Private exchanges offer yet another alternative to group health plans

Companies that want to continue providing benefits to employees while keeping a tight rein on costs are the target audience.

By — Posted Sept. 5, 2011

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With potentially more than 50 state-based versions of a public health insurance exchange set to emerge by 2014, another version of a post-health reform insurance market is emerging: the private exchange.

A private exchange is an existing concept taking on a new name. The idea also has been pitched as a "defined benefit" plan and has been part of a package with a health reimbursement account. Simply put, a private exchange is an alternative to a group health benefit plan. Rather than paying a portion or all of a premium, an employer pays each of its workers a flat amount and sends each to choose his or her plan.

The idea has taken root in a few spots, most notably in Minnesota, where the health plan Medica has partnered with Bloom Health of Minneapolis to offer a private exchange option to employers. The Chicago Tribune reported in August that pharmacy chain Walgreens, which has more than 7,770 stores nationwide, is planning to start its own private-exchange marketplace, though the company has not confirmed the report.

Here's how a private health exchange works:

An employer decides what it can afford to pay for health benefits -- for example, $1,000 per employee per month. Rather than enrolling every employee in the same plan and using the $1,000 to pay for a portion of a premium, the employer puts $1,000 in an account for each worker.

Then one of two things happens: One, the employee works with a third party that acts as a clearinghouse. The worker chooses from any plan available in the individual market, with the clearinghouse administering the employee's HRA, and helping connect brokers and health plans with the employees who want to buy coverage.

Bloom Health CEO Abir Sen described his and other companies in the field working under that scenario like a supermarket, with insurance in one aisle, wellness programs in another aisle, and perhaps supplementary benefits in another aisle.

Under the second scenario, the employer sends the worker to a third party that gives him or her a limited set of choices, for instance a range of plans offered by the state's Blues plan. Sen described this option as a kind of "walled garden" where employees can choose coverage.

Bloom Health recently announced agreements with Blue Cross Blue Shield of Michigan and Medica to administer private exchanges that would include various types of policies sold by the insurers.

The "supermarket" and "walled garden" options could be expanded in 2014, when state-sponsored public health insurance exchanges launch. Then the employee might choose between spending that $1,000 in the public exchange and buying something in the individual market.

Jean Abraham, PhD, assistant professor at the University of Minnesota School of Public Health, said that based on previous studies of how consumers select health plans, premiums are likely to be the main consideration for workers who are choosing from an array of possible plans. Second in importance would be whether the person's doctor and preferred hospital are in the plan's network. She said new technology that uses algorithms to select a health plan based on consumers' preferences should help people choose among the huge number of available health plans.

"The benefit of this is that people get more choice, and to the extent you could have better aligning of people's preferences with plans, that's a good thing," Abraham said.

A private exchange would be a better deal for the employer than not offering health benefits, because the company can still reap the tax advantage of offering health benefits and avoid the penalty that would apply to companies with 50 or more employees if they decided not to offer benefits, analysts said.

Rick Lindquist, director of sales at Zane Benefits, a private exchange clearinghouse, said the private exchange option is likely to be attractive to employers in a few categories:

  • Small businesses that do not offer health benefits.
  • Any business struggling with annual increases in premiums.
  • Large companies who want to stop spending so much on health benefits but don't want to lose workers or risk employees being sick and uninsured.

Incidentally, Lindquist said, many of Zane's customers are physician offices.

There are a few potential drawbacks and caveats for employers offering private exchanges, analysts said.

Large employers in particular are increasingly concerned about improving employees' health through wellness programs, and rely on group health benefits for feedback on the group's relative health. Under a private exchange, they lose that feedback.

Lindquist dismissed that concern. "Talk to one of our clients, and they will say that's not a benefit, that's a hassle," he said.

Employers also must be careful not to violate the Employee Retirement Income Security Act and the Health Insurance Portability and Accountability Act. To stay compliant with the health benefit provisions in ERISA, employers who help offset the cost of an individual plan are responsible for overseeing the plan if they direct employees to enroll in it. The benefit would be subject to a long list of regulations.

This means that under a private exchange where a worker is choosing from any plan in the individual market, the employer should be "shielded" from knowing which plan the employee selects or whether he or she has filed claims, experts said. That's where a third party like Zane Benefits or Bloom Health comes in. They handle the employer's money and help workers choose a plan while maintaining the separation between the employer and the benefit plan. "The employer is just the co-financer," Sen said.

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