Corporations' 'Seismic Shift' to Private Exchanges

In the looming shadow of the ACA, how do companies, both big and small, provide for employee health benefits? How do they pay for benefits? How do they communicate these decisions to their employees? How do they still attract and retain the best talent under this shifting system? What is the role of the C-Suite? What is the role of Human Resources?

No doubt exists that the questions have now changed. How do we get to the answers? Does the law itself provide for the answers? Does the private marketplace? A combination of both? Are some questions simply unanswerable until the law changes accordingly? In light of these emerging questions, and possibly, limited answers, what options do employers have to provide such health benefits to their employees in the shadow of the Act?

Private Exchanges

One option that has gained traction is the “seismic shift” to private exchanges. The federal public exchanges under the ACA, also known as the “Health Insurance Marketplace,” have received quite a bit of mostly negative press, caused by the botched roll-out of enrollment, which was primarily due to website issues. However, private exchanges have been receiving more positive attention from companies, and such attention has been reflected in the migration of these companies to private exchanges through benefit-offering platforms for their employees.

What is a “private exchange”? Similar to the public exchanges, private exchanges are marketplaces for health insurance and other benefits, such as dental, vision, life, disability, among others, that allow individuals to “shop” for insurance. Employers negotiate and contract with the private exchange for the provision of benefits for their company. Then, those eligible employees may choose from the benefits offered by the selected private exchange. Further, the employer will provide a defined contribution ( e.g., $3,000), as further discussed below, that can be used to purchase benefits on the exchange.

Private exchanges offer employers control over rising health costs, reduce the administrative burden of providing health benefits to employees, and increase benefit offerings for employees, by offering, for example, ancillary benefits such as life and disability benefits in addition to health benefits. Controlling health care costs, a major catalyst of this seismic shift, is evident in the equally seismic shift from the traditional defined benefit model approach of offering health benefits to a defined contribution model approach. Under the traditional approach, employers offer certain health benefits to employees, share in most of the cost of those benefits, and bear most of the risk of offering (and bearing the financial burden of) health insurance for employees.

Some increasing issues with this approach to providing health benefits are the increased costs associated with health care in general, the changing landscape of how insurance is provided, the Affordable Care Act and its impact on compliance and costs, the economy and the impact on employment-related and budgetary issues, among others.

The Defined Contribution Approach

Because of these issues, and the impact they have had on employers, many employers are beginning to move their employer-provided health care from the defined benefit approach to a defined contribution approach. An example of this approach, for illustrative purposes, is when an employer makes cash contribution into an account on behalf of an employee, and then the employee can use such contributions to purchase insurance on behalf of him/herself and his or her family, if applicable. As stated in “The Emergence of Private Health Insurance Exchanges: Fueling the 'Consumerization' of Employer-Sponsored Health Insurance,” published in the Booz & Company Perspective in 2012, “[t]his model allows the company to cap its healthcare costs at a desired threshold, improving control of current expenses and future liabilities.” Simply, it allows employers to “'monetize' their commitment” to providing employee health insurance through a defined contribution by the employer. See “The Value of Private Health Exchanges,” Mark Roberts, BenefitsPro, Aug.30, 2013.

This new approach utilizing a defined contribution model of providing health insurance benefits to employees corresponds to a shift in thinking presented by Aon Hewitt in its 2013 Health Care Survey, “A New Way of Thinking About Health Care: Manager or Transfer Health Risk,” wherein Aon Hewitt describes the current state of employer-provided health care as “Compensation and Benefits” and that the future state of employer-provided health care as “Compensation and Compensation.” When such shift occurs, and the treatment of employer-provided health care is treated as compensation as opposed to a benefit, the employer is “shifting” risk. Thus, the transfer of risk occurs within certain aspects of the defined contribution model, such as shifting financial costs and administrative burdens. Specifically, although employers have the ability to control their bottom line under this model by offering compensation in lieu of benefits, employers are shifting significant financial liability to their employees. Any subsidy provided would be provided by the employer itself, as governmental subsidies are not available under these private structures, as they are under the governmental exchanges.

