Private exchanges have become the next big thing in healthcare, the newest approach to controlling employers’ healthcare costs and maybe even a way of moving healthcare from a defined benefit to a defined contribution. But they are unlikely to control healthcare costs and the only thing they will move us towards is socialized medicine.
An increasing number of employers are having employees use online “private exchanges” to make their annual healthcare plan selections. According to an Accenture study, one in four employers is considering a private exchange and an estimated 30 million employees will select their employer-provided healthcare plan through a private exchange by 2017.
On the surface private exchanges are attractive. Instead of the employer choosing a healthcare plan for its employees, the employer gives each employee a set amount of money to spend on a healthcare plan of the employee’s choosing. The employees then use the online exchange to select plan parameters that best meet their needs. Employees are able to maximize the value they receive from their healthcare allotment. The employer is removed from the healthcare decision process, no longer providing a defined benefit, healthcare, instead just providing a defined financial contribution for the employees to spend as they see best.
But this isn’t actually how insurance works. Health insurance works by spreading risk – costs – across a group. Most people pay for more care than they receive, some people receive care that costs far more than what they paid in premiums. In theory an exchange allows consumers to maximizes the value they receive for their spending – the people that don’t consume much healthcare can pay less for their coverage. Conversely the people that consume a lot of healthcare will maximize the care they receive for their dollars spent. If this happens then the healthy greatly reduce their subsidization of the unhealthy. Theoretically, an efficient private exchange that maximizes value for employees shifts more of the cost burden to employers or insurance companies.
Private exchanges have problems in the real world as well. Ideally the private exchange model helps control healthcare costs by creating more engaged consumers. Because employees are “spending” their own money they are more aware of the cost of healthcare and so more likely to think about ways they can save money throughout the plan year – private exchanges should lead to more cost-conscious healthcare consumers that make better healthcare spending decisions. However even if it doesn’t – even if costs keep going up – the employer is still protected from healthcare cost inflation. The employer isn’t providing healthcare, it is providing a financial contribution towards the healthcare the employee secures. Employers can keep their contribution flat and let the employees figure out how to make their healthcare fit within the budget.
Time will tell if this actually happens. History suggests the opposite, that employers will instead increase their defined contributions to match rising healthcare costs. And costs will keep going up. Lifestyle and consumer choices are certainly helping to drive healthcare costs increases. However a far bigger driver is medical technology. Our for-profit medical technology industry has made amazing advances in treatment and care that have allowed us to save people that used to die. But its primary goal is still profit. Every year the industry comes up with new procedures or refinements. Most provide only incremental improvements in care but they all come with a higher price tag. Every year the industry spends billions of dollars successfully encouraging doctors to recommend the new procedures nd treatments. And it’s about to get much, much worse. There is a flood of new treatments and targeted drugs getting ready to hit the market. Some will undoubtedly be true advances, but all are likely to cost tens and even hundreds of thousands of dollars per treatment.
For insurance to work, boundaries have to be drawn around what is paid for by the risk pool. Right now, employers with self-funded plans decide how to draw the line around care, decide what will be covered and not covered, which networks to choose or exclude. Carefully drawn boundaries are one of the best tools employers have to control costs, whether excluding treatments or defining a narrower network to give it more leverage in negotiations. In the private exchange model the employer largely cedes this right to draw the boundaries around acceptable care – the employer is giving up one of the most powerful tools available to control rising healthcare costs.
With private exchanges, the task of drawing the boundaries falls to the insurance companies. But the Affordable Care Act has made it much harder for insurance companies to draw boundaries. One of the tools insurance companies used to make sure healthcare insurance remained affordable were annual and lifetime limits on payment for care, similar to the financial limits of auto or home insurance. The ACA forced insurance companies to remove these financial limits. Arguably the ACA has made it very difficult for insurance companies to control costs.
So if employers give up the rights to draw boundaries for their groups of employees, and costs continue to increase because insurance companies aren’t able to effectively draw boundaries, what’s left? At some point the only option to control costs will be for the federal government to step in and draw the boundaries, to decide how much to spend on the care of any one person. In some circles they call that Socialized Medicine.
This, really, is the biggest problem with private exchanges – they take the conversation in the wrong direction. We as a country need to have a realistic discussion about healthcare cost boundaries, about how much the group can afford to pay for the care of any one person. The private exchange model, by seeming to suggest that each individual is entirely in control of his or her healthcare premiums, will help defer the conversation that our country needs to have.
Blake Ashby is the President of HealthSight, LLC, a technology company that uses social networking and group financial transparency to engage the members of a healthcare plan
Sorry for the test message. Word Press is funky and I never know if am logged in.
Anyways, I would comment that few if any other nations try to control health care prices by exposing patients to high deductibles. This amounts to using patients as economic kamikazes. What it means in practice is that if patients face high deductibles, they will refuse to buy less necessary care (or just be unable to buy it) and this will discipline the market.
In other words, the patient takes the risk that a certain test or procedure is not worth paying for. What if they are wrong? I have two instances in my own life where an extra EKG and an extra CBC might have prevented life-threatening disease. And I study health care a lot!
(though I am an insurance agent, not a doctor.)
Other nations try and control costs by wading in and controlling prices. The providers get less money, as one of our contributors suggests. (then in some cases the providers move to America, where patients bear the burden of cost control.)
Sorry, but I think this misses the bigger picture. First, we’ve heard for years about the incentives that employers have to reduce healthcare costs, but this has achieved little, save for high deductible plans that pass more insurance cost to beneficiaries. Where’s the evidence that employer engagement is going to work? More likely, benefit designs based on the employer model will be skewed based on the owners/managers’ particular needs–i.e, who are the doctors in the network?
We should be moving away from an employer based model to a consumer directed model. This has been the common wisdom of both the Heritage Foundation and the Obama administration. Insurance exchanges accomplish this. Now, the individual employees shopping through large exchanges will provide even more clout to large insurance entities that will drive tougher pricing of provider groups and hospitals. That’s how costs will come under control. It hasn’t happened with employer sponsored healthcare (which has declined markedly over time) and there’s no evidence that it will succeed in the future.
However, if the private and public exchange models don’t succeed, the next step will likely be to socialize the financing of medical care.
Counter-intuitive, but smart.
Nice post Blake. For an equally counter-intuitive argument. See also: lisa rosenbaum’s excellent piece on the right to patient’s right to uninformed-decision making. http://t.co/bezubVlysu
This cost discussion is always about how the patient has to accept less, not about how the medical industry has to accept less.
People fearing the cost controls of “socialized medicine” are usually those with subsidies, either from their employer or government.
For me, it’s hard to say the actual conclusion now because there are still more evidences required.Thanks for sharing an informative post.
Thanks for a thoughtful article, Blake.
It is not the job of individual employers to reduce America’s health care costs. All an individual employer can do is to lower their own corporate exposure to those costs.
We are already seeing that employers who not adopt defined-contribution schemes are seeing grotesquely large premiums. Look at the premiums for most state government or large school district plans.
You make an interesting comment that we have to debate how much society should pay for the care of any one person. I agree but that is a minefield, i.e. look at the mileage that the right wing harvested from the very mention of ‘death panels,’
My own solution would be to once again let insurance companies sell policies with more modest annual and lifetime limits. If a policyholder got some severe cancer and had insurance claims exceeding $250,000, the providers would just have to accept $250,000 and get on with the care. If you had price controls on cancer drugs this would work fine.