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Commentology: What Your Employer Is Secretly Thinking As Obamacare Goes Live Part II

In response to Kip Piper’s recent post, “What Your Employer Is Secretly Thinking As Obamacare Goes Live” Michael Turpin writes:

A very comprehensive article and predominantly spot on. I do have a few alternative views.

Employers are waiting to see if public exchanges are viable alternatives – As a consultant who works with employers every day, the universe of employer sentiments is varied. The preponderance of public exchange options with be narrow network, lower level reimbursement plans that will not be like for like equivalents to employer sponsored open access PPO plans. With low individual mandate penalties and higher costs for younger exchange enrollees due to 3:1 community rate banding, there is concern that the first enrollees will select against the plans and not be offset by younger, healthier participants who will balk at the prospects of higher premiums.

Self insurance will be highly prevalent – The average employer can save as much as 6% by self funding their insured benefits. It is true they take on higher liability but the first 6% is essentially playing with house money because the employer will not pay taxes on insured benefits or insured PPACA taxes. Employers, especially those with young healthy employees, would be better served self insuring to avoid community rate cost old to young shifting and insured premium taxes. Younger consumers use fewer benefits. Average year over year medical trends will likely be low single digits — much lower than the likely community rated increases tendered the first year in the exchanges.

Private exchanges will gain some traction – The IBM decision is only for retiree medical benefits. Walgreens is the first major retailer to adopt a private exchange for actives. A private exchange is to health plans what the 401k was to defined benefit pension plans. A true private exchange pits multiple insurers against one another in a Cost Co type private market where individual enrollees are given an annual stipend to buy benefits. Each enrollee can choose between a range of plans and insurers.


The premise is that insurers will cannibalize each others pricing — not unlike a retail store, and in doing so, drive pricing below what employer sponsored plans have been able to achieve as single purchasers. The current private exchange market is very limited in terms of employers choosing to force active employees to buy on a defined contribution basis. It is appealing for employers who want to cap their annual liabilities by merely cost shifting to employees. Employees tend to be less fussy about having less purchasing power if they have lots of health plan options to choose from — versus the usual two to three options available from their employer. There are risks. Many employees tend to buy down, purchasing high deductible plans to achieve more affordable monthly premiums.

As premium dollars reduce with each cheap plan selection, there are fewer dollars to offset the cost of claimants. This was the demise of cafeteria plans in the 1990s when young, healthy employees opted for cheaper coverage and contributed fewer dollars to the employers plan. High utilizers continued to incur the same amount of claims but now had fewer plan dollars to offset losses. Loss ratios spiked and plan options disappeared because they became too expensive.

Private exchanges are more a Trojan Horse opportunity for employers to cost shift to employees without overtly dropping coverage. Most of the initial private exchange players will be low wage workforces and low margin businesses — retail, hospitality and agriculture. White and gray collar firms will wait and see what choices prove best for their strategy.

Expect employers to drop spousal coverage for working spouses – Expect changes to plans with aggressive wellness, smoker premium differentials, a greater prevalence of high deductible plans, penalties for non compliance with biometric testing, carve outs of bundled high margin insurer programs like RX and a more aggressive enforcement of a bi-lateral contract of health: we provide your healthcare and you take personal responsibility to ensure you are not assymptomatically ill ( get an annual physical ), close gaps in care ( be compliant with chronic care treatment regimen ), improve consumerism with cost comparison tools for ambulatory services( don’t get a $3,000 MRI when you can get one for $800 ) and reduce access to outlier providers who charge higher costs for similar outcomes.

It’s going to be a wild time as providers become insurers, insurers become providers, consulting firms begin to see products and a group purchasing market fragments into a variety of consumer based procurement models. There will be lots of misinformation.

Employers will bear the brunt of the responsibility for educating an irritable, insured and uninsured employee population that does not like the idea of being the first generation to leave the safety of open access PPO, co-pay island to enter the primordial world of medical homes, captivated care and tightly managed medical oversight.

