or... How The Brady Bunch Got Me Thinking about Private Exchanges
My kids, ages 12, 10 and 7, recently stumbled upon The Brady Bunch on one of the thousands of cable channels we have available to us. As I watched some shows with them, I thought back to simpler times (such as when we only had a few television channels from which to choose). One episode has Peter Brady riding his bike from store to store to find a job. Today, he likely wouldn’t have been able to ride his bike—given today’s fear of creepy people. More likely, he would have put down his X-Box remote and simply logged onto Monster.com or some other website to search for a job.
Another episode has the entire family searching for their beloved dog, Tiger. The clan rides around town in search of Tiger, checking in with Mrs. Brady and Alice at Command Central by way of pay phones--do payphones still exist? Today, Tiger likely would have had a chip or some other tracking mechanism on his body that sends signals to a smart phone. He likely would have been found in minutes--it took the Bradys a full episode to find him!
As the nostalgia wore off, I began to think how each episode is so predictable. Things generally begin fairly calmly, then someone has some sort of catastrophe, the catastrophe gets resolved, and everyone learns a valuable lesson and is happy at the end. It’s all very status quo!
That same formula is true of most situation comedies on television, which got me thinking about the standard cost management strategies employed by many employers. Each year, there is a general calmness at the beginning of the year. Then the “catastrophic” health plan renewal is presented to them. The age old discussion ensues, When are we going to market? What plan design changes can we make? Can we reduce employee contributions? While this can be an arduous and painful process for many, all are usually moderately happy in the end. Then, we fast forward and do it all over again the next year.
It doesn’t have to be that way. While Health Care Reform generally has received negative criticism from employers for lots of valid reasons, it also has sparked a wave of innovation centered on cost control. For example, employers are implementing health improvement programs with a renewed sense of urgency, and insurance companies and third-party vendors are providing the tools and resources to support such programs. Other examples include value-based benefit plan designs, captive insurance companies, alternative funding mechanisms that allow fully-insured employers to enjoy cash flow and/or to share in positive claim experience, self-insurance products that allow smaller employers to take charge of their cost issues without the exposure of traditional self-insured contracts, and private exchanges.
Private exchanges, in particular, are receiving a lot of buzz these days. The concept is not a new one, but the environment in which they are being rolled out is more conducive to products and programs that go against the historical status quo techniques aimed at controlling costs. Private exchanges are simply an online marketplace similar to Amazon.com where employees can go to elect a variety of benefits, ranging from a health plan to pet insurance.
Private exchanges are predicated on three component parts: defined contribution by employer, employee choice, and a technology platform. The driving force behind cost management for an employer is establishing a defined contribution to give to employees each year. More specifically, the employer establishes a budget for the year and then allocates an annual amount for each employee, say $5,000. In year two, the employer can increase or decrease the defined contribution based on the business climate at the time. For example, the employer may increase the $5,000 by 3%, or to $5,150. In theory, this increase is more manageable than the uncertain renewal from the carrier.
The next driver of cost management is employee choice. In general, employees will have a wide range of health plan options from which to choose, ranging from more expensive traditional plans with copays to less expensive plans with qualified high deductibles. They also will have the opportunity to choose a dental plan, voluntary benefits, and wellness programs. They simply use the defined contribution from the employer, say $5,000, to review and choose the suite of benefits that make the most sense to them.
The third component of a private exchange is technology. There is an online site, or “store,” where employees can take their defined contribution and use it to purchase benefits. Once done, they simply confirm their “shopping cart” and check out. It’s very much like shopping online at Amazon.com, except the employee is buying employee benefits.
In short, private exchanges won’t be a fit for every employer – I’m not sure how the Bradys would have handled them. However, coupled with a good health improvement program, they are an alternative way to tackle the annual health plan budget issue and employers should be aware of their pluses and minuses.
BTW--we're hosting two seminars on the Bright Choices Private Exchange. To learn more, click here.