Additionally, employers' former duties of plan design and other insurance relationships, such as claim issues, would be outsourced to the private exchanges. Notably, many private health exchanges offer service contracts between the exchange provider and the employer, which are group contracts, governed by the Employee Retirement Income Security Act of 1974, as amended (ERISA). Thus, other responsibilities and liabilities, such as those under ERISA or those under a self-insured arrangement, would remain, depending upon the contracts executed and the plan document.

In an interview between Forbes and Eric Grossman, National Exchange Leader at Mercer, Grossman states, “[t]he private exchange model is an innovation that has unleashed a wave of transformational change that touches virtually all employers, who must now fundamentally rethink how to provide benefits to their workforces. Private exchanges have already taken off with meaningful adoption in 2014, and we believe that's going to accelerate exponentially.” “Private Health Insurance Exchanges Unleash 'Transformational Change,'” Paul Howard, Jan. 24, 2014.

A Significant Shift

With the shifting burdens and costs of the defined contribution approach, employers are restructuring their employer provided health benefits, and the private exchange is on the rise. The data that is available to date demonstrates the significance of this particular shift. Eric Grossman aptly states that “One's [one company is] an outlier, a few may be a passing fad, but over 50 is the beginning of an industry trend.” “Surge of Employer Health Exchanges is no 'Passing Fad,'” Bruce Japsen, Oct. 16, 2013.

“[H]istorically,” says one source, “most employers have offered only one health plan, such as an HMO or PPO, the rapid emergence of private insurance exchanges ' which Accenture estimates will grow to 40 million enrollees by 2018 ' will expand benefit choices and fuel the purchasing of ancillary benefits through a new pool of discretionary premium dollars, the annual amount an employer allocates for each employee's insurance that can be used for ancillary benefits or other options, after the cost of the health plan premium is covered.”

“One-in-Four Employees Choose Lower-Priced Health Plans via Private Insurance Exchanges to Decrease Premiums, According to Accenture Research,” Accenture Newsroom, Dec. 10, 2013.

Reuters, for example, has predicted that 2014 will be a “watershed” year for companies to participate in private exchanges. See “Petco, Applebee's Employees Join Growing List on Private Exchanges,” Beth Pinsker, http://www.reuters.com/article, Oct.15, 2013. More particularly, Reuters predicts that over one million active employees (up from 100,000 in 2013) are due to participate in these exchanges “as companies seek new ways to reduce their exposure to rising healthcare costs.' Id.

Many large companies have already made the news when they shifted their employees to a private exchange model of providing health benefits. For example, Walgreen Co. announced in September 2013 that it will provide insurance in 2014 to more than 160,000 eligible employees through a private exchange run by Aon Hewitt Corporate Health Exchange. Likewise, in the fall, Petco and Kinder Morgan announced that they will be offering benefits to their eligible employees through one of Mercer's private exchanges in 2014. International Business Machines Corporation (IBM), General Electric Company and Time Warner Inc. also announced last year that they will be shifting their retired workers toward private health exchanges as well.

The PEEC

The Private Exchange Evaluation Collaborative (PEEC), a new independent, objective initiative created to help employers design private exchange strategies, released a survey in December 2013 that indicates that “[45%] of employers have implemented or plan to consider utilizing a private exchange for their full-time active employees before 2018.” Executive Summary, Private Exchange Employer Survey Findings, Private Exchange Evaluation Collaborative, December 2013. Although employer interest is great, barriers and uncertainty still exist. For example, the PEEC also found in its 2013 survey that 80% of employ- ers agreed that the following were “barriers to adoption”: “immaturity of the private exchange market, stability of cost over time, stability or track record of exchange administrator, limited information about private exchanges, [and] employee readiness.” Id.

