It seems as though every day I receive an e-mail or read a new article about some organization launching a private exchange or about a benefits administration company touting its private exchange capabilities. Several headlines I’ve come across just in the last week have read…
- Mercer Launches Private Exchange through Partnership with Benefitfocus;
- Steps to Consider when Setting up a Private Health Insurance Exchange;
- Wal-Mart Exploring Private Exchange for Small Businesses; and
- Employers at the Intersection of Public and Private Exchanges.
It is the hot commodity in our industry. Everyone wants to talk about, explore, and implement a private exchange — and for good reason. Private Exchanges represent a new and innovative way to tackle two age-old problems: rising health care costs in an inefficient market. Who wouldn’t want to talk about, explore, and implement a product that addressed those challenges! The challenge lies in the fact that while many people may want to implement a private exchange, the vast majority are flying blindly to do so. In this blog, I hope to provide some basic information that can help an organization or employee benefit agency truly assess the opportunity and provide a glimpse into what is necessary to take that first, second, and third step. First, we should start by defining what an exchange is and what it is not. As highlighted in a recent MillsonJames blog post, there are many organizations that are touting themselves as a private exchange when, in fact, they are merely offering an ability to support a defined contribution for health care strategy or, to unearth a term many of us have forgotten, Flex Plan funding. The key component of a Private Exchange is carrier participation. Without the carrier agreeing to participate in a true exchange environment, you really don’t have an exchange. The best definition of a Private Exchange that I’ve found came from my former employer, AonHewitt. They state, “A health care exchange is a marketplace that connects insurance companies with individuals or employees wishing to purchase health insurance. The more exchange participants, the greater the economies of scale that increase carriers’ ability to offer competitive prices. In this insurance marketplace, as in every consumer market, the element of competition will ultimately reduce prices.” In an effort to educate the masses, I’d like to call out four specific words/ideas that are critical to that definition and the Private Exchanges, in general.
- Marketplace – To achieve the objective of effectively managing health care costs, there must be a marketplace where employees can shop and buy health care coverage. Ideally, to maximize the effectiveness of an exchange, the marketplace should bring together multiple carriers so that the consumer has choice and can utilize decision support tools available to make an informed decision. That said, underwriting in a multi-carrier environment is no cake walk and must be considered.
- Purchase – In any other market, a consumer has the ability to make their own decision and make a purchase. Choice and decision are the cornerstones of an efficient market. When I go to the grocery store, I get to choose what I want at the price I want or I go to the next grocery store. Our employee benefit/health care system hasn’t worked that way for a long time. The employer makes multiple decisions and then the employee makes their selection based on those employer’s decisions. Not exactly how any other purchase process works in the US. Within a private exchange, the employee has significantly more options within the marketplace and can truly make a purchase that is more aligned with their everyday lives.
- Economies of Scale – This is a critical component of a private exchange. In order to make an exchange work, there must be volume which yields economies of scale. Without volume, there won’t be a carrier willing to touch the risk with a proverbial ten-foot pole. This presents a real challenge for the small to mid-market business segment (SMB). Most all of the large market players (AonHewitt, Mercer, etc) have created their private exchanges for their large market client base. Darden and Sears, by themselves, create economies of scale. Underwriters and sales people at the carriers can agree on that point. So, how does an SMB organization take advantage of a private exchange? The answer is that they must band together and join a private exchange that brings a market to bear. There are several organizations taking this approach for the SMB market and they have already worked with the carriers to promise volume through aggregation of smaller organizations. Contrary to what you may read in the press, private exchanges are available to the large-, mid-, and small-markets – but how they skin the cat varies. The common denominator to each is volume and economies of scale.
- Competition – Competition is the lifeblood of American society. It is celebrated as a virtue at all levels of our society. It fuels business and determines who succeeds and who does not–those who are able to compete succeed, while those who cannot will fail. A private exchange must have this element of competition to achieve the anticipated objective of managing health care costs.
I firmly believe that private exchanges will re-shape our industry and present a large opportunity to the marketplace as a whole. However, as with any new business, there will be contenders and pretenders – those that deliver on the above necessities and those that will cut corners to capitalize on the hot, new commodity – but fall short. As you begin evaluating a private exchange for your business, we strongly encourage sorting the wheat from the chaff upfront so that you avoid challenges down the line and ensure success. We’re all in this new health care economy together. Let us know how we can help.