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While Healthcare.gov Struggles, A Different Story Plays Out On The Private Exchanges

All eyes are on the hullaballoo created by the challenges at Healthcare.gov and several of the states’ public insurance exchanges.  Yet all the while, like in a magic show, attention has been diverted from the real action going on elsewhere.  Quietly and in a relatively drama-free way, the private health insurance exchanges are busily taking over the world of insurance and, in my opinion, portend a radical set of changes in how our health insurance system operates.

Several years back, a number of companies began building private health insurance exchanges to initially help companies offload the incredible burden of retiree benefits.  Companies such as Extend Health (now owned by Towers Watson), Senior Educators (now owned by Aon), and several others provided a way for large employers to get themselves out of the business (and balance sheet liability) of providing group benefits for retirees, instead providing them with money to purchase their own individual health policies through then small, now large companies.  The private exchanges went about the business of building websites that work, call centers that buzz and a wide array of insurance product offerings at various prices.  Now, several years later, hundreds of thousands and possibly millions of individuals are out there shopping their little hearts out, choosing their own plans, and dealing with the consequences of high deductibles and the like.

These various private exchanges are now poised and ready to begin serving active employees in 2014 as guaranteed issue (the requirement that all can be insured and no one turned away) goes into effect as a result of the Affordable Care Act.  And lest you think this is a small marketplace, you are wrong.  In 2008 there were about 120 million total employed workers and just over half of these worked for companies of 500 employees and above (39 million worked for companies with 5000 employees or more).  In other words, we are talking about nearly half of American adults and that doesn’t even include the dependents they bring along into their insurance plan.

Interestingly, such large US employers as Walgreens and Petco and DineEquity (parent company of Applebee’s Neighborhood Grill & Bar® and IHOP® restaurants) are all-in on the private exchange program, committing to transfer all of their employees from group plans to the exchange to purchase individual plans come January 2014.  The exchanges of Towers, Aon, Mercer, Buck Consultants and a plethora of others are alive and well and open for business at exactly the time when employers are trying to figure out how fast they can reasonably get out of the middle of health insurance administration and run for the hills.

Yes, there is much discussion (I think it may actually be wishing) about how companies will never do this en masse—that employee group benefits are too important a tool for employee recruitment and retention.  But I don’t really believe this is a lasting consideration for most companies.  A study from consulting firm Oliver Wymansuggested that “20% to 30% of the marketplace would gravitate to a private exchange over the next three to five years without any bias by size of employer.”  They also found that around 50% of all employers would switch to private health insurance exchanges if they could realize 10% savings; more than 20% of employers would move employees to exchanges even if there were zero savings.  If that last statistic doesn’t suggest that HR departments are putting on their track shoes and getting ready to run, I don’t know what does.

I have to believe that while the mass migration to private exchanges may start slowly, it will pick up speed faster than Apolo Ono in winter.  There are a few reasons why I believe this to be the case, including the giant hassle and expense of being the health benefits administrator of record.  Being out of the benefits administration business means less overhead cost, less drama as employees come to you when they want something covered, less lawyers to keep up with HR regulation.  On a positive note, transitioning to an exchange can also be a real positive for employees, opening up far more plan choices to them, enabling plan customization for special populations (e.g., disease-focused plans or regional-focused plans), even creating overall cost-savings in some cases.

But most importantly, transitioning to the private exchange means employers have the ability to fix their annual health benefit costs at a known and predictable amount that they control.  They will give employees an allowance to purchase health plans and each year can choose to raise the contribution by a fixed, amount.  If they are smart they will peg that increase at or near the consumer price index (CPI).  CPI has been rising a few percentage points a year (e.g., it rose 1.7% in 2012) while health insurance costs have been rising 3-5 times faster.

