By Dave Sheppard, CLU, ChFC
Vice President, USI Insurance Services
As healthcare costs continue to escalate, employers are desperately seeking any solution to control their medical benefits expenses.
Private exchanges are often positioned as the solution to these problems, when in fact it is the underlying economics of the defined contribution model that can help employers achieve their short-term cost-reduction goals. Under a defined contribution health plan, an employer gives its employees a fixed amount of money to purchase health insurance coverage. Employees use those funds to buy or help pay for a health insurance plan they select for themselves.
Long-term success of the employer health plan will depend on many factors, some of which can be facilitated through a private exchange. However, it is important to understand exactly what a private exchange is before determining whether it is a suitable option for employees.
Positives & Negatives of a Private Exchange
- Online platform allows for employee flexibility with enrollment
- Allows for more choices in health plan options than traditional employer offerings
- Typically includes decision-support tools to help employees determine the best plan for them
- Defined contribution can help employer cut costs
- Can serve as one consolidated billing platform for multiple HR functions, such as COBRA, Flexible Spending Accounts (FSA) and payroll
- Be cognizant of compliance and regulatory concerns with exchanges
- Still very new in the marketplace, so there is often some confusion relating to various exchange products and vendors
For groups of 100 or more lives, a private exchange is a platform to deliver benefits to employees. It is important to note that the insurance, the employer costs and ultimately the claims, still require significant attention regardless of the delivery model to employees.
Private exchanges typically offer employees choice among five or more medical plans, with a web-based decision-support tool to assist employees in their enrollment choice. The multiple plan and price points mitigate employee backlash to the reduced or defined employer contribution. Employees are also generally offered group ancillary and voluntary coverage options such as dental and vision, or often supplemental benefits, such as pet and critical care coverages.
By defining their contribution, employers are generally able to reduce total costs by 5 to 10% or $250,000 for a 500-life group. This is both due to their reduced contributions and employee migration to high-deductible plan options.
It should be kept in mind that a private exchange is not insurance. The underlying insurance can be structured in a variety of forms, from fully insured to self-funded, and ranging from traditional preferred provider organization (PPO) plans that are rich in benefits to minimal value and minimal essential coverage plans.
Depending on the structure of the platform, a private exchange may include consolidated billing for the employer, and may integrate with other employment-related services such as Flexible Spending Accounts (FSA) or Health Reimbursement Arrangements (HRA), COBRA services and/or payroll.
Finally, as health care reform is fully implemented, the marketplace for employer-subsidized health coverage will undergo dramatic changes. No matter the insurance plan design or delivery platform chosen, it is important to be cognizant of any potential compliance or regulatory issues.
Accordingly, before entering into any private exchange arrangements, employers will need to work carefully with their insurance broker and counsel to evaluate the potential risks associated with any post-health care reform arrangement.
Dave Sheppard, CLU, ChFC, is Vice President, Employee Benefits, at USI Insurance Services. He has over 35 years of demonstrated sales and managerial experience in all facets of employee benefits. He has held various sales and senior leadership positions with both brokers and carriers throughout the northeast region.
Disclaimer: The postings on this site are my own and do not necessarily reflect the views of USI.