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Four Novel Ideas About Private Exchanges

Private exchanges experienced modest levels of adoption last year despite all the press and predictions.

The first significant cohorts to embrace this approach were mostly large employers with savvy benefits resources and substantial money at risk in the “pay or play” analyses. They found private exchanges to be a viable strategy, and many chose this route rather than abandoning health insurance and sending employees to public exchanges. But private exchanges will be a choice for many more employers.

Don’t for a second think the current level of adoption will be the norm. Private exchanges will become a central force in benefits strategies for a growing number of employers. Employer survey data supports a rising adoption trend with more employers willing to pull the trigger over time. Those of us understanding the value of a private exchange solution celebrate the early adopters and continue to invest in product choice and solution functionality, while anticipating an inevitable tipping point.

So what happens next? We expect increased carrier participation and more small and medium businesses to move to private exchanges. The next 18 months will bring continued growth among employers of all sizes, and then prepare for a sea change. Meanwhile, here’s a look at four novel ideas that will expand adoption levels:

  1. Declining Cost of Adoption 

Fee structures for exchange software will drop significantly and mirror those of widely available basic enrollment solutions. Employers and advisors alike will begin to understand it is less about the software and more about everything else that will drive adoption into private exchanges.

  1. All or Nothing? Consider a Transitional Approach

One reason businesses are cautious about diving into private exchanges is the all-or-nothing proposition. Most exchanges offer a purist model: you either convert to a defined contribution strategy with predetermined “storefronts” or you continue to offer traditional benefits.

Our company is testing an option that bridges these worlds. This transitional approach enables employees to shop online for their benefits, but they are not limited by a defined contribution model. Employer funding does not change, but it introduces employees to the concept of selecting their own benefits among a broader selection of plans and taking more responsibility for their coverage.

Such an intermediary strategy could work well for companies that have diverse pay scales, for example in a business where a lot of employees earn $35,000 annually and another faction makes six figures. In addition to setting up different classes of employees, it also can accommodate contributory and non-contributory components of a benefits package. For instance, the company pays 100 percent of life insurance, but contributes nothing toward disability coverage. The key is that the employer does not yet have to lock in to a defined contribution.

Many players are struggling to create and define the boundaries of private exchanges. Our company discovered we don’t have to deliver standardized product offerings. In today’s evolving market, you can’t take a cookie-cutter approach. You need flexibility to enable employers to dip their toes in the water and position their workforce for bigger changes down the road.

  1. The Carrier Factor

While there is tremendous focus on the design of exchanges and the reluctance of employers to matriculate, everyone seems to overlook the role of another key player: carriers. While their participation is crucial to the short- and long-term success of these benefits solutions, they seem to be dragging their feet for one core reason: control. Private exchanges present challenges to these organizations relative to control. Carriers have to rethink pricing and underwriting strategies. In addition, they need infrastructure to support the transformation.

Carriers that have the most market share experience the greatest trepidation to change. For example, the Blues generally maintain the largest market share in every state, particularly down market among small- and mid-sized business. Yet, in our experience, these organizations often lack technological flexibility.

At present, many carriers are so concerned about building and perfecting their own private exchange solutions they are not able to collaborate well with other solutions they often deem as competitors. This comes on the heels of an almost exclusive focus on preparing for public exchange activities largely focused on the individual marketplace. As the market matures and carriers work through these challenges, expect to see greater cooperation and more plan options available through everybody’s exchanges.

  1. The Skinny on Narrow Networks

A huge debate is now raging about “narrow” networks creating disequilibrium in the marketplace. This solution provides access to a limited number of health care providers and facilities in exchange for lower cost. Employers don’t like to offer these options; they have nightmares about waves of employees marching on their executive offices with verbal “flame throwers” because their favorite doctor or hospital is excluded from the list. Individuals are passionate about their providers – until they have to foot more of the bill.

Narrow networks will become foundational to private exchanges. Individuals will select them more often than employers because the choice and price difference only impacts their family – not an entire population of employees.

In the future, it won’t be unusual for an exchange to offer six to eight plans and then double the selection with skinny networks to deliver additional choice. When an employee discovers his (or her) health insurance will cost 15 to 20 percent less in one of these plans, guess what’s going to happen? These networks suddenly become more viable, and employers don’t have to carry the blame for limiting choice; employees will make the decision to go that route themselves.