When you transfer your employees to an exchange, this basically becomes not your problem, thus marking the end of sucking up unpredictable rate increases for years and watching it eat into profits.  By fixing healthcare costs at a lower rate of growth than in the past, employers realize real savings to their bottom line, particularly when they have challenging growth years.    WalMart, for instance, as I wrote about HERE, went through 9 quarters of flat sales while healthcare costs rose 9% per year during that period.  As healthcare costs rise faster than sales, margins (profits) get eaten alive.  When a company can predict its healthcare costs and as its margins become better and more predictable, there is an improvement in a company’s bottom line and therefore, likely, it’s stock price.  When one guy’s stock price improves, his competitors have to take notice and act accordingly or suffer the wrath of the market.  In the end, I think this need to “keep up with the Joneses” may be the biggest accelerant under the private exchange flame.

So who absorbs that increase in healthcare costs if the employers cap theirs?  Yes, indeed, the employee, who is now experiencing pretty dramatic increases in out of pocket costs.  The hope is, of course, that some of the major changes underway in the healthcare system (ACOs, pay for performance, preventive services, yadda yadda) will help alleviate the build up of that pressure.  But as they say, hope is not a strategy.  Thus, employees, aka healthcare consumers, must take a serious look at how they consume healthcare and start to play a role in managing their own costs and the behaviors that drive them.  No doubt this will take a while, but it may well be just the kindling needed to drive more consumer accountability.  Ironic, isn’t it, that Applebees might lower their healthcare costs by using exchanges and, accidentally, cause a reduction in sales of their Riblets Platter (calories: 1720-2100; sodium: 3130-4850 mg). We can already see consumer engagement rising, even though in microscopic amounts, where consumers have access to price transparency information:  who wouldn’t choose a $1000 ultrasound when the alternative down the road is twice as expensive and where information on quality is largely absent?

It is interesting to note that early indicators show that people joining exchanges definitely price shop. Aon found that 42% percent of employee populations from three companies participating in Aon Hewitt’s Corporate Health Exchange chose less expensive coverage than they had previously, 26% selected richer coverage and 32% went with a plan that was comparable to what they had, according to this article in HIX.   It will be interesting to see how much this price shopping translates to more accountable or at least more cost-aware consumer behavior.

One of the most significant changes in the healthcare system, one which I have written about before but which is becoming of greater and greater urgency as exchanges proliferate, is the imperative for insurers selling products on the exchanges to learn how to market to and serve consumers.  Until the exchanges, virtually all insurance was sold to employers in business-to-business mode.  Now carriers have to figure out how to differentiate themselves on websites and via marketing where the guy listening is you and me.  With insurance carriers loved just about as much as cable companies (aka, not), this is no mean feat.

There was a NY Times article last week about how culturally dour Russian service workers, such as waiters and flight attendants, have had to go through a pretty significant amount of “charm school” to get good at serving consumers in their newer capitalist system.  I can imagine that the next class to enroll will be the US insurance carriers.   Health insurers are going to have to get good at consumer acquisition and, more importantly, retention, if Aon’s data is any indication:  they found that nearly 80% of the more than 100,000 U.S. employees enrolled in plans through their exchange chose a different plan for 2013 than they had in 2012 – with more opting for cheaper coverage than better benefits.

One discussion I haven’t seen anywhere yet is the impact that all of this exchange upheaval will have on the health/wellness/prevention market, particularly as it pertains to small companies selling products to payers and employers.  It has long been true that health insurers want to see a return on investment of no more than 1-2 years when they invest in programs that profess to reduce costs.  Why? Because they don’t have those enrollees for very long, usually a couple of years, and they want to realize the return from spending money on weight loss and smoking cessation and disease management and all the rest.   If health plan members are switching every year, and if insurers are required to spend 80% of all premiums on care, not administration (as they are as a result of the ACA), will they keep investing in these programs?

And furthermore, if employers are going to be getting out of the health benefits business, will they also turn away from these purchases?  I see a billion little companies trying to sell a variety of niche wellness, prevention and care management programs directly to employers and I am wondering if they have a future if employers want to forget about this topic entirely.  I imagine that some employers will see the provision of these programs as key to employee recruitment and retention, but not because it lowers cost.  Rather they will look for meaningful perks–and they may be unrelated to health–that make employees happy to come to work.  Instead of smoking cessation it might be ping-pong tables in the lunch room or time off to do charity work or free ice cream on Fridays; after all, they don’t have to care that much about whether the ice cream leads to worsening health if they have capped their costs.

