reach out to your Aon representative or email@example.com.
1 “How Has U.S. Spending on Healthcare Changed Over Time,” by Rabah Kamal and Cynthia Fox, Kaiser Family Foundation, December 20, 2017, https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/#item-start
2 “How Has U.S. Spending on Healthcare Changed Over Time,” by Rabah Kamal and Cynthia Fox, Kaiser Family Foundation, December 20, 2017, https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/#item-start
3 Aon Consumer Driven Health Plan – Large Market Results 2017