Analysis

Why mid-market companies should pay attention to private health exchanges

Key considerations to take into account

While definitive figures are not available, it is widely believed that between five and seven million Americans receive their health care through private exchanges in 2015. By 2018, industry experts predict an eightfold increase in enrollment in these company-sponsored plans. Such dramatic growth in any insurance plan should be enough to make companies take a second look, but there are added complexities related to private health exchanges that warrant special attention.

Why mid-market companies should pay attention to private health exchanges

July 31, 2015

By Nicholas Paulish, Director, Deloitte Consulting LLP

While definitive figures are not available, it is widely believed that between five and seven million Americans receive their health care through private exchanges in 2015. By 2018, industry experts predict an eightfold increase in enrollment in these company-sponsored plans. Such dramatic growth in any insurance plan should be enough to make companies take a second look, but there are added complexities related to private health exchanges that warrant special attention. Among them are the breadth of services offered through the exchange vendors, the degree of control companies are willing to hand over to employees to manage their health benefits, and the potential cost savings privately-run exchanges can offer.

Loosely defined, a private health exchange is a virtual “mall” where employees can shop and purchase health care. The traditional private exchange model utilizes a “defined contribution” approach, whereby employers set aside a predetermined sum for insurance coverage for their employees. What’s different about private exchanges, however, is that third-party, for-profit companies own and operate the online marketplaces where employees access the available options. These marketplaces are similar to the government-based exchanges provided through the Affordable Care Act (ACA). undefined

While employees covered through private exchanges currently comprise a very small percentage of the tens of millions of Americans on company or private insurance plans, Deloitte estimates that the proportion could reach about a fifth of Americans on such plans by 2018. For comparison, about 9.5 million Americans are enrolled in the public exchanges that emerged through the ACA in 2015.

Focus on employees: choice, understanding of benefits

Along with cost savings, the growth in private exchanges is inextricably linked to consumer choice. Think of the expanding array of private health exchanges as shopping malls. The owner of the exchange is the mall operator. Meanwhile, the health plans and insurers, and their individual plan offerings within the exchange, serve as the stores and products, respectively. Depending on the options available within each exchange, employees can browse and buy medical, dental or life insurance in the “stores” using their employer’s subsidy, choosing the products that best fit their needs.

Depending on the offering, employees can choose from several insurers within a single exchange with plan designs at different price points. Most exchanges offer interactive capabilities, such as decision support tools that help employees select the health insurer and plan design based on their anticipated family health care needs. Other capabilities, such as transparency tools, help employees find the most economical providers for such services as diagnostic imaging, lab tests and bloodwork.

In spite of the health-related services offered through private exchanges, it’s not just traditional health insurance companies that are operating in this domain. Human resources consulting firms and financial services companies are emerging as operators of private exchanges. Even retailers have joined the fray, targeting small and mid-sized companies in particular as potential clients for these insurance products.

Considerations in adopting private exchanges

So what are some key considerations mid-market companies should take into account when weighing the advantages and disadvantages of a private exchange? First, it’s important to note that private health exchanges can offer employees greater choice in health care options. But companies do relinquish some level of control with certain strategic elements of a private exchange, such as the design of the available health care plan options and the associated health insurance companies. Employers that are considering adopting private exchanges as a vehicle to deliver health care to their employees should keep the following questions top of mind:

  • How does a private exchange fit into my human resources strategy? What are the employee recruitment and retention considerations?
  • Will transitioning to a private exchange increase or decrease my company’s immediate and longer-term employee benefit, administrative, management, and procurement costs?
  • Will my employees value the new type of healthcare coverage and the options afforded them?

For many companies, the decision to send their employees to a private exchange may come down to a few cost-reducing considerations. For example, through the defined contribution approach to financing healthcare, employers can assign contributions based on inflation, business results or other pertinent factors, providing them with cost predictability and helping them better align HR strategy and costs with business needs. Private exchanges offer robust traditional open enrollment and ongoing administration services that can also help companies redeploy human resources staff in a more strategic manner. As well, many benefits-related tasks such as actuarial and consulting assistance, legal services and temporary labor, for instance, can be outsourced to the exchange.

But cost is not the only deciding factor. If employees suspect they aren’t receiving value through such plans, or if the implementation and communications are poorly executed, a private exchange could fail. And as an employer, it’s also critically important to align a private exchange with the organization’s overall human resources strategy.

Consumers have made it abundantly clear that they want choice, convenience and quality when choosing health insurance. Through a well-planned private insurance exchange, mid-market companies can answer that call through benefits that meet both health needs and the digital demands of the future.

  1. As reported by the Kaiser Family Foundation in their September 2014 report “Examining Private Exchanges in the Employer Sponsored Insurance Market”.
  2. As reported by the Department of Health & Human Services in their January 27, 2015 Office of the Assistant Secretary for Planning and Evaluation Issue Brief, “Health Insurance Marketplace 2015 Open Enrollment Period: January Enrollment Report”.
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