Simply put, here's how a private exchange works: employers or exchange sponsors offer a package of coverage choices, define a contribution amount that acts as the employee's budget, and the employee selects how to allocate their budget dollars.
This basic process may seem like the answer to today's healthcare woes for both employees and employers. However, there are some important realities employers need to know about when it comes to providing healthcare through a private exchange.
The primary reason employers want a great benefit plan is to improve employee retention and recruitment. In fact, one study found that 59 percent of employees are somewhat likely to accept a job with lower pay in exchange for better benefits. However, the reality of cafeteria plans is that market rates increase over time. In turn, rates for employees become prohibitively expensive if employers do not continue to increase their contributions. Ultimately, neither employees nor employers are getting what they need in terms of affordable health care due to inevitably rising costs. This leads to the loss of a valuable recruitment and retention tool.
So-called "research" promoted by companies that stand to benefit from higher adoption rates has been dramatically inflated. The reality is that relatively few employers are jumping on the private exchange bandwagon. The National Business Group on Health reported that only three percent of employers used private exchanges in 2015, and only 10 percent felt that private exchanges control costs better than their current plans. Don't be fooled into thinking your company is not keeping up with healthcare trends by not converting to a private exchange.
Traditionally, large employers have been able to negotiate rates that benefit the company and the employees. With private exchanges, that power goes away. The Deloitte Center for Health Solutions 2015 Survey revealed that two big concerns for employers are lack of control over healthcare spending (47 percent) and lack of flexibility to move to private insurance exchanges in their industry from eligible employees and unions (45 percent). Going with a private exchange means relinquishing cost control and negotiating power.
Let's face it. The priority of most every insurance carrier is to meet the needs of their shareholders, which means they need to constantly look for ways to improve their bottom line. (Many insurance brokers are guilty of the same.) As a result, the online decision-making tools supposedly designed to help employees make informed choices often lead them to make choices that may not be in their best interest.
Often times, employees in a private exchange wind-up selecting far more voluntary products than they might actually need. This isn't a coincidence. Questionnaires can be vague and confusing, or just downright difficult to answer (e.g. "how many times do you plan to visit the ER this year?".) Does anyone really ever plan to visit the emergercy room? Additionally, some employees often make selections based on affordability, only to find out later they are not covered for important services. The results of having an inadequate benefit plan design and enrollment platform include low morale, decreased productivity, increased turnover, and a disengaged workforce, not to mention inadequate coverage.
It's a myth that switching to a private exchange will eliminate claims' fluctuation risks. Private exchanges do not pool risks across various employers, putting each employer in its own risk pool. Additionally, even employers with fully-insured private exchange plans are still liable for taxes and risk premiums that are built into their rates. Decreased risk occurs through long-term strategies, not through exchange rates that are only predictable for the current year. In fact, research shows that 94 percent of large employers are not moving to a fully-insured option because costs and risk typically increase by 6.5 to 11.5 percent. This includes factors like reform penalties, fees, risk margins, state premium taxes, state-mandated benefits, and brokerage commissions.
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The reality is that while there may be a few benefits to private exchanges, (namely online benefits enrollment, though there are plenty of other ways to achieve automation), there are also many pitfalls. We strongly encourage companies that are considering this approach to do more research. To that end, we've put together an extensive white paper on this topic which is incredibly informative. You can download it here: Examining the Reality of Private Exchanges: What Employers Need Know.
If you'd like to discuss the topic of private exchanges further, as well as explore other ways to achieve the benefits of online benefits enrollment automation without the drawbacks of an exchange, we are here to help.