All eyes are on the hullaballoo created by the challenges at Healthcare.gov and several of the states’ public insurance exchanges. Yet all the while, like in a magic show, attention has been diverted from the real action going on elsewhere. Quietly and in a relatively drama-free way, the private health insurance exchanges are busily taking over the world of insurance and, in my opinion, portend a radical set of changes in how our health insurance system operates.
Several years back, a number of companies began building private health insurance exchanges to initially help companies offload the incredible burden of retiree benefits. Companies such as Extend Health (now owned by Towers Watson), Senior Educators (now owned by Aon), and several others provided a way for large employers to get themselves out of the business (and balance sheet liability) of providing group benefits for retirees, instead providing them with money to purchase their own individual health policies through then small, now large companies. The private exchanges went about the business of building websites that work, call centers that buzz and a wide array of insurance product offerings at various prices. Now, several years later, hundreds of thousands and possibly millions of individuals are out there shopping their little hearts out, choosing their own plans, and dealing with the consequences of high deductibles and the like.
These various private exchanges are now poised and ready to begin serving active employees in 2014 as guaranteed issue (the requirement that all can be insured and no one turned away) goes into effect as a result of the Affordable Care Act. And lest you think this is a small marketplace, you are wrong. In 2008 there were about 120 million total employed workers and just over half of these worked for companies of 500 employees and above (39 million worked for companies with 5000 employees or more). In other words, we are talking about nearly half of American adults and that doesn’t even include the dependents they bring along into their insurance plan.
Interestingly, such large US employers as Walgreens and Petco and DineEquity (parent company of Applebee’s Neighborhood Grill & Bar® and IHOP® restaurants) are all-in on the private exchange program, committing to transfer all of their employees from group plans to the exchange to purchase individual plans come January 2014. The exchanges of Towers, Aon, Mercer, Buck Consultants and a plethora of others are alive and well and open for business at exactly the time when employers are trying to figure out how fast they can reasonably get out of the middle of health insurance administration and run for the hills.
Yes, there is much discussion (I think it may actually be wishing) about how companies will never do this en masse—that employee group benefits are too important a tool for employee recruitment and retention. But I don’t really believe this is a lasting consideration for most companies. A study from consulting firm Oliver Wyman suggested that “20% to 30% of the marketplace would gravitate to a private exchange over the next three to five years without any bias by size of employer.” They also found that around 50% of all employers would switch to private health insurance exchanges if they could realize 10% savings; more than 20% of employers would move employees to exchanges even if there were zero savings. If that last statistic doesn’t suggest that HR departments are putting on their track shoes and getting ready to run, I don’t know what does.
I have to believe that while the mass migration to private exchanges may start slowly, it will pick up speed faster than Apolo Ono in winter. There are a few reasons why I believe this to be the case, including the giant hassle and expense of being the health benefits administrator of record. Being out of the benefits administration business means less overhead cost, less drama as employees come to you when they want something covered, less lawyers to keep up with HR regulation. On a positive note, transitioning to an exchange can also be a real positive for employees, opening up far more plan choices to them, enabling plan customization for special populations (e.g., disease-focused plans or regional-focused plans), even creating overall cost-savings in some cases.
But most importantly, transitioning to the private exchange means employers have the ability to fix their annual health benefit costs at a known and predictable amount that they control. They will give employees an allowance to purchase health plans and each year can choose to raise the contribution by a fixed, amount. If they are smart they will peg that increase at or near the consumer price index (CPI). CPI has been rising a few percentage points a year (e.g., it rose 1.7% in 2012) while health insurance costs have been rising 3-5 times faster.
When you transfer your employees to an exchange, this basically becomes not your problem, thus marking the end of sucking up unpredictable rate increases for years and watching it eat into profits. By fixing healthcare costs at a lower rate of growth than in the past, employers realize real savings to their bottom line, particularly when they have challenging growth years. WalMart, for instance, as I wrote about HERE, went through 9 quarters of flat sales while healthcare costs rose 9% per year during that period. As healthcare costs rise faster than sales, margins (profits) get eaten alive. When a company can predict its healthcare costs and as its margins become better and more predictable, there is an improvement in a company’s bottom line and therefore, likely, it’s stock price. When one guy’s stock price improves, his competitors have to take notice and act accordingly or suffer the wrath of the market. In the end, I think this need to “keep up with the Joneses” may be the biggest accelerant under the private exchange flame.
