Health care costs are rising for employers and workers alike, and standard mitigation techniques to control those increases have run their course, says Rob Malley, national health exchange design leader for Aon Hewitt. Here, he describes how private health care exchanges can change the rules of the health care benefits game.

A colleague of mine recently showed me a copy of the hospital bill from his mother's birth in 1942. His grandmother had a normal delivery, spent 27 days in a semi-private room, and the total bill, including medicine and one phone call, was $70.12. And his grandfather paid the bill in full upon discharge!

How times have changed.

Today, large employers spend nearly $13,000 to provide coverage for every employee enrolled in their health care plans. This represents an increase of 52% since 2006. Employers have been unable to keep up with these exploding costs and have been forced to ask employees to absorb an ever-increasing share. Between 2006 and 2012, according to the Aon Hewitt Health Value Initiative database, employer costs increased 40%, while employee costs (paycheck contributions and out-of-pocket expenses) increased 82%. If you assume an average pay increase for an employee to be about 3% per year, an employee saw only a 19% increase in wages during this time period. With medical trend expected to continue to increase at the 8% to 9% level, there is no relief in sight, and employers are left continuing to face the challenges they have tried to tackle for so many years: 1) How do they offer comprehensive and affordable health care benefits to their employees; 2) are the health care benefits (and cost of these benefits) going to attract and retain market talent; and 3) how much of the cost are they able to absorb, and what impact does that have on their ability to compete both domestically and globally?

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There was some glimmer of hope that health care reform would have a positive impact on both access and cost, but many experts in the field have concluded it has done and will do very little to address the cost pressures. So, where do employers go from here?

Albert Einstein is said to have defined insanity as doing the same thing over and over again and expecting different results. Many employers have spent years trying to mitigate trend increases through standard plan management strategies, including insurance carrier realignment, insurance carrier negotiations and cost-shifting to employees, either through plan design changes, increases to employee contributions or both.

Unfortunately, this strategy has run its course, and many employers feel they are out of levers to pull. If employers are looking to achieve different results, they need to “play” differently; they need to step back and re-evaluate their overall health care strategy. Without exiting health care altogether and paying the associated penalties, there are two strategies an employer may consider:

• Stay in the game, and continue providing health care benefits in the traditional way, but change the rules of how employees can play. This includes aggressively managing the health of the employee and dependent population; fundamentally changing how employees behave around their own health; and driving risk reduction, health improvement and trend mitigation.

• Change the game altogether and leverage a private exchange model to drive competition, efficiency and long-term trend mitigation. The remainder of this article will focus on this latter approach.

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What is a private exchange?

An exchange is simply a competitive marketplace that brings together suppliers and buyers an in efficient way. Think of Amazon.com Inc., Travelocity.com L.P. or Zappos.com. These are all exchanges that we use every day. In health care, the exchange brings employees to a marketplace to shop for their health plans. The marketplace portal allows employees to sort and filter just like they do today for any other consumer product. They can sort by price, by insurance carrier or by plan design. They can compare the insurance carrier networks or their prescription drug formularies. With employees as the buyers, insurance carriers need to change how they market and sell their products; the sale is no longer to the employer.

Private exchanges are prevalent in the Medicare space today and work well in keeping costs down for post-65 retirees. If exchanges work in the post-65 space for health care, is there a way to take the exchange concept and apply it to the active employee and even pre-65 retiree space?

Why can a private exchange work in the active (commercial) market?

There are six elements to a commercial private exchange that are essential to its architecture — no single one of these elements, or any subset of them, would yield the same result. They all must work together, in unison, to drive the desired results. These essential elements include:

• Risk Transfer/Insured Product: Employers need to convert from self-insured to fully insured, putting the risk back on the insurance carriers. Today, employers are like ATMs, simply paying transaction fees to carriers or third-party advisers to dispense money to health care providers.

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Employers assume the risk and hope that at year-end claims are in line with their original projections. But in the insured world, risk is passed back to the health plans, and employers gain predictability of health care expenses. The only piece that changes an employer's monthly expense is a change in headcount. Accountability for the price of the product in a competitive, consumer-based market will force insurance carriers to become more efficient and innovative in their products, contracting efforts and networks, and those that do so will be amply rewarded through insured underwriting margins, which can be five to 10 times the margins on administrative fees.

• Multicarrier Standardized Plan Designs: By standardizing plan designs, an exchange forces real competition among insurance companies and increases the elasticity of demand and pricing; it makes it very easy for employees to keep their same plan and change insurance carriers. This drives a competitive marketplace. Comparisons of insurance carrier rates are easier, and barriers to change are lower. This is a significant departure from the current model, where moving an entire group from one insurance carrier to another presents significant barriers to change.

• Best-in-Market Provider Discounts: Another benefit to a competitive, multi-insurance carrier model is the lowering of overall national costs through best-in-market provider efficiency. One insurance carrier may have the best-in-market contracts with the provider community in California, but another insurance carrier may have the best contracts with providers in New York. By offering multiple insurance carriers and a regional rating structure, employers are able to take advantage of the best contracts in every market.

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• Consumerism: In today's environment, providing employees with choice will mean that consumer-driven designs are part of the menu. The broad range of consumer-driven designs — and the attractive pricing available for insured versions of these plans — can potentially yield significant cost savings for the employer and employees. Further, given the exchange model, choice alone promotes consumerism, pushing employees to become better consumers of health care dollars.

• Employee Choice and Flexibility: Today, employees have little to no control with regards to the insurance carrier they select or the plan design in which they enroll. It is decided at the employer level, where decisions are made based on what would be best for “most” employees. Under an exchange, the sale is direct to the employee, where an employee has choice among multiple insurance carriers and multiple plan design options. If price is too high from one year to the next, the employee can vote with their feet and choose a new insurance carrier for the next year. Employees have choice on design, price, provider networks and prescription drug formularies. Though price is a significant factor, it is not the only factor, and providing employees with a choice of insurance carriers and plan designs can only be viewed as an enhancement to where most employees find themselves today.

• Defined Contribution Subsidy: Employers will have a fixed, predictable annual health care cost exposure only sensitive to the number of employees covered. This will enable movement to a “defined contribution” form of delivery, where the employer's commitment to health benefits becomes an element of their Total Rewards strategy.

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Why should an employer consider a private exchange?

A private exchange may not be the right strategy for every employer. There are several key decisions points that will either steer an employer toward an exchange or away from one. Employers that answer affirmatively to several of these questions are potