Private Exchanges: Fad or Future? (OPINION)

Prior to the passage of the Affordable Care Act (ACA) in 2010 the term “exchange” was, more often than not, associated with a currency transaction. To count the number of times this word has been referenced in the media since then would be a monumental task at best.

The term “public exchange” became a part of this country’s daily vernacular following the passage of the health-care law. Per its anointed definition, the phrase described a broad universe of health insurance options, derived through unfettered competition and free of geographic boundaries.

In recent months a new “exchange” term has gained notoriety and, other than shared lingo, bears little resemblance to the version conceived through legislation. The term private exchange is the new catch phrase in the private sector, but its principal tenet — defined contribution — is as old as the 401k plan.

While the concept is simple, its application in the health-care world is a little more complex. If you recall, the corporate retirement planning landscape changed forever in the 1980s and ’90s as companies moved away from the defined benefit pension model that promised workers a guaranteed pot at the end of the rainbow.

The 401k plan, and its variations of defined contribution plans, would replace this balance-sheet-busting concept with an annually defined contributory approach that placed investing authority in the hands of the consumer and aimed for a projected return, versus a promised payout.

The overall concept is similar with private exchanges: Give employees set dollars to spend, multiple options from which to choose, and tools to assist in making appropriate choices. In the world of health care, unfortunately, there are no rainbows or the proverbial pot of gold at the end. ROI from a pure dollars-and-cents perspective is nonexistent; cost of care continues to rise; and consumption is the variable that companies struggle with year-over-year, while waiting for the next big hit to the bottom line.

So what exactly is a private exchange? At the basic level it provides an enrollment platform — typically electronic, coupled with call-center capabilities — and allows multiple employee benefit offerings, decision support tools, and a defined contribution approach. Think of it as Expedia-meets-health-care purchasing.

Private exchanges offer employers the opportunity to provide more choices in health plans and other employee benefit products and provide a set subsidy annually for employees. This differs from the traditional one-size-fits-all benefits approach, whereby the employer makes the health care purchasing decision on behalf of all employees, with contributions often tied to a percentage of premiums.

Where before an employee enrolled annually into the company’s medical, dental and vision plan under a private exchange, that same employee may now have five to eight medical options from which to choose, with varying deductibles and co-pays. Similarly, there may be multiple dental, vision and life insurance options from which to choose.

The appeals to employers include more predictable costs and budgeting, versus long-term reduction in health-care costs. Successful private-exchange platforms incorporate decision support tools to guide the individual to appropriate choices, providing a consumer experience where the employee now feels empowered and engaged in the purchasing process. Engagement, coupled with appropriate health management programs, can help reduce utilization over the long term and improve quality of care.

Recent studies support that employees strongly favor choice in benefits and transparency in cost. Interestingly, when given multiple medical options, including their current plan, from which to choose, more than 70 percent of the time, employees will choose a plan with lesser benefits.

Private exchanges also help large employers meet the requirements of the ACA by offering, as one of the core options, a medical plan that meets both the affordability and plan-value testing requirements of the law. Additionally, employers with divergent salary ranges are now able to provide choices that meet the financial needs of most every employee, ultimately increasing participation in the benefits program.

More than likely, private exchanges are going to play an integral role in employer-sponsored health-care plans going forward, as employees demand more choice and flexibility. 

Tom Hayes is the national practice leader for employee benefits at Regions Insurance, a top-30 national insurance brokerage with 23 offices in eight states in the Southeast and Indiana. He can be reached at [email protected].