February 18, 2014
Within the next few years, millions of employees could have more options when picking a health plan — and employers could have a way to test innovations that may help control the cost of providing health benefits.
Those are just two of the potential benefits of what are known as private exchanges — online marketplaces in which employers can give employees a set amount of money to pick the health plan and other benefits of their choice.
Opt for a health plan with a high deductible and maybe a narrow network of hospitals and doctors, and you might have a few extra dollars for dental insurance or to buy additional life insurance. Opt for one of the most expensive health plans, and you might pay a larger share of the total cost.
For employers, private exchanges could simplify the chore of providing health benefits, giving employees a choice of health plans and making plain the cost of health insurance and other benefits that are part of a worker’s total compensation.
Over time, the private exchanges also could enable large employers to compare how well competing health insurers control costs and experiment with new types of health plans.
“Long term, this is going to be one of the preferred ways in which employers and their employees obtain coverage,” said Mike Derdzinski, senior vice president of employee benefits for Johnson Insurance Services in Racine.
Benefit consultants and insurance brokers — ranging from those who work with the largest companies in the country to those who work with midsize and small employers — are setting up private exchanges.
Diversified Insurance Solutions, an insurance broker in Pewaukee, launched a private exchange on Jan. 1, and so far it is encouraged by the response.
“Everybody wants to learn more about it,” said Robert Sowinski, chief executive of Diversified Insurance.
Johnson Insurance plans to set up its private exchange this spring.
National companies — among them Towers Watson, Mercer, Aon Hewitt and Buck Consulting — also have private exchanges in place for their clients.
The exchanges typically offer four to six health plans, varying in deductibles and other out-of-pocket expenses. Some designed by national companies offer health plans from several insurance companies. Others offer plans from just one company.
Clients using Buck Consulting’s private exchange include Arby’s Restaurant Group, Bob Evans Farms, Church & Dwight Co., Domino’s Pizza and Xerox, its parent company.
And 33 companies, ranging in size from 100 to 30,000 employees, among them Petco and DineEquity, the parent company of Applebee’s and IHOP restaurants, are using Mercer’s exchange.
Only about a third of the companies are giving employees a set amount of money, called a defined contribution, that can be allocated among different benefits, such as health, dental, short- and long-term disability insurance and life insurance, said Steve Kreuger, a partner and U.S. exchange solutions leader for Mercer.
For other companies, the private exchanges simplify the administration of benefits and give employees a wider choice of health plans, Kreuger said. Companies also want to give employees time to get used to the concept.
The companies that give workers a set amount of money see one immediate benefit: Employees realize how much their health benefits cost.
“One of the struggles that employers have had a long time is getting employees to understand the true cost of coverage,” said Matt Weimer, director of group operations for Diversified Insurance.
Giving employees a set amount of money also can reframe how they view that cost. Instead of focusing on their share of the premium, they focus on what their employer is giving them to spend.
Nationally, annual premiums for health insurance offered by employers last year averaged $5,884 for single coverage and $16,351 for family coverage, according to the annual survey by the Kaiser Family Foundation, a health policy research organization, and the Health Research & Educational Trust, an affiliate of the American Hospital Association.
Workers paid on average 18 percent, or $999, of the cost for single coverage and 29 percent, or $4,565, for family coverage.
Roughly one in five workers, however, was in a plan that cost at least $19,622 a year. And workers at employers with fewer than 200 employees paid an average of 36 percent of the cost of family coverage.
Most economists contend that workers pay the entire cost in the form of lower wages. That’s because there’s no distinction between wages and benefits to an employer. Both are part of compensation — and both are a business expense.
The rising cost of health care is partly why middle-class wages have been stagnant for more than a decade.
One concern is that employers will use private exchanges to shift more costs to employees. That hasn’t happened yet. But getting a set amount to spend on benefits does encourage people to opt for health plans with high deductibles.
That’s already a well-established trend, and one that encourages people to be better consumers of health care, many economists contend.
The real potential of private exchanges could come from testing new ways of controlling the rise in health care spending.
Private exchanges could make it easier for large employers to compare how well health plans control costs — and, in turn, spur insurers to be more innovative.
“The best exchanges will be the most innovative,” said Dave Osterndorf, Towers Watson’s chief health care actuary. “Employers will learn from the exchanges, and even those who don’t move to exchanges will learn the best ideas.”
For example, private exchanges will enable large employers — who typically pay most of the medical bills of their employees and their families — to compare how competing health insurers manage patients with chronic diseases such as diabetes.
An employer may spend $3,500 a year on someone whose diabetes is well controlled compared with $37,000 for someone whose disease is not managed, said Osterndorf, one of the architects of Towers Watson’s private exchange.
The best health plans over time should have lower premiums and draw the most employees.
Employers also could offer health plans that give people incentives to manage their health and health care costs.
“And, frankly, it is going to be a world of incentives and disincentives,” said Osterndorf, who is based in Milwaukee.
An employer could offer a tiered health plan that gives employees and their families an incentive to get care from hospitals and doctors thought to provide the best care at the lowest cost. Or it could offer a health plan that requires them to pay a larger share of the cost when they want a procedure no more effective than one that costs less.
At the same time, employees still could have the option of picking a more traditional health plan — albeit by paying more for it.
“We’ve gone into this because we have some very strong opinions on how to make this work,” Osterndorf said.
Proving that some of its ideas can control costs will take time. But Osterndorf is confident Towers Watson’s private exchange will provide a platform to do that.
“It will get better every year for the next decade,” he said.
©2014 Milwaukee Journal Sentinel
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