Are Private Health care Exchanges in Your Future? As the Affordable Care Act (ACA) inches closer to full implementation, employers have more to think about than ever before. In addition to changes in benefits requirements, there are also significant developments in the way that health plans may be offered to employees, most notably, the advent of private health care exchanges that parallel the public exchange marketplaces introduced under the ACA. This article focuses on potential strategies and considerations for employers who may want to consider a private health care exchange and related strategies for managing their health plan expenses. Three Key Takeaways 1. As the ACA takes hold, the availability of private health care exchanges may significantly impact employers and their benefit programs especially those with high-turnover workforces. Employers may want to re-examine their philosophy and approach toward employee health care benefits in response. 2. To determine if private exchanges are a fit for their workforce, employers should weigh two critical factors the size of their workforce (and the economies of scale it might bring), and how much control they want to retain over health care design and delivery. 3. As employers contemplate any new exchange model, they need to consider the costs and benefits of each potential approach. Employers should also factor in the potential risk of failure of any new strategy or partner, especially in an untested environment. p.1
A careful review of Health Care Exchanges may be most relevant for those employers with high turnover workforces. Understanding Health care Exchanges Are They A Fit for Your Organization? Under the ACA, a health care exchange is a marketplace where individuals can shop online for coverage from multiple insurance carriers, compare designs and prices, and select appropriate plans. In addition to the ACA-mandated public state exchanges, third-party insurers have begun offering private exchanges directly to Plan Sponsors for purchase on their employees behalf. Given the current political environment, as employers examine their approach in the short and long term, a careful review of health care exchanges must be in the mix. Although complexities and interdependencies exist, it may be helpful to narrow down the focus to three key areas of consideration. 1 How exchanges may play into your overall HR and benefits philosophy. There is no question that both the ACA and health care exchanges are impacting the way that human resources (HR) and benefits professionals view the design and delivery of their health plans. With so many changes and market events in play, it s time for Plan Sponsors to get philosophical and help bring clarity to the role that employee benefits can and should play in achieving organizational objectives. Questions to consider: What is your philosophy toward your benefits and their delivery? How paternalistic is your culture? Are you willing to cede control of your employee benefit plan design to someone else? How important are health care benefits to your employee value proposition? What role does workforce health (and health improvement) play? How vital is bending the cost curve to your health care strategy? Will you exit the health care benefit sponsor role when it is feasible to do so? p. 2
Size, demographics, and control are critical factors in determining your organization s potential migration to a health care exchange strategy. As health coverage can be considered a key form of employee compensation, the answers to these philosophical questions can help inform your decision-making. Implications for employers: Health exchanges represent a dramatically different model for both organizations and their employees, and HR benefit strategies will need to evolve in response. While some employers are enthusiastic about the idea of empowering employees to play a greater role and purchase plans on an exchange, they remain concerned about whether employees are prepared for that challenge. Employees will need time and education to help grasp the concept. Beyond the question of fit, there are considerable change management and communication implications to factor in. What are the employee disruption concerns? 2 how the size and demographics of your employee base, and the amount of control you wish to retain, affects your approach. Size, demographics, and control are critical factors in determining your organization s potential migration to a health care exchange strategy. With your employee data providing you with a solid handle on your population s needs, the decision becomes one of your preferences for control. Questions to consider: How large is your employee base and what is the state of its overall health? Are your provider networks robust, cost-effective, and designed to optimize the health of your workforce? How important is an integrated and uniform employee experience for wellness and condition management programs? How much control and flexibility does your organization want over what any health care exchange offers? Are your key competitors currently considering moving to an exchange? If so, is your CFO pressuring you to do the same? p. 3
As the chart below highlights, the size of an organization s employee population and the amount of control it desires to manage the process will influence the decision of whether or not to migrate to a health care exchange. As a result, few employers who are firmly in the red zone (with larger employee populations and a greater need for HR control) are likely to migrate to the green zone. Three other factors influencing this potential migration include 1) workforce demographics what types of employees do you have and how long are they typically employed with your organization? 2) competitive landscape if key competitors are migrating to an exchange, will others follow suit? and 3) potential employee disruption i.e., will employees react negatively to any significant or perceived loss of benefits if they are pushed to an exchange? In addition, employers may have different considerations for different parts of their population (i.e., part-time workers or retirees) when considering an exchange strategy. For example, the degree to which you desire to control the employee experience or the coordination of wellness programs may be less critical for your retirees versus your other employee segments. Employee Population Size and Amount of Control May Determine Health care Exchange (HIX) Strategy Less AMOUNT OF DESIRED CONTROL More Smaller Green Zone More likely to migrate to HIX WORKFORCE DEMOGRAPHICS COMPETITIVE LANDSCAPE POTENTIAL EMPLOYEE DISRUPTION SIZE OF EMPLOYEE POPULATION Red Zone Less likely to migrate to HIX Larger p. 4