So who absorbs that increase in healthcare costs if the employers cap theirs? Yes, indeed, the employee, who is now experiencing pretty dramatic increases in out of pocket costs. The hope is, of course, that some of the major changes underway in the healthcare system (ACOs, pay for performance, preventive services, yadda yadda) will help alleviate the build up of that pressure. But as they say, hope is not a strategy. Thus, employees, aka healthcare consumers, must take a serious look at how they consume healthcare and start to play a role in managing their own costs and the behaviors that drive them. No doubt this will take a while, but it may well be just the kindling needed to drive more consumer accountability. Ironic, isn’t it, that Applebees might lower their healthcare costs by using exchanges and, accidentally, cause a reduction in sales of their Riblets Platter (calories: 1720-2100; sodium: 3130-4850 mg). We can already see consumer engagement rising, even though in microscopic amounts, where consumers have access to price transparency information: who wouldn’t choose a $1000 ultrasound when the alternative down the road is twice as expensive and where information on quality is largely absent?
It is interesting to note that early indicators show that people joining exchanges definitely price shop. Aon found that 42% percent of employee populations from three companies participating in Aon Hewitt’s Corporate Health Exchange chose less expensive coverage than they had previously, 26% selected richer coverage and 32% went with a plan that was comparable to what they had, according to this article in HIX. It will be interesting to see how much this price shopping translates to more accountable or at least more cost-aware consumer behavior.
One of the most significant changes in the healthcare system, one which I have written about before but which is becoming of greater and greater urgency as exchanges proliferate, is the imperative for insurers selling products on the exchanges to learn how to market to and serve consumers. Until the exchanges, virtually all insurance was sold to employers in business-to-business mode. Now carriers have to figure out how to differentiate themselves on websites and via marketing where the guy listening is you and me. With insurance carriers loved just about as much as cable companies (aka, not), this is no mean feat.
There was a NY Times article last week about how culturally dour Russian service workers, such as waiters and flight attendants, have had to go through a pretty significant amount of “charm school” to get good at serving consumers in their newer capitalist system. I can imagine that the next class to enroll will be the US insurance carriers. Health insurers are going to have to get good at consumer acquisition and, more importantly, retention, if Aon’s data is any indication: they found that nearly 80% of the more than 100,000 U.S. employees enrolled in plans through their exchange chose a different plan for 2013 than they had in 2012 – with more opting for cheaper coverage than better benefits.
One discussion I haven’t seen anywhere yet is the impact that all of this exchange upheaval will have on the health/wellness/prevention market, particularly as it pertains to small companies selling products to payers and employers. It has long been true that health insurers want to see a return on investment of no more than 1-2 years when they invest in programs that profess to reduce costs. Why? Because they don’t have those enrollees for very long, usually a couple of years, and they want to realize the return from spending money on weight loss and smoking cessation and disease management and all the rest. If health plan members are switching every year, and if insurers are required to spend 80% of all premiums on care, not administration (as they are as a result of the ACA), will they keep investing in these programs?
And furthermore, if employers are going to be getting out of the health benefits business, will they also turn away from these purchases? I see a billion little companies trying to sell a variety of niche wellness, prevention and care management programs directly to employers and I am wondering if they have a future if employers want to forget about this topic entirely. I imagine that some employers will see the provision of these programs as key to employee recruitment and retention, but not because it lowers cost. Rather they will look for meaningful perks–and they may be unrelated to health–that make employees happy to come to work. Instead of smoking cessation it might be ping-pong tables in the lunch room or time off to do charity work or free ice cream on Fridays; after all, they don’t have to care that much about whether the ice cream leads to worsening health if they have capped their costs.
Yes, I know, employers are worried about absenteeism and productivity and all that jazz, but those things are incredibly hard to measure and even harder to correlate with specific initiatives on the health front. Thus, should all those health and wellness entrepreneurs be worried? Maybe so. I would love to hear from employers on this or see the Pacific Business Group on Health study this potential phenomenon. I think this could become a real objection for investors looking at all of these little companies; one has to wonder whether their market will still be there 5-10 years from now when it is time to exit or whether the marketplace of purchasers will have declined precipitously.
Many of those entrepreneurs will say that the solution is building direct-to-consumer products. I have to say that answer makes me wince. Perhaps I am too much the cynic after all these years watching healthcare costs fiddle while consumers burn. It is definitely possible that the rise in exchange purchasing, alongside its companion effect, the rise in high deductible health plans, will drive better consumer purchasing behavior and increased health accountability; as I noted above, I genuinely believe it will have some impact. But will consumers ever really invest large quantities of their own cold hard cash in preventive health products on a big enough basis to sustain all those aspiring wellness entrepreneurs? Perhaps if they have money left after that yummy platter of Riblets.