Yes, I know, employers are worried about absenteeism and productivity and all that jazz, but those things are incredibly hard to measure and even harder to correlate with specific initiatives on the health front.  Thus, should all those health and wellness entrepreneurs be worried?  Maybe so.  I would love to hear from employers on this or see the Pacific Business Group on Health study this potential phenomenon.  I think this could become a real objection for investors looking at all of these little companies; one has to wonder whether their market will still be there 5-10 years from now when it is time to exit or whether the marketplace of purchasers will have declined precipitously.

Many of those entrepreneurs will say that the solution is building direct-to-consumer products.  I have to say that answer makes me wince.  Perhaps I am too much the cynic after all these years watching healthcare costs fiddle while consumers burn.  It is definitely possible that the rise in exchange purchasing, alongside its companion effect, the rise in high deductible health plans, will drive better consumer purchasing behavior and increased health accountability; as I noted above, I genuinely believe it will have some impact.  But will consumers ever really invest large quantities of their own cold hard cash in preventive health products on a big enough basis to sustain all those aspiring wellness entrepreneurs?  Perhaps if they have money left after that yummy platter of Riblets.

Lisa Suennen is a founding partner of Psilos Group Managers. She blogs at Venture Valkryie, where this post originally appeared.

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Mitch Collins
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Mitch Collins

Lisa:

Excellent article on a number of issues. I especially like and agree with your observations about the likely future for wellness and other similar vendors-the graveyard for providers of these services is growing fast. There are a number of better ways to retain ee’s, build your employer brand and what-not. These more or less useless wellness programs aren’t one of them, at least not for most. Give me a free (healthy) lunch every day and I will be thrilled:) And engaged, likely to recruit my healthy friends and so forth.

Dudley Heininger
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Polecamy kasy fiskalne najlepszych producentów. Kasy fiskalne w dobrych cenach.

Bob Hertz
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Bob Hertz

Barry, the number of beds and bed-days are indeed going down, but hospital spending keeps going up in the aggregate. This is because hospitals have learned to take advantage of insurer fee schedules in many cases. There is an entire industry showing hospitals how to maximize the ‘intensity’ and reimbursement from the fewer and fewer patients. Hospitals by and large remain a ‘money pit.’ Most non-elderly patients fear them economically even while they appreciate the care that is received. My fear is that hospitals will get even meaner about collections and debt, all at the same time that they are… Read more »

Barry Carol
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Barry Carol

Bob – Over the last 30 years or so, the number of acute care hospital beds in the U.S. declined by almost one-third despite significant population growth and is now less than 1 million. There is a long term secular trend away from inpatient hospital care thanks to less invasive surgical techniques and better drugs that help keep people out of the hospital or shorten stays when they’re there among other things. The large insurers reported fairly impressive declines in the number of inpatient bed days per thousand members in the last few years including among Medicare Advantage members. Regarding… Read more »

Bob Hertz
Guest
Bob Hertz

Your observations are appreciated. I have written on the tendency of a tiny number of heroic medicine cases to ‘break the bank’ and cause a rise in health insurance premiums. I wish there was more effort spent in attacking the details of the most expensive care. On a $2 million claim, how much is spent on grotesquely expensive drugs? How much is spent on ICU charges and hospital bill padding? I would like to see all large claims posted on the internet, of course leaving out the patient’s names but including the provider’s names. Let our pesky journalists at it.… Read more »

Michael Turpin
Guest

Hospitals are deeply concerned about the bad debt arising out of HDHPs. It is a real concern. Anytime you introduce self insurance, there is a risk of bad debt. However, the bad debt is limited to the maximum out of pocket cost mandated by the new law. After taking a deduction for bad debt and whatvshould be increasing reimbursement from formerly uninsured , now insured patients, my suspicion is the risk is limited for those losing sleep over HDHP proliferation. HDHPs offered alongside richer plans tend to drive better trends because the rich plans retain the high utilizers who are… Read more »

