Private health insurance exchanges can give employees a wide choice of benefit plans, while reducing employers' administrative burdens. But employers still have to take steps to ensure that exchanges will meet their employees' needs, note Eric Grossman and Frances Andreasen of Mercer L.L.C. in their analysis of exchanges.

The re-election of President Barack Obama makes one thing completely clear — the major requirements of U.S. health care reform, as enacted in the Patient Protection and Affordable Care Act, remain on course toward full implementation in 2014.

An important aspect of the ACA is new public exchanges. While the primary intent of the public exchanges is to provide access to coverage for millions of Americans, they have an important secondary impact: the creation of retail marketplaces to shop for medical plans.

Employers continue to wrestle with ACA requirements, weigh their options for compliance and decide how to address what, for many, will be significant cost increases. At first glance, the new public exchanges were viewed by many executives as the solution to their longstanding problem of rising health care costs: Why not just end benefits sponsorship and send everyone to the public exchanges?

But financial analyses, increasing concerns about public-exchange readiness and recognition of the importance of employee health to the health of the business have all changed that initial view — to the point where very few employers with more than 50 employees are considering the benefits exit strategy and public-exchange approach, at least over the next several years.

However, employers can still participate in the benefits marketplace through private exchanges and not only avoid the financial and employee-relations downside of exiting benefits sponsorship, but potentially gain advantages for the organization and its employees.

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What is a private exchange?

Put simply, private exchanges are marketplaces with a variety of benefit product offerings. Some private exchanges will be a market only for health plans — medical, dental, and/or vision. But we expect the most successful exchanges will offer a wide range of products that will enable employees to meet most or all of their risk coverage needs through a single market offering everything from medical coverage to life and disability insurance, critical illness policies, even auto and home cover.

A major appeal of private exchanges is that they can help address ever-increasing health care costs, which has long been top-of-mind for employers. For most of them, the requirements of the ACA exacerbate the cost problem, particularly for organizations in lower-margin, heavily part-time industries such as retail and hospitality.

How can private exchanges help? In several ways; we'll highlight three:

1. The use of a private exchange can facilitate the transition to a defined contribution approach to providing benefits coverage. This transition is analogous to the defined-benefit-to-defined-contribution revolution in retirement plans over the last 15 to 20 years. A DC approach shields the employer from the open-ended costs of traditional arrangements and gives the employer direct control over future cost increases.

2. Moving to a DC approach may solve an employer's cost issues, but if it simply shifts increasing costs to employees, many will consider it sub-optimal. Private exchanges will operate much like markets do in other sectors of the economy. Since health plans and other benefit providers will be competing for the consumer's business, the market forces of innovation and price competition will be in play.

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3. Many employees are currently over-insured for health coverage. A private exchange with compelling decision support and access to other benefit products that enable employees to manage their risks will help drive adoption of medical plans that will be less expensive and have a slower rate of cost increase.

Importantly, the employer's role changes when it provides benefits through a private exchange. Today, employers control most aspects of their benefits programs — which benefits are made available, details of the plan design, which carriers/vendors are offered and so on. With a private exchange, employers still will determine how much they will pay toward benefits and how to allocate that money among their employees.

But they will rely on the exchange sponsor to provide most or all benefits management functions, including handling the compliance complexities of the ACA. And an exceptional end-to-end consumer experience — ranging from employee education to decision support tools, shopping and customer-service enhancements — also will be the responsibility of the exchange sponsor.

Employer perspective

The positive potential of private exchanges is reflected by our latest research. Mercer L.L.C.'s 2012 National Survey of Employer-Sponsored Health Plans surveyed 2,809 public and private organizations with 10 or more employees, and found that 56% of employers would consider offering employees health insurance through a private exchange. At the same time, few employers believe it is likely that they will terminate their employee health plans within the next five years. Just 7% of employers with at least 500 employees and 22% of employers with 10 to 499 employees believe it is likely or very likely that they will do so.

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Given the complexities of the ACA and the shifting health care landscape, utilizing a private exchange can provide a win-win solution for employers and employees. But it's vital for organizations to perform the appropriate due diligence to ensure that a private exchange will meet the needs of their workforces.

If, for example, a company decides to provide health insurance through a private exchange that offers a confusing profusion of choices with inadequate decision support, employees may be overwhelmed and make poor choices. While the best exchanges will expand employee choice, they will do so in a way that supports consumers with a modern, intuitive, user-friendly experience that only promotes confidence in the process.

Ultimately, providing employee health care through a private exchange is going to be a significant culture change for employers and their employees. It needs to be approached with appropriate attention to effective change management that supports employees through the transition. The case for private exchanges as a consumer-friendly, cost-efficient solution needs to be made in a clear and compelling way so that employees can easily grasp the advantages.

Indeed, employers who take the private exchange path will have strong reasons for doing so in terms of cost and resources. But all the same, they will want to ensure their employees are going to be well cared for in a new benefits frontier.

Eric Grossman is a senior partner and the U.S. innovation leader for Mercer L.L.C.'s health and benefits business in the U.S. He is an expert in the strategic development, design, financing and management of health care and group benefit programs. He may be reached at eric.grossman@mercer.com.

Frances Andreasen is a principal in Mercer's health and benefits business and is a leader of Mercer's collaborative solutions with health care partners. She may be reached at frances.andreasen@mercer.com.