Private Exchanges: The Best Option for All Businesses?

The media and insurance industry circles frequently mention private exchanges as an alternative to public marketplace exchanges or traditional insurance plans. A recent survey of employers by Towers Watson and the National Business Group indicated that one-third plan to move their employee benefit plans to private exchanges within the next few years. They may be looking to avoid the headaches and uncertainties involving employee benefits, including spiraling costs and increasing regulations associated with the Affordable Care Act (ACA).

But are private exchanges the best option for all employers and for all health plans, especially for popular dental and vision benefits?

Explore the Options.  Options for dental and vision coverage will appeal to employers and employees in different ways. The key is to match set goals to the option that offers the best fit. Most employers rely on brokers and insurance consultants to provide reliable information they can use to make dental and vision benefit decisions. They also expect brokers to educate employees on the choices that will meet their needs and those of their family members.

Six Factors to Know About Private Exchanges.  Private exchanges, which typically are organized by brokers, private enterprise or insurance companies, give large and small employers the opportunity to manage benefit costs, educate employees about coverage choices and simplify plan administration.

There are many private exchange options in the marketplace. It’s important to recognize the differences to know whether the dental and vision plans and services offered will meet employee benefit needs. When reviewing private exchange options, here are six factors to consider:

1.  Understand the structure. The concept of private exchanges has been around for years as a different way to provide benefits to employers. The private exchange structure is a collective purchasing system where multiple carriers offer benefits in one place, which can help make benefit purchases more efficient. Some private exchanges offer a range of medical, dental and vision benefit choices at varying costs, making it easier for employees to find options that fit their budgets. Employers often rely on producers or agents for guidance in this environment.

• Private exchanges may be designed as defined contribution plans, with employers contributing a specific dollar amount for employees to put toward premiums for the benefits of their choice.
• For groups with fewer than 50 full-time eligible employees purchasing in the private exchange, plans also may include Essential Health Benefit packages that, under the ACA, medical carriers are required to offer to small employers.

2.  Review exchange owners and their insurance experience. Carefully review the organizers of the exchange to determine their background and experience with insurance. Ask several questions:

• How is the exchange organized and what is the owners’ business philosophy?
• How long has the exchange been in business?
• What carriers offer benefits through the private exchange? What are their reputations and levels of experience?
• What types of and how many employer groups have committed to participate in the exchange?
• What employer industries are represented? Are they a good match for your business in terms of the type of benefits your employees need?

Most employers are looking for insurance partners they can trust to provide the benefits employees need. It’s important that they are comfortable with the exchange owners and operations. For example, if the private exchange represents mostly small employers, it may not be a good fit for a larger group. The risk and administrative costs will be spread out across all participating employees, which means those from a larger employer may not receive the level of benefits they had previously.

3.  Examine plan designs and options to customize benefits. Many exchanges feature plans with limited options and flexibility. Some have group plans, while others offer individual coverage only. This may be an excellent fit for employers wanting to provide employees with access to insurance benefits. But it may not be satisfactory for employers who are used to customizing their plans, or employees who participate in plans that offer incentives and rewards based on usage. Find out whether the exchange will allow access to other group options that offer more flexibility in plan design and if employees have options if their life circumstances change.

4.  Assess the communication process. It’s important to know who will own the communication relationship with employees. Many exchanges communicate benefits information directly to employees, and employers may not be involved in the process. Some employers will welcome the opportunity to hand over this responsibility, while those who have communicated benefits proactively with employees may not.

5.  Explore wellness program options. Some private exchanges include wellness programs as part of their services. It’s important to know how these programs will operate, including use of information gathered about employees’ health and lifestyle habits. Employers need to determine the role they will have in keeping employees healthy and should make sure they can maintain these goals within the private exchange partnership.

6.  Evaluate cost savings. The Centers for Medicare and Medicaid Services projects that health care costs will increase more than 6 percent in 2014, and 6.2 percent thereafter for the following eight years. Employers feel significant pressure to keep health care costs under control.

The private exchange model, featuring defined contributions for employee benefits, may be an appealing idea to many employers, but it’s important to have a complete picture of associated costs. For example, if the private exchange offers only plans with limited options, will employees be satisfied with this choice? Could employers experience unexpected turnover, resulting in lost productivity and higher costs for hiring and training new employees?

Finding the Right Benefits Solution.  Historically, employers have worked alongside producers and insurance carriers to design benefit plans that fit their employees’ goals and needs. Private exchanges may be an excellent option for some employers, but remember that not all private exchanges are the same. Employers should first clearly define their benefit goals and philosophy. Then they can explore private exchanges, reviewing the structure, plans, communication process, wellness services and projected savings to find the best partner.