Bob Hertz
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Bob Hertz

Thanks Michael for a very good analysis. I was fascinated by your sentence that long term medical costs will go up if a majority have high deductible plans, due to unit costs and hospital intensity. This is actually a blockbuster statement as opposed to the conventional wisdom of virtually all conservatives. Can you expand on your position? Also, the spreading of high deductible plans creates another set of problems. Hospitals and doctors will have more and more problems with collecting money from patients………….especially those patients who chose an HSA style plan just because it was cheaper, not because they actually… Read more »

Michael Turpin
Guest

A properly designed exchange must offer plan designs capable of achieving lower single digit year over year medical costs. An exchange, by itself, is merely a financng mechanism — it is hardly a panacea for rising costs as Lisa points out. Cafeteria plans were around in the 80’s. As a consultant who is ancient enough to remember them, we watched as younger healthy people ( generally 50% of the population ) bought higher deductible, cheaper medical plans and pocketed the difference. The premiums they no longer spent in the health plan were no longer available to offset the claims of… Read more »

David Bynon
Guest

Nice article, Lisa. I’ve been watching the industry from a senior employee point of view for a while. In this area, the private exchanges offer a pretty good service helping to transition Medicare eligible employees off of company health benefits and into the Medicare system. It’s curious to me that people react so strongly to this transition. After all, the “privatization” of retirement benefits started decades ago, and for most of us it works. It works because none of us want to be handcuffed to a company based purely on benefits. Most of us prefer to be upwardly mobile, and… Read more »

Barry Carol
Guest
Barry Carol

Shortly before I retired at the end of 2011, my employer stopped allowing its new retirees to buy into the employer’s plan with our own money. The company engaged Extend Health to help employees find a new insurance plan though the employee had to pay the premium out-of-pocket. For those of us like me who were Medicare eligible, Extend Health was to help sort through options for choosing a Medicare Advantage, Part D and supplemental plan. In my particular county, I found them to be all but worthless. The concept of the private exchanges for employed workers is, in effect,… Read more »

Lisa Suennen
Guest

Barry, sorry to hear that Extend wasn’t helpful to you. I have heard lots of positive stories too, but I suppose these things can happen. it is a brave new world to be sure and I agree that the employee being treated as a customer will be an essential factor in the exchanges’/carriers’ ongoing success. Lisa

Keith S
Guest

When employers move / allow their employees to go a private exchange, does that mean that the employer then pays the fine for not offering coverage?

If they also provide a defined contribution, does that somehow satisfy the play or pay issue?

Thanks,

Lisa Suennen
Guest

If the employer facilitates coverage through defined contribution, they have satisfied their obligation and would not be fined, provided the insurance plans provided in the exchanges meet the mandated federal minimum benefits.

Keith S
Guest

Hi Lisa, Thank you and a few follow ups if I can?

1. The facilitating through a defined contribution means that the employer contributes enough to satisfy the shared resposibility aspect of an employee not paying more than 9.5% of their w2 towards premium?

2. The plans available via the private exchange are individual policies or group policies?

Thank you again,
Keith

Lisa Suennen
Guest

Keith, I actually don’t know the answer to the first question; as to the second, they are all individual policies.

Jeff
Guest
Jeff

Very nice, thought-provoking article. But I’m wondering if the model you are positing here (employer defined contribution plan used to purchase individual insurance on a private exchange) can survive IRS Notice 2013-54. Doesn’t the IRS notice prohibit this arrangement, because the employer defined contribution plan will, by its very nature, violate health care reform’s prohibition on annual dollar limits?

Lisa suennen
Guest
Lisa suennen

Jeff, it is the health insurance product purchased by the employee (or employer) that needs to meet that test of no annual limit, not. The employer contribution.

Jeff
Guest
Jeff

Lisa: I think IRS Notice 2013-54 says the employer funded arrangement must satisfy health care reform’s prohibition on annual dollar limits–and it will fail to do so because it’s deemed to impose an annual dollar limit equal to the amount of the premiums used to purchase the individual policy and it cannot be integrated with the individual policy to demonstrate compliance with health care reform. This should not be an issue for group policies purchased on a private exchange.