do the insurance carriers and products available match the needs of your organization? Implications for employers: Your organization will have to decide, how much, if any, involvement you want in the choices offered by the exchange. Do the insurance carriers and products available match the needs of your organization, or is it a one size fits all arrangement? If your employees appreciate many health care choices today, will they feel they still have choice in the future? Will a health care exchange provide too many choices and paralyze employees when trying to make a decision about coverage? Can the exchanges provide the right employee engagement experience including decision support for your employees? 3 How to explore the costs and benefits. In the past, employers have offered a certain set of health benefits and have shouldered most of the financial risk and price volatility, but their ability to do so has become more and more constrained. Even before exchanges arrived on the scene, continued cost increases have caused employers to consider shifting from this defined benefit approach to a defined contribution or DC model to rein in current expenses and limit future cost increases. For some organizations, a private exchange model makes the DC approach easier to implement and substantiates the investment they have already made in their employee health care programs, while allowing them to continue to meet their fiduciary responsibility. Similar to the DC retirement plan model, with a DC-like approach, specific employer contribution levels rather than the benefit ultimately received by the participant are explicitly defined. For example, all single employees might receive $5,000 to allocate toward the cost of their medical plan coverage, and $8,000 would be allocated to employees seeking family coverage, regardless of which plan option they select. This approach allows an employer to control the amount it spends. But if the exchange is not able to control costs in other ways, such as through condition or health management programs or more aggressive network management, employees could face significantly higher expenses in the future. p. 5
With any approach, there are different risks and rewards to consider. Sponsoring an employee benefits program has become more challenging as the implications of the ACA are fully realized. At the same time, relinquishing control over health care may be more challenging than ever. This may be a good time to re-evaluate your health care benefits strategy. This is a key consideration: With the exchange model still in its infancy, cost management is unproven. Of course, there is risk in doing anything new, and employers need to think about the alternatives should an exchange be less successful than anticipated. These concerns could be anything from the business failure of the vendor or lack of cost management improvement to hidden administrative costs or issues with participant satisfaction. Do you understand all of the costs of the exchange model you are considering? Some may offer free services but charge substantial commissions on insured products, including health insurance as well as other voluntary products such as long-term disability. Some may involve aggressive direct marketing of those products by the vendor. Some may include recordkeeping services in their pricing, while others may allow you to keep your current administrative relationship if you agree to view the exchange more like a health plan rather than a full suite of services. With any approach, there are different risks and rewards to consider. Understanding exactly what services are provided and how the vendor gets paid (including how much of their fees are reliant on direct marketing to plan participants) is critical to understanding whether an exchange may work for your organization. p. 6
Proceeding cautiously toward A dc funding approach may be a valid strategy for now. Questions to consider: What is the total cost of participating in the exchange, and how does it compare to your alternatives? Is a DC funding approach appropriate for your organization? Does your insurance model matter self-insured versus fully insured? How does the exchange get paid, and how are cost increases handled (passed to employer or employees in premiums or fees)? If many of your current costs are included in the cost of products on the exchange, is that acceptable? What is the long-term viability of the health exchange partner? If the health care exchange performs poorly, are there exit strategies to consider? Implications for employers: It will be a few years until the longer-term viability of the exchange marketplace is clear. Actions by direct business competitors in your industry will likely play a role in employer adoption. Proceeding cautiously toward a DC funding approach may be a valid strategy for now. Some Plan Sponsors may choose to phase in a DC strategy over a period of several years. The total cost of participating in an exchange is critical to a valid business case, but may not be easy to determine. Encourage vendor transparency with respect to commissions and employee marketing efforts. Early adopters may want to develop a backup plan if the exchange concept does not work as promised, or if the vendor contracted exits the business. p. 7
Evaluate all exchange options carefully and align them with your current and future workforce planning needs. Summary As Plan Sponsors consider the possibility of moving toward health care exchanges, they should evaluate their options and align them with current and future workforce planning needs. Interest in health exchanges is understandable and may be appropriate for employers especially those in higher turnover industries. Given the pressure of continuing cost increases and uncertainty about untested exchanges in the marketplace, it is prudent for employers to focus on three things first: 1) consider the costs and benefits of each potential approach, 2) clearly understand the role that employee population size and amount of control can factor into any decision, and 3) take into consideration the risk of failure of any new strategy or health care partner. For more information and support to help your organization navigate your program through health care reform, contact your Fidelity Representative to arrange a meeting with Fidelity Benefits Consulting. For Plan Sponsor, advisor, and institutional use only. Not for use with plan participants. All content herein is for discussion and informational purposes and is not intended to provide tax, legal, insurance, accounting, actuarial, investment, or other financial advice. Fidelity does not provide legal or tax advice. Any statements provided herein are personal views only. No part of this content should be construed, explicitly or implicitly, as an offer to sell, a solicitation of an offer to buy, an endorsement, guarantee, or recommendation for any financial product or service by Fidelity, its affiliates, or any third party. If consulting or other expert assistance is required, the services of a competent professional should be sought regarding your specific situation. Pursuant to IRS Circular 230, the material contained herein was not intended or written to be used, and it cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax law, or promoting, marketing, or recommending to another person any tax-related matter. 2013 FMR LLC. All rights reserved. 655580.1.0