Limited information and employee readiness are two critical points that companies, and executives of those companies, need to take into consideration when examining and/or adopting new strategies for providing health insurance to employees. For example, Accenture has found that 83% of Americans are unfamiliar with private exchanges. “One-in-Four Consumers Will Receive Employer Health Benefits Through Insurance Exchanges in Five Years, Accenture Research Shows,” Accenture Newsroom, Dec. 10, 2013. Thus, a profound disconnect exists with such high unfamiliarity on the employee level, and the corresponding seismic shift to private exchanges on the employer level, with such shift “ultimately surpass[ing] state and federally funded public exchanges, as early as 2018.” Id.

Conclusion

Vigorous and swift efforts must be made, on the part of the private exchange platforms as well as the employers themselves, to educate employees about this shift in structure. Employees may easily see this new model as a way for employers to shift the financial burden to them with nothing more. Employers will quickly feel the negative impact of this, not only of the human resources side, but also on the production, attraction and retention sides, not to mention the affected bottom line. When implementing strategies to shift to a defined contribution model of any type, like that of the private exchange, employee readiness and support is a key factor. This strategy implementation reaches through all management levels of the company as well, especially the C-Suite. Such thoughtful strategy implementation is critical to the success of adopting a new model of employer-provided health benefits, especially in such a time of legislative and market unrest and uncertainty.

Jennifer S. Kiesewetter is a partner in the Memphis office of Butler Snow LLP. She can be reached at [email protected].

The first quarter of 2014 is over. The major provisions of the Patient Protection and Affordable Care Act (the Affordable Care Act, ACA or Act) are now in full swing, save the occasional delay of certain mandates. Companies, both large and small, understand that this law is now a fixture of our legislative structure. It's not being repealed and it's not being overturned. Instead, it will be amended, tugged at, pulled at, changed, expanded, and contracted. That's how legislation works. In all of these changes, which are occurring on a continual basis, legislative impact is not the only impact that necessitates attention. The private marketplace, which has a major role in the changes brought about by the ACA, plays a crucial role in the development of the law, as well as the resulting impact on employers.

'Seismic Shifts'

So, what does that mean? It means the law with respect to providing employer-provided health insurance is changing. It is shifting in greater proportions than we've ever seen before. Shifts in great proportions like this result in significant consequences, which lead to a “seismic shift.” With these great shifts, the way companies provide, and pay for, employee health benefits is also changing, thus contributing to the seismic shift. Benefits, and the provision thereof, was once only a Human Resources issue. However, a resulting factor of this seismic shift is that benefits issues have now fallen at the doorstep, or on the board room table, of the C-Suite.

In the looming shadow of the ACA, how do companies, both big and small, provide for employee health benefits? How do they pay for benefits? How do they communicate these decisions to their employees? How do they still attract and retain the best talent under this shifting system? What is the role of the C-Suite? What is the role of Human Resources?

No doubt exists that the questions have now changed. How do we get to the answers? Does the law itself provide for the answers? Does the private marketplace? A combination of both? Are some questions simply unanswerable until the law changes accordingly? In light of these emerging questions, and possibly, limited answers, what options do employers have to provide such health benefits to their employees in the shadow of the Act?

Private Exchanges

One option that has gained traction is the “seismic shift” to private exchanges. The federal public exchanges under the ACA, also known as the “Health Insurance Marketplace,” have received quite a bit of mostly negative press, caused by the botched roll-out of enrollment, which was primarily due to website issues. However, private exchanges have been receiving more positive attention from companies, and such attention has been reflected in the migration of these companies to private exchanges through benefit-offering platforms for their employees.

What is a “private exchange”? Similar to the public exchanges, private exchanges are marketplaces for health insurance and other benefits, such as dental, vision, life, disability, among others, that allow individuals to “shop” for insurance. Employers negotiate and contract with the private exchange for the provision of benefits for their company. Then, those eligible employees may choose from the benefits offered by the selected private exchange. Further, the employer will provide a defined contribution ( e.g., $3,000), as further discussed below, that can be used to purchase benefits on the exchange.

Private exchanges offer employers control over rising health costs, reduce the administrative burden of providing health benefits to employees, and increase benefit offerings for employees, by offering, for example, ancillary benefits such as life and disability benefits in addition to health benefits. Controlling health care costs, a major catalyst of this seismic shift, is evident in the equally seismic shift from the traditional defined benefit model approach of offering health benefits to a defined contribution model approach. Under the traditional approach, employers offer certain health benefits to employees, share in most of the cost of those benefits, and bear most of the risk of offering (and bearing the financial burden of) health insurance for employees.

Some increasing issues with this approach to providing health benefits are the increased costs associated with health care in general, the changing landscape of how insurance is provided, the Affordable Care Act and its impact on compliance and costs, the economy and the impact on employment-related and budgetary issues, among others.

The Defined Contribution Approach

Because of these issues, and the impact they have had on employers, many employers are beginning to move their employer-provided health care from the defined benefit approach to a defined contribution approach. An example of this approach, for illustrative purposes, is when an employer makes cash contribution into an account on behalf of an employee, and then the employee can use such contributions to purchase insurance on behalf of him/herself and his or her family, if applicable. As stated in “The Emergence of Private Health Insurance Exchanges: Fueling the 'Consumerization' of Employer-Sponsored Health Insurance,” published in the Booz & Company Perspective in 2012, “[t]his model allows the company to cap its healthcare costs at a desired threshold, improving control of current expenses and future liabilities.” Simply, it allows employers to “'monetize' their commitment” to providing employee health insurance through a defined contribution by the employer. See “The Value of Private Health Exchanges,” Mark Roberts, BenefitsPro, Aug.30, 2013.

This new approach utilizing a defined contribution model of providing health insurance benefits to employees corresponds to a shift in thinking presented by Aon Hewitt in its 2013 Health Care Survey, “A New Way of Thinking About Health Care: Manager or Transfer Health Risk,” wherein Aon Hewitt describes the current state of employer-provided health care as “Compensation and Benefits” and that the future state of employer-provided health care as “Compensation and Compensation.” When such shift occurs, and the treatment of employer-provided health care is treated as compensation as opposed to a benefit, the employer is “shifting” risk. Thus, the transfer of risk occurs within certain aspects of the defined contribution model, such as shifting financial costs and administrative burdens. Specifically, although employers have the ability to control their bottom line under this model by offering compensation in lieu of benefits, employers are shifting significant financial liability to their employees. Any subsidy provided would be provided by the employer itself, as governmental subsidies are not available under these private structures, as they are under the governmental exchanges.

Additionally, employers' former duties of plan design and other insurance relationships, such as claim issues, would be outsourced to the private exchanges. Notably, many private health exchanges offer service contracts between the exchange provider and the employer, which are group contracts, governed by the Employee Retirement Income Security Act of 1974, as amended (ERISA). Thus, other responsibilities and liabilities, such as those under ERISA or those under a self-insured arrangement, would remain, depending upon the contracts executed and the plan document.

In an interview between Forbes and Eric Grossman, National Exchange Leader at Mercer, Grossman states, “[t]he private exchange model is an innovation that has unleashed a wave of transformational change that touches virtually all employers, who must now fundamentally rethink how to provide benefits to their workforces. Private exchanges have already taken off with meaningful adoption in 2014, and we believe that's going to accelerate exponentially.” “Private Health Insurance Exchanges Unleash 'Transformational Change,'” Paul Howard, Jan. 24, 2014.

A Significant Shift

With the shifting burdens and costs of the defined contribution approach, employers are restructuring their employer provided health benefits, and the private exchange is on the rise. The data that is available to date demonstrates the significance of this particular shift. Eric Grossman aptly states that “One's [one company is] an outlier, a few may be a passing fad, but over 50 is the beginning of an industry trend.” “Surge of Employer Health Exchanges is no 'Passing Fad,'” Bruce Japsen, Oct. 16, 2013.

“[H]istorically,” says one source, “most employers have offered only one health plan, such as an HMO or PPO, the rapid emergence of private insurance exchanges ' which Accenture estimates will grow to 40 million enrollees by 2018 ' will expand benefit choices and fuel the purchasing of ancillary benefits through a new pool of discretionary premium dollars, the annual amount an employer allocates for each employee's insurance that can be used for ancillary benefits or other options, after the cost of the health plan premium is covered.”

“One-in-Four Employees Choose Lower-Priced Health Plans via Private Insurance Exchanges to Decrease Premiums, According to Accenture Research,” Accenture Newsroom, Dec. 10, 2013.

Reuters, for example, has predicted that 2014 will be a “watershed” year for companies to participate in private exchanges. See “Petco, Applebee's Employees Join Growing List on Private Exchanges,” Beth Pinsker, http://www.reuters.com/article, Oct.15, 2013. More particularly, Reuters predicts that over one million active employees (up from 100,000 in 2013) are due to participate in these exchanges “as companies seek new ways to reduce their exposure to rising healthcare costs.' Id.

Many large companies have already made the news when they shifted their employees to a private exchange model of providing health benefits. For example, Walgreen Co. announced in September 2013 that it will provide insurance in 2014 to more than 160,000 eligible employees through a private exchange run by Aon Hewitt Corporate Health Exchange. Likewise, in the fall, Petco and Kinder Morgan announced that they will be offering benefits to their eligible employees through one of Mercer's private exchanges in 2014. International Business Machines Corporation (IBM), General Electric Company and Time Warner Inc. also announced last year that they will be shifting their retired workers toward private health exchanges as well.

The PEEC

The Private Exchange Evaluation Collaborative (PEEC), a new independent, objective initiative created to help employers design private exchange strategies, released a survey in December 2013 that indicates that “[45%] of employers have implemented or plan to consider utilizing a private exchange for their full-time active employees before 2018.” Executive Summary, Private Exchange Employer Survey Findings, Private Exchange Evaluation Collaborative, December 2013. Although employer interest is great, barriers and uncertainty still exist. For example, the PEEC also found in its 2013 survey that 80% of employ- ers agreed that the following were “barriers to adoption”: “immaturity of the private exchange market, stability of cost over time, stability or track record of exchange administrator, limited information about private exchanges, [and] employee readiness.” Id.

Limited information and employee readiness are two critical points that companies, and executives of those companies, need to take into consideration when examining and/or adopting new strategies for providing health insurance to employees. For example, Accenture has found that 83% of Americans are unfamiliar with private exchanges. “One-in-Four Consumers Will Receive Employer Health Benefits Through Insurance Exchanges in Five Years, Accenture Research Shows,” Accenture Newsroom, Dec. 10, 2013. Thus, a profound disconnect exists with such high unfamiliarity on the employee level, and the corresponding seismic shift to private exchanges on the employer level, with such shift “ultimately surpass[ing] state and federally funded public exchanges, as early as 2018.” Id.

Conclusion

Vigorous and swift efforts must be made, on the part of the private exchange platforms as well as the employers themselves, to educate employees about this shift in structure. Employees may easily see this new model as a way for employers to shift the financial burden to them with nothing more. Employers will quickly feel the negative impact of this, not only of the human resources side, but also on the production, attraction and retention sides, not to mention the affected bottom line. When implementing strategies to shift to a defined contribution model of any type, like that of the private exchange, employee readiness and support is a key factor. This strategy implementation reaches through all management levels of the company as well, especially the C-Suite. Such thoughtful strategy implementation is critical to the success of adopting a new model of employer-provided health benefits, especially in such a time of legislative and market unrest and uncertainty.

Jennifer S. Kiesewetter is a partner in the Memphis office of Butler Snow LLP. She can be reached at [email protected].