Private exchanges have catapulted to prominence in the past few years, and for a time, many thought that employers’ adoption of them would be rapid. However, that view has become more nuanced with less emphatic responses from many companies as some seem uncertain how to respond. Who is moving to a private exchange, when, and why are they making the switch?
The Sweet Spot
First, lets start with the basics. There are two primary ways for employers to insure their employees: the fully insured or the self-insured model. A company that is fully insured uses an insurance company for their benefits – that third party holds the risk. Being self-insured means the employer carries the financial risk for providing benefits. Fully insured companies are usually small or mid-sized while most large companies are self-insured.
Up to now, small to mid-sized employers have been the large growth driver in the proverbial sweet spot for the private exchange market. This is due to a variety of reasons including their smaller size, which makes switching easier, and the fact that many insurance carriers and brokers offer private exchange options. A large, self-insured employer has many more hurdles to face, including the perception that they will need to contract out separately to either build or purchase a private exchange. Large employers have taken a 'wait and see' approach to private exchanges. Regardless of size, these companies are paying close attention to healthcare reform.
The Affordable Care Act (ACA) has been a catalyst for change in the healthcare industry, with private exchanges being at the vanguard of this movement. Indeed, the ACA has been a disruptor in the industry with regulatory compliance now being a significant driver in how companies approach benefits. However, with any disruption there are opportunities and the opportunities for private exchanges are significant. Managing compliance efficiently is vital for companies, and private exchanges can be a means toward doing so--especially since many private exchanges provide assistance complying with the regulatory and reporting requirements.
Another important factor to consider is the perception that Federal departments are reluctant to enforce a new law too strictly. They want companies to make an effort to comply with new and complicated regulations but don’t want to punish them if they’re obviously making a genuine effort. Since many of the ACA’s compliance regulations require a display of “reasonable effort” on the part of an employer, migrating to a private exchange can help companies meet these guidelines.
Of course, employers are looking to private exchanges as more than just a compliance vehicle. Among the self-insured employers, there has been a trend toward private exchanges to support their retirees. With the rocky rollout of Healthcare.Gov, these employers prefer to keep their retirees off public exchanges and use a private exchange instead. The employers who use a retiree exchange may be more likely to consider a private exchange for their active employees.
More broadly, private exchanges offer greater choice for employers to let their employees make their own healthcare decisions. For a company switching from a traditional benefits model where they might have only offered one plan to their employees, a private exchange allows them to offer a variety of plans and reduce costs with consumer-driven health models. A private exchange also allows employers to offer decision support features such as plan comparison tools and cost estimators that help employees make the best choices for themselves and their families. Furthermore, by leveraging their data from a variety of data sets like claims information, employers can offer individual employees plan recommendations based off their own data, bringing the many choices offered through an exchange into a best-match alignment.
In the end, however, private exchanges are the catalysts for change rather than the end itself. Many of the factors that employers and employees like about exchanges can be offered through other technology platforms that are not defined contribution based. For example, decision support tools and communication features can be offered through an online enrollment and communications platform that uses a defined benefit model.
Whether a private exchange or a sophisticated benefits platform, the real change will come with time as millenials gain ascendancy in the workforce. Millenials demand the technological tools and data driven support that private exchanges and technologically advanced benefits platforms are able to offer. Just as data has transformed the financial industry, the healthcare industry will continue to see a shift toward data being the foundation of the consumer’s online experience. Private exchanges can be the agent for change, but there will likely be a deconstruction of the various benefits private exchanges offer such as consumerism and choice. These factors will be the real drivers in the healthcare revolution, not necessarily private exchanges.
Learn how Benefitfocus can give you greater flexibility to navigate the evolving private exchange landscape.