The way in which organizations have traditionally offered health insurance coverage to their workers is undergoing a real evolution as more and more companies seek out alternative solutions like switching to defined contribution models and private health insurance exchanges.
Private health insurance exchanges haven’t come out of left field. They’ve been around for years. But a flurry of recent press coverage and the government’s own healthcare.gov, have helped raise both mainstream awareness and momentum among consumers and employers who want another viable approach to health insurance. A recent Kaiser Family Foundation report asserts that private exchanges have the potential to "reshape employer-sponsored health insurance."
The adoption of private exchanges is growing faster than experts anticipated. This year, it’s estimated that between 2.5 to 3 million people will be enrolled in a private insurance exchange for their benefits coverage. That number is poised to potentially soar to as many as 40 million by 2018. That’s roughly one quarter of all individuals who have employment-based insurance.
So what’s all the hubbub about?
Piquing companies’ interest
According to the 2014 Kaiser HRET Employer Health Benefits Survey (EHBS), 13 percent of employers with 200 or more employees who currently don’t offer benefits through an exchange were considering using one. In fact, over the next three to five years, several national surveys estimate that between 20 to 33 percent of employers will move to adopt a private exchange approach.
Private trumps public
Private exchanges seem to be far more attractive to employers than public ones. A recent Towers Watson & Co survey says a whopping 99.5 percent of eligible employers (those with less than 50 employees) have no intention of moving their full-time employees onto state- or federal-run exchanges, many of them still struggling and suffering from negative press. More than three-quarters say they don’t have confidence in their ability to be a viable alternative to their current health care plans.
Making the switch
Private exchanges seem to be turning the heads of mid-sized companies that may not have had a whole lot of bargaining power in the market in the past. But bigger entities have jumped on board too. In 2014, some notable large employers also started utilizing private exchanges for their active, retired or part-time and seasonal employees including Target, IBM, Time Warner, General Electric, Whirlpool, Walgreen’s, Sears, Petco and Darden Restaurants.
How it works
Defined contribution models work like this: a company gives a fixed amount of money to each employee to use towards his or her health care coverage. Through a private exchange, each worker then shops for and selects the coverage options that best suit their needs and budget. There is no traditional “one-size-fits-all” plan. The decision for choosing a plan shifts from the employer to the individual employee. This shift to a more retail, consumer-driven way of thinking about obtaining insurance seems to be a natural by-product of the longer-term trend of companies moving more benefits costs onto their employees.
Switching to a private exchange does several key things for employers. It relieves the company of the burden of having to choose plans, provider networks and financing strategies for their entire workforce. It cuts out administrative hassles. The employer still has to pick what plans to make available, assess the costs involved, decide on the contribution strategy and communicate to their employees.
But perhaps the biggest lure to a defined contribution approach via a private exchange is the ability to help keep escalating costs under control in both the short and long run. A recent Towers Watson & Co. poll showed almost one-quarter of employers surveyed view private exchanges as a way to cut their health care expenses.
Health insurance remains one of a company’s largest expenses. The Kaiser Family Foundation says that annual premiums for employer-sponsored family health coverage topped $16,800 this year---triple what it was in 1999. Since funding health plans can make or break an organization, defined contribution enables an employer to take control of its spending.
The cost savings benefit can be substantial, especially for small to mid-sized companies. PricewaterhouseCoopers estimates that for the more than 5.6 million U.S. employers in this category, private exchanges may supply more affordable coverage to workers than what the company could obtain on their own.
What’s in it for employees?
With defined contribution, employees get a fixed amount of money to put towards “right-sizing” their insurance for their situation. Workers choose what coverage best suits their needs and their budget. In addition to greater transparency, private exchanges usually offer dramatically more plan choices and options--- including wellness and a host of supplemental options like dental, vision, life, disability, accident and even pet insurance.
Many employees can find savings and value in using a private exchange since they are in the driver’s seat---buying health insurance and other benefits that suit their individual lifestyle, financial and risk tolerance and changing needs.
To recruit and retain
Lastly, providing an attractive benefits package is paramount in recruiting and retaining talent. A recent survey found that almost half of employees polled said benefits were an important reason they joined a company, and 60 percent said they are an important reason for staying. Exactly how employees will perceive and react to using a private exchange for their health insurance over a more traditional approach remains to be seen.