Michael Turpin is frequent speaker, writer and practicing benefits consultant across a 27 year career that spanned assignments in the US and in Europe. He served as the northeast regional CEO for United Healthcare and Oxford Health from 2005-2008 and is currently Executive Vice President for Benefits for the New York based broker, USI insurance Services. He writes at Usturpin’s Blog.

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Mitch CollinsMichael TurpinMichael TurpinJohn BallardBrad F Recent comment authors
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Mitch Collins
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Mitch Collins

Mr. Turpin:

Seems that in addition to low margin industries, those with older and therefore sicker/more costly workforces will also move aggressively to exchanges?

Michael Turpin
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John, you hardly sound like a neophyte. My views are formed like a bizarre cord of random threads accumulated from a career as a consultant both here and in the Europe — where I was hospitalized in the Uk’s NHS with very serious pneumonia. I also served for as a senior executive with a major insurer for three years but found my desire to “fix” the system conflicted with our shareholder obligations. Altruists and free radicals don’t always make great for profit CEOs. I must confess the graphic you allude to is not mine — but an illustration I chose… Read more »

Michael Turpin
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John, you hardly sound like a neophyte. My views are formed like a bizarre cord of random threads accumulated from a career as a consultant both here and in the Europe — where I was hospitalized in the Uk’s NHS with very serious pneumonia. I also served for as a senior executive with a major insurer for three years but found my desire to “fix” the system conflicted with our shareholder obligations. Altruists and free radicals don’t always make great for profit CEOs. I must confess the graphic you allude to is not mine — but an illustration I chose… Read more »

John Ballard
Guest

I’m glad not to be seen as just another crank. Thanks for that. I do appreciate your background, mostly because my entire career was in management for the very labor-intensive cafeteria environment. When I use the expression “bottom of the food chain” it takes on a real meaning both literally and metaphorically. My subordinates were always the working poor. The food business is not known for good wages except for a few select jobs. After three or four decades I should have been a Republican, but my daily contact with the people who were the life blood of the business… Read more »

John Ballard
Guest

Thank you for your reply, Mr. Turpin. I have read through your 2011 post two or three times and tried my best to understand what it means. But I’m just an old food service manager in retirement with no expertise in the fine points of actuarial and insurance formulas and accounting. I feel like a first quarter undergraduate trying understand the arguments of a doctoral defense. Correct me if I’m wrong, but your two-axis graph seems to be textbook Libertarian with no wriggle room — which makes interesting conversation but doesn’t take into account the many hybrids scattered across the… Read more »

Michael Turpin
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Brad, the early adopters of private exchanges are very attracted to the financial control and predictability you describe — they can allocate how much they want to spend and then let each plan option’s costs dictate whether people must spend more. The challenge will be that many private exchanges will offer coverage options but these plans may lack cost controls ( low co-pays, no consumerism, no wellness incentives, open access PPOs designs etc ) and in doing so, these plans will result in double digit year over year trend increase. If an employer is facing a 10% increase, they may… Read more »

John Ballard
Guest

Since the key parts of the legislation were crafted more by the insurance industry than the sponsors, I am guessing that at some point a few key leaders finally woke up to the fact that unless something is done to curb costs the parasites will kill their hosts. it’s not like the insurance people have no other products — liability, life, fire, theft, auto, home owner’s — the list is endless. Most were TPAs anyway, so the worst pill they had to swallow was the medical-loss ratio. Not a bad trade-off in return for millions of new customers, subsidies in… Read more »

Brad F
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MIchael A question on your private exchange assessment: “As premium dollars reduce with each cheap plan selection, there are fewer dollars to offset the cost of claimants. This was the demise of cafeteria plans in the 1990s” With current (and future?) private HIX iterations, wouldnt the employer look at yearly expense, decide what they want to give their work staff the following year, and allocate “x” dollars across the board for each individual to apply for a policy? If more young folks by cheap plans and the sick folks by pricey ones, the amount employers will contribute to support workers… Read more »