Employers want defined contribution
Interest in private exchanges is growing, and more insurers are looking to provide employers this new option.
“Intent is translating into action now,” says Ashish Kaura, a partner with Booz & Company, a management consulting firm.
More payers are joining the game with their own exclusive exchange platforms. Recently, Cigna announced that it had established a retail exchange for smaller employers in the Atlanta, Dallas, Washington, D.C., and San Francisco markets with plans to expand through 2014. Health Care Service Corporation (HCSC), Blue Cross Blue Shield of Michigan and WellPoint also offer employers an alternative to traditional defined-benefit plans through their Bloom Health organization.
Mercer announced that 33 large employers now offer its Mercer Marketplace.
“The current enrollment numbers for Mercer Marketplace as well as other exchanges are relatively small today. We do see great interest from employers in offering a private exchange solution to their employees,” says Sharon Cunninghis, the leader of the exchange solutions.
According to industry experts, application of private exchanges is beginning in the area of group-retiree plans. Kaura says he expects even more movement in 2014. However, more employers could be turning to private exchanges for their active employees as well.
“If there is success with group retiree plans, then employers are convinced that private exchanges can handle that volume and do it in a more consumer-friendly way, they’ll be more encouraged to think about active employees moving onto private exchanges without incurring any employee backlash,” he says.
Brian Cheney, senior director of exchange management for HCSC’s Blue Directions, says private exchanges typically have several fundamental components that make it an attractive option to employers including a defined-contribution approach, an engaged employee, enhanced choice and technology or support to guide employee decision making.
“It typically expands the offering of plans you might see between five and seven benefit offerings,” he says. “You might have a very rich PPO or a direct-access care kind of plan. You might have a health savings account or a consumer-driven plan at the other end of that spectrum. And the whole idea is to engage employees in their decision process about what healthcare benefits really match best for them.”
Cheney says increasing employee engagement in how their healthcare dollar is being spent helps create an environment of consumerism, which will potentially drive down the overall healthcare spend over time.
“I don’t think that anybody out in the market is there yet,” he says. “They’ve done the fundamentals first, talked about defined contribution, talked about how great their platforms are, but when you can really get the employers’ trend line and start to impact their bottom-line costs, that’s where we believe our Blue Directions is going to add value in the future.”
Even with public exchanges gaining enrollment this month, payers say interest in private exchanges remains strong because it targets employer populations. While public exchanges are targeted to individuals looking for health insurance coverage, private exchanges offer a parallel healthcare delivery option for employers and group plans.
“What we’re addressing right now is that employers still want the risk and to manage claim costs. They just want to offer it differently to employees,” says Rick Allegretti, vice president of marketing strategy and business development for HCSC.
According to a recent survey from Booz & Company, after surveying more than 500 employers and 300 consumers they found strong interest in private exchanges and of those surveyed, 70% to 80% would prefer a private exchange to a public one.
“I think there is more faith that they will come through in terms of delivering on the promises that they are making,” Kaura says.
He believes the value proposition is stronger for small to mid-sized companies.
“These are typically segments where the negotiating leverage is less, where typically there is less competition for these accounts on an account by account basis,” he says.
Since launching the Mercer Marketplace private exchange last year, Cunninghis says the platforms have attracted both large companies such as Petco and smaller companies with as few as 100 employees. Nearly three-fourths of the exchange clients have fewer than 2,000 employees.
Executives at HCSC, who operate the private exchange Blue Directions, say that while they are seeing a lot of interest in national accounts, the sales so far have been in small to mid-size markets.
The private exchange model was particularly appealing to small business owners in Illinois. In December, the Small Business Advocacy Council (SBAC) launched a small-business oriented private health insurance exchange with Land of Lincoln Health, a consumer-operated and oriented health insurance plan (CO-OP) in the state.
Elliot Richardson, the founder of the SBAC, says the private exchange model is appealing to small business owners because it provides flexible benefits in a user-friendly way. They decided to partner with Land of Lincoln Health because they were attracted to the co-op nature of the health plan.
“We need a disruptive vehicle in the market that can begin to stabilize insurance rates and we know that they are not going to come down immediately, we understand that, but at the same time in Illinois health insurance is a major obstacle to the growth of the small business community and small businesses in general and we see the co-op as our best chance of attacking that and stabilizing those rates,” Richardson says.
Employer size can also impact what type of private exchange employers are attracted to. For instance, experts say fully insured private exchange platforms may have more appeal for smaller or mid-sized clients while self insured options with a defined contribution may be more attractive to larger clients who are already comfortable with carrying the risk.
“Fully insured offerings are really good from a budgeting perspective,” says Lisa Feddema, director of exchange management for HCSC. “So when it’s fully insured the carrier takes on the risk and the client really does cap their defined contributions for that particular year, so some clients are going to find that financially advantageous.”
Blue Directions and Mercer Marketplace offer both funding options.
Kaura says multi-carrier exchanges are more common and more attractive to employers, although payers may prefer single-carrier models where they have more capability to customize the product and the value proposition of their offerings.
As interest grows in this healthcare delivery platform, payers who create or participate in private exchanges can benefit by responding to employer demand and may be able to maintain or enhance retention rates.
“At HCSC, we have a lot of market share we are interested in retaining our business and are always interested in gaining new business as well,” Feddema says.
Cunninghis says private exchanges serve as an additional distribution channel with 20 different types of insurance from medical and dental to life and auto insurance.
Average employer contributions in private exchanges vary and experts say it is difficult to gauge since many are still in their infancy.
Kaura says Booz & Company believes the current volume in private exchanges is somewhere between 750,000 to 1 million members at this point, which doesn’t provide enough volume to accurately gauge defined contribution trends.
Experts say it will be a slow slide towards defined contribution with some employers maintaining traditional benefits.