The history of employers offering health coverage options to their employees has been married to a direct benefits model. Employers would take on the majority of the financial burden, and everyone received the same set of plan options.
Offering insurance was enticing for employees, and companies used it competitively to attract the best and brightest. Then costs went on the rise. And they kept rising, until finally, in 2012, the average cost of an employee’s health coverage reached over $10,000 per person, and companies didn’t know if they could afford covering employees over the long-term.
It was out of this dilemma that private exchanges arose.
What is a private health exchange?
A private exchange is essentially speed dating for employers and insurance providers. It’s a marketplace meant to connect employers with benefits providers. And just like speed dating, the more employers that show up to the party, the more competitively priced the plan offerings become.
Different from public exchanges, private exchanges aren’t run by any government entity, and tax credits aren’t typically offered to low-wage workers. Instead, these exchanges focus primarily on active employees, pre-Medicare retirees, Medicare-eligible retirees, and sometimes individuals who don’t have a plan offered through their employer.
Private exchanges have a long-running history with Medicare, but they are a relatively new experience for employees. And their popularity is growing at a much higher rate than initially expected. In fact, in 2013, Walgreens announced its’ plans to join a private exchange run by Aon that serves 18 companies and 600,000 employees.
They’re not alone. Roughly one-forth of American employers are contemplating moving to a private exchange by 2016, and 45% plan to make the move by 2019.
Cost plays a major factor in the success of private exchanges. US health spending is anticipated to increase more than 6.2% annually until 2022. That’s 49.6% by 2022. Multiply that amount by the number of employees working for large employers, and the sum is overwhelming to say the least. The existence of exchanges allows employers to create a spending model comparable to an annual salary increase.
Private exchanges create a competitive marketplace when shopping for insurance. If one company can’t meet your coverage and cost needs, surely another will. And this healthy competition aids in moderating cost increases over the long haul.
On top of that, they’re evolving to meet new needs. According to Towers Watson, a newer type of private exchange has emerged, giving employers the ability to shop both private and public exchanges, as well as individual and group products, with the possibility of using government subsidies.
Why do employers like them?
Employers love to save money, but they don’t want to alienate their employees in the process. As such, 94% of large employers have no intention of dropping their health benefit coverage anytime soon. But 84% of them ranked cost reduction as the most vital goal. And 44% of them trust that private exchanges will be the desired approach to offering health coverage over the next five years.
Private exchanges help employers manage costs through fixed employer funded subsidy amounts, enhance the predictability of expenses, and meet all employer coverage requirements under the ACA. By offering a fixed amount subsidy for employees to shop with, employers no longer have to design a general plan for everyone.
Employers want what’s best for their team, too. 45% of large employers wanted to improve access to plans, and 43% wanted to increase health care choices, including health and wellness programs.
Why do employees like them?
First and foremost, private exchanges give employees choices. Generally, employers have access to roughly five insurance carriers, each offering about five plans. So when once employees lived under the rule “you get what you get, and you don’t throw a fit,” they’re now available to choose their plan. It kind of smells like freedom.
Private exchanges also put a little more power in the hands of employees when it comes to their shopping experience. Because they have the option to move to another plan provider each open enrollment period, they can better expect full support for themselves and their families when managing their healthcare needs.
These exchanges also open up a more transparent dialog about healthcare costs. Since employees take a set subsidy amount to the marketplace, they tangibly see what their employer contributes to their benefits.
Lastly, due to the employee-directed shopping experience, Human Resources staff can focus more time on other areas important to the workplace, which may just be the least anticipated benefit for moving to a private exchange.
In the upcoming open enrollment period, benefit administration systems will grow and change, offering customizable delivery to various segments of the workforce based on cost and value. Private exchanges will be on the front line of this movement, offering choices that will satisfy the needs of a diverse employee population and curb costs for employers.
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