Here’s Why Employer Health Plan Private Exchanges Do Not Reduce Cost Nor Expand Choice and Competition
Can you imagine the glee in employer boardrooms upon hearing: “we have $X budgeted for healthcare for the next few years and that’s exactly what we’re going to spend,” regardless of the actual health premium cost?
For employers seeking yearly cost predictability, using a Private Exchange to implement a health benefit plan appears to make perfect sense.
However, as they are constructed today, Private Exchanges will have little to no effect on overall healthcare costs.
Instead, a move by an employer to a Private Exchange is merely a one-time fix; a veiled cost-shift from the employer to the employee. Furthermore, claims that Private Exchanges will benefit employees by providing them more health plan choices isn’t true… In reality, there is no choice at all.
To a large extent, Private Exchanges are simply an outgrowth of the changes in employer-sponsored retirement benefit changes.
Over the past 40 years, Defined Contribution (DC) retirement savings plans (generally known as a 401(k) or 403(b)), where employers contribute a set amount every year to an employee-managed savings account, have supplanted employer-managed Defined Benefit (DB) pension plans as the go-to retirement plan for most employers.
Generally, with DC retirement plans, employers free themselves from costly DB legacy costs while providing employees the freedom to manage their retirement savings directly and to access the funds at employees’ discretion.
Similar to DC retirement plans, in that they both allow employers to contribute an annual set and predictable dollar amount, employer-sponsored health benefit plans using Private Exchanges emerged over the past decade. In such plans, employers provide an employee a set amount of money dedicated to healthcare benefits (e.g. the employer gives the employee $250 per month). Then, employees use that money to select a health plan from a list of options on a Private Exchange website (which are usually set-up, run, and often owned by the employer’s brokers and/or consultants). Usually, the health plan options listed on the Exchange have premiums that exceed the amount given to the employee by the employer. Thus, the employee must evaluate the options presented, pick a plan, and then pay the difference between the premium of the plan selected and the amount given to them by the employer.
A One-Time Cost Fix
As you have probably experienced, with most traditional employer-sponsored health plans, during every open enrollment period, employees choose from among 1-3 health plan options (e.g. PPO, HMO or high-deductible) and the employer covers some percentage of the health premium while employees cover the remainder. Typically, employees are only shown the monthly amount they are required to pay and are not shown the total premium amount, which would include the employer’s share. On average, the premium split is around 70% paid by the employer and 30% paid by the employee.
However, when employers begin using a Private Exchange, employees are shown a new set of numbers . Instead of the traditional employer decision to cover a certain percentage of the premium, now, with a Private Exchange, the employer has the ability to pick a set dollar amount and essentially say to employees: “I will provide $X towards your health benefit and you can take that money to our Private Exchange and choose from a variety of health plan options.” Upon seeing the large dollar figure contributed by the employer and the new plan options, employees generally fail to realize that the employer used to cover 70% of the premium with the old, traditional health benefit plan, but now, the $X is only 65% of the premiums for a new plan on a Private Exchange.
Hence, the cost-shift from employer to employees is disguised.
In fact, health plans using Private Exchanges do nothing to affect the overall cost of healthcare. Healthcare costs will continue to rise and health plan premiums will rise as a result. Thus, in order to keep up a suitable annual benefit plan for employees and not trigger poor employee morale or increased turnover, employers must continually raise their $X contribution in order to minimize the impact to employees.
Therefore, employers will continue to bust through healthcare budgets with Private Exchanges.
Why Don’t Private Exchanges Lower Healthcare Costs?
The evidence shows that when employees are asked to use a Private Exchange, they overwhelmingly choose the lower premium High Deductible Health Plan (HDHP). Now, it is logical to assume that HDHPs will lower overall healthcare cost because the prospect of higher out-of-pocket costs will lead to the reduction in demand for healthcare.
Unfortunately, the reduction in demand is only temporary. Surprisingly, demand for high-cost healthcare services actually increases with HDHP. Why? Well, those with HDHPs are less likely to seek ongoing help with managing chronic conditions since they have to pay out-of-pocket for that care. Inadequate control of diabetes, high-blood pressure and other conditions results in high-cost hospitalization and catastrophic events such as heart attacks and strokes. Now, considering that 86% of US healthcare costs are the result of chronic conditions and that nearly all of us will have at least one chronic condition if we live long enough, it is easy to project the healthcare cost implications of Private Exchanges.
Simply Offering More Health Plan Options with a Private Exchange Does Not Provide More Choice
With the Affordable Care Act (“Obamacare”), all individual and small-group health plans must consist of 10 “essential benefits” or features in order to be classified as a Qualified Health Plan. Therefore, the real choice a Private Exchange provides is: does one want to pay more for healthcare today or does one want to pay more later?
Shoppers using a Private Exchange can either choose a low deductible with a higher premium and pay little out-of-pocket, or choose a high deductible with a lower premium but potentially pay more out-of-pocket. Maternity care, mental health and pediatric services are “essential benefits” and must be included in every plan, regardless of whether one needs them or not. If you are not of child-bearing age or if you do not have children, you have no choice but to pay for a health plan that includes maternity care and pediatrics.
More importantly, in most everyday consumer transactions, consumers buy a good or service based on the value that good or service provides. For example, consumers can buy many different brands, flavors and sizes of ice cream, and at difference price points. But, with Private Exchanges, consumers cannot shop for different features such as provider networks or innovative delivery models – there is no choice of overall value. Instead, the choice is either a lot or a little: access to more doctors and hospitals or less; a big doctor network or a small “narrow” network. It is like saying “you can have any choice of ice cream that you want, as long as it is vanilla. BUT, don’t worry, you do have the choice of 1 scoop or 2.”
Employers should temper any enthusiasm for Private Exchanges because they do not save money in the long-term and do not expand consumer choice. However, should the original idea for Private Exchanges come to fruition and consumers are allowed to build their own health plans piece-by-piece based on what they value – with coverage choices, provider networks, different delivery models, technology, etc., then, consumers will have a REAL choice, and, healthcare costs have a REAL chance to be controlled.
Tom Valenti is Founding Partner of Forthright Health (ForthrightHealth.com) Forthright Health builds customized networks of primary care physicians who contract directly with employers in order to reduce cost, improve quality and increase service. You can follow him here: @tjvalenti