Tuesday, October 9, 2012

Private Health Insurance Exchanges––Will They Save Money? Will the Idea Grow?

Private health insurance exchanges will save employers money but not make health insurance cheaper.

Because private health insurance will save employers money, they will grow.

Will Private Insurance Exchanges Reduce Health Insurance Costs?

There's lots of buzz these days about private insurance exchanges. The idea is to give employees more choice in purchasing their own individual coverage from a big menu of insurance companies and plan alternatives, and as a result, create more robust competition and thereby help control costs.

But I think private insurance exchanges will have just the opposite effect on the price of large employer health insurance plans.
First, private insurance exchanges will increase the insurance program expense factor for any large employer plan using them. A large self-insured plan may operate on an expense factor in single digits (maybe 90% of premiums go for claims and 10% of premiums for insurance company overhead). Individual products operate on an expense factor of as much as 20% and small group plans as much as 15%. Moving away from self-insurance and to an individual choice platform will increase the expense factor leaving the employee less money for benefits.

Second, employers currently save a lot of money in a self-insured plan because self-insurance gives the employer more flexibility. For example, a self-insured plan doesn't have to comply with state benefit mandates. There is widespread agreement that self-insurance flexibility saves employers lots of money and that is why almost 100% of large employers do it. That savings would end, or be reduced, if the employer eliminated its self-insured plan and instead offered a much more complex individual choice platform in an insurance exchange, leaving less money for benefits.

It has been suggested that this expense disadvantage of an exchange can be offset by giving employees consumer-driven options that work to bring costs down. That makes sense. However, a self-insured employer could achieve the same savings by making its offerings similarly consumer-driven.

Proponents of private insurance exchanges argue that by pitting many health plans against each other and giving employees these choices we will have a more robust market which will drive health insurance prices down. But it's dog eat dog out there now in the group health insurance business. Ask a business owner or benefits manager how they market their health insurance and they will tell you they have their consultant or broker regularly get bids from a number of insurers to improve their plan. Most small employers do it every year.

You know, it's ironic that the country's biggest insurance intermediaries selling these new exchanges––who are the ones now in charge of making a health insurance market on behalf of their employer clients––now think the current market doesn't encourage aggressive competition! Just what have employers been paying these guys to do for all of these years?

This strategy could accelerate the market movement toward modestly more efficient Health Savings Account (HSA) plans. But many employers are already offering this option and employees are selecting it––it wouldn't take private exchanges to do that. 

Will Private Insurance Exchanges Grow As a Part of the Market?

Yes.

But let's have some honesty about why.

It is not because this model is more expense efficient or that it will create some new magical kind of competition that will bring prices down.

This model will grow because we are finally getting to the point where some employers just can't afford the traditional kind of health insurance––defined benefit health insurance.

It is a wonder, given how much employers pay and how quickly their costs have been rising, that they have been able to provide generous benefits this long.

Replacing traditional employer health insurance with private exchanges is just replacing defined benefit health insurance with defined contribution health insurance.

Will this be better for workers?

Which would you rather have, a defined benefit pension plan, like your dad or your granddad had, or a defined contribution 401k pension plan?

Plan sponsors move to defined contribution plans for one reason and one reason only, it's cheaper for them, and correspondingly more expensive for the beneficiary. This is cost shifting plain and simple.

Now, it may be essential cost shifting. Two of the first companies to announce this shift are ones that are in very low margin businesses (restaurants and retail). It could well be that this is the only way they can continue to provide any benefits at all.

If the plan sponsor in the private exchange continues to increase their premium support to the worker at about the rate that health insurance prices grow, then the worker will be no worse off and will have more choices––great!

But what is likely happening is that the employer has moved to this strategy because they intend to increase their health insurance contribution by something less than what it has been––probably to something between their wage increase rate and the historically much higher health insurance cost trend rate. All of the press releases and hype surrounding recent announcements about this have noticeably been missing the most important factor in any business planning the sponsors and their exchange operators have done––their assumed rate of increase in future years and therefore the expected savings for the employer.

If I were the reporter writing about this I wouldn't have given them the free publicity without being able to report that critically important fact.

One reporter recently asked me, "Is this defined contribution premium support strategy the same thing as the Ryan Medicare plan for seniors?"

My answer was no––the private exchange defined contribution strategy could be a lot worse. First, the latest Wyden-Ryan Medicare reform plan introduces the benefits of competitive bidding to Medicare for the first time. The employer market has had competitive bidding from the beginning. But the big difference is that the Wyden-Ryan premium support plan guarantees seniors that the federal contribution for existing Medicare benefits will not be reduced for the two lowest cost plans available in the senior's market. Whatever those two plans cost, seniors wouldn't pay any more than they do today as a percentage of total costs (and actually get a refund if they buy the cheapest plan). And, seniors wouldn't get benefit reductions.

If an employer adopts this private exchange strategy, and doesn't attempt to keep pace with health insurance inflation for at least the cost of a baseline plan, the employee will either have to make-up the premium difference out of their pocket, or buy a plan with lower benefits. That wouldn't be anywhere near as generous as the Wyden-Ryan Medicare plan.

If everyone in America were on this kind of private exchange program one could argue it would take money out of the system and theoretically slow the rate of health care inflation for all of us. But if this strategy is concentrated in only a part of the market, I doubt it will matter much.

And, I expect this will be a strategy, that while it will grow, will be concentrated in only part of the market; lower margin employers with lower wage workers.

If an employer follows this strategy, I expect to see their employees' health insurance costs begin to outstrip the employer's premium support. That after all is the money saver for the employer built into this concept. As that happens, the employer's benefit package will become less competitive in attracting workers.

That isn't as big a problem for the employer's bottom line if the employer hires unskilled workers in relatively low-paying industries like the retail and restaurant industry. But if the employer is competing for skilled workers a deteriorating benefits package is going to be an issue.

It is hard for me to be overly critical of employers who have just hit the limit on what they can contribute to their health insurance plans. That employers have been so dedicated to providing benefits for this long in the face of skyrocketing costs is amazing. This may be the only way the employer can continue a medical benefits package.

But let's be clear on what this is.

This is cost shifting.

Lets not tell people this is really going to be better for them.
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