‘Defined contribution’ approach could limit employers’ risk, save them money. By Joe Gardyasz
Jim Green, office business leader for Mercer LLC’s Urbandale operations center, said a majority of the 1,400 employees at the center will be involved in supporting Mercer’s private exchange on a national basis. Photo by Duane Tinkey
Public vs. private exchanges
The most important distinction between a public and a private exchange: Public exchanges are the only route by which individuals or employers can qualify to receive federal tax credits under the provisions of the Patient Protection and Affordable Care Act.
A key advantage of private exchanges, experts say, is that it enables employers to eliminate some of the administrative burden of offering health-care insurance as a benefit while still “playing” and not being subject to penalties for not offering coverage under the new health-care law.
Much of the discussion around the federal health care overhaul has centered on the public online exchanges, or marketplaces, that will begin operating in every state this fall. However, a number of insurance brokerages are gearing up to provide another option for employers next year: private health insurance exchanges.
Mercer LLC, a subsidiary of Marsh & McLennan Cos. Inc. with a major operations center in Urbandale, is among several major health benefits companies developing a private exchange option.
Its Mercer Marketplace Exchange, which will be rolled out this fall, will provide employers with software to enable their workers to select the best coverage for their situation from a range of options.
“The pressures on employers around cost have motivated the acceleration of this type of solution,” said Jim Green, principal of Mercer’s Urbandale center, which will serve as the company’s national processing center
for its private exchange.
At the same time, West Des Moines-based LMC Insurance & Risk Management Inc. is developing a private health care exchange that also will begin enrolling employers nationwide this fall.
Named eNavigate, the private exchange “will help businesses of all sizes who are interested in streamlining their benefits processes while providing choices to better fit their employees’ needs,” said Greg LaMair, president of LMC, which owns LaMair-Mulock-Condon Co. and four other subsidiaries in Iowa.
Though health benefits groups have previously dipped their toes into providing online marketplaces to enable companies to offer benefits choices electronically to their employees, a number are now plunging in head-first, now that the Patient Protection and Affordable Care Act has made the concept of purchasing exchanges more familiar to human resources departments.
The power of decision-support software – and the potentially lower costs from group buying power – are among the factors that are making private exchanges a viable option for employers, Green said.
Most important, the model will enable employers to move to a defined contribution approach to providing health care benefits, Green said.
In essence, the exchanges will provide a mechanism for employers to provide a set monthly amount to each worker for health coverage, and let employees choose the coverage they want through the private exchange.
“As employers get to the edge of the cliff and decide whether they’re going to be a sponsor of benefits or not, cost is usually the reason,” he said.
“The defined contribution solution that the private exchange offers puts a cap on that, and it puts a budget on that. It’s essentially the difference between being fully insured and self-funded. If you’re fully insured, you write a check and you know what your cost is. If you’re self-funded, you only know a little bit of that, and there’s variability. So the private exchange solution puts that predictability on cost if you take the defined contribution approach.”
The idea of moving to a defined contribution model for health coverage gained some traction in the late 1990s, according to a July 2012 issue brief by the Employee Benefit Research Institute (EBRI).
However, employers “were hesitant to drop group coverage in favor of offering individual policies because the non-group market was not considered a viable alternative to the employment-based system,” according to the EBRI brief. Additionally, employers have opted to continue to offer group plans because they provided a tax-free benefit that was valued by workers. Rather than giving workers a fixed allowance to pay for health premiums, many instead began offering health savings accounts or health reimbursement arrangements.
A lot of interest
According to Mercer’s most recent national survey of employer-sponsored health plans, 56 percent of employers polled said they would consider offering a private insurance marketplace to their workers, up from just 18 percent in 2011.
“We’re definitely seeing a lot of interest,” Green told group of about 15 human resources representatives during a recent health insurance workshop Mercer held for small and midsized employers. One of the biggest advantages will be one-stop shopping for a range of employee benefits, not just health insurance, he said.
“So as opposed to me as the employer or the HR person having to handle 11 or 20 vendor relationships, I’ve got the exchange relationship, and they’ve got all those relationships,” Green said. “They’re pre-qualifying, negotiating terms, getting the group buying power. So I’m centralizing my interaction with the insurance marketplace. So the business owner can focus on making the business better, rewarding its people better.”
Bob Skow, CEO of the Independent Insurance Agents of Iowa Inc., said the competition that may be generated by private exchanges could be good for the marketplace. However, he voiced concern that exchanges may add further cost to the system.
In theory, the private exchanges should operate more efficiently, experts say, because they’re aggregating the purchasing power of smaller employers into larger groups.
“Actuaries are suggesting significant cost increases next year, so every nickel and dime is going to make a difference at that point,” Skow said. “So if the private exchange is not burdened with the same costs, they may be more
Skow said he expects that a majority of employers will sit on the sidelines and observe the action for the first year or two before deciding whether to enroll in a private exchange. And until companies begin rolling out their exchanges later this year, they’re going to keep details of their design and pricing “close to their vests” for competitive reasons, he said.
Countdown to enrollment
Richard DeBartolo, a senior vice president with LMC, credits the Affordable Care Act, enacted in March 2010, with accelerating the move toward private exchanges.
“The way employers purchase insurance and the way employees enroll in insurance, the whole platform has been pretty manual and not real 21st-century-looking,” he said. “It’s always been in our minds to make it a
better process. Health care reform just kind of pushed us in that direction.”
LMC began vetting potential technology partners in the fall of 2011 and selected bswift, a Chicago-based firm that five years ago developed one of the first state-level online health insurance exchanges for Utah.
“The fact that (bswift was) already in the exchange business and had lived in it and knew how it worked, it really put them at the front of the list,” DeBartolo said. “They were by far the deepest and most integrated system we
LaMair said LMC plans a formal rollout of its private exchange in July during its annual benefits benchmarking event, with the intent of beginning to enroll employers in the fall for coverage that begins Jan. 1, 2014.
DeBartolo said he envisions a majority of small businesses with up to 100 employees moving to private exchanges in the next two to three years.
Savings through greater economies of scale should be a major incentive for smaller employers to consider private exchanges, he said.
“It’s really our intent to aggregate groups not just for administrative purposes but also for risk purposes, if we can,” he said. “We may be negotiating things as a block of employers, rather than a single employee, so they may be able to get some economies of scale.”
Green said Mercer’s technology partner in its private exchange, Charleston, S.C.-based Benefitfocus Inc., is developing a cloud-based exchange for Mercer that will allow employees to personalize the way they shop for insurance. For instance, an employee who indicates she would like to know the details will be shown more details than someone who just wants to find the best price.
The software will also enable employers to choose the level of control they want to maintain in administering their health care plans, so they could have Mercer take care of all of the administrative tasks, or retain some of those functions internally.
Many small employer groups may choose not to enroll in a private exchange, Green said. It’s likely the earliest adopters will be within the sectors that face the greatest risk and uncertainty, particularly those with large numbers of hourly workers in the retail, hospitality, low-margin manufacturing and health-care industries, he said.
Employers in those sectors “would benefit the most from having the Affordable Care Act issues addressed for them, and also fixing their costs via a defined contribution approach,” he said. “On the other hand, I wouldn’t be surprised if we have those on the other end of the spectrum that today are leading-edge in their benefits packages that say, ‘I see tremendous value in this for me as an employer long-term, and I’m going to be an early adopter.’ They may not benefit as much financially as someone in the retail industry, but they will be leading-edge strategically.”
With Iowa’s group and individual insurance markets currently dominated by just two or three insurers, private exchanges could potentially be a game changer for other companies seeking to gain market share.
“That’s not the intent, obviously,” Mercer’s Green said.
“But bringing choice to a marketplace that lacks choice is always a good thing, in our mind. Most of the markets in which Mercer has offices have five or six viable (health insurance) options. Certainly our experience here is that it’s a two- or three-carrier market, probably for the past 10 to 20 years.”
Wellmark Blue Cross and Blue Shield, which is expected this month to announce whether it will participate in the state’s public exchange, has not yet made any decision regarding private exchange participation either, said Traci McBee, a Wellmark spokeswoman.
“Wellmark is constantly considering ways for customers to access our health insurance products and services,” McBee said in an emailed statement, “including building private exchange-type shopping capabilities for consumers and small businesses to provide convenient options to purchase Wellmark health insurance. … Because of the substantial variability between various exchange models, we are carefully evaluating the merits of which models will be the most beneficial to consumers.”
If Wellmark doesn’t participate in the emerging exchanges, LMC’s DeBartolo said, they may lose out on some opportunities they might otherwise have.
“It may or may not be the right business strategy for them; I’m not trying to pass judgment there,” he said.
“But if they don’t play, there is going to be a certain element of CEOs and CFOs who say, ‘I’m going to an exchange/defined contribution. If they’re available, great. If they’re not, I’m still going there.’”
What exchange features are most valued by employers?
In a national survey of employer-sponsored health plans conducted for Mercer Inc., employers ranked the features they said would most influence their decision to offer a private health care insurance exchange to their employees. Below are the top features by percentage that ranked them “important” or “very important.”
69%: Decision-support tools available to help employees select products and services
65%: Employees have a choice of medical plans
62%: Access to multiple vendors, with pre-negotiated terms and conditions
54%: External administration of program, customer service and vendors
51%: Can facilitate a defined contribution approach (employer provides a set dollar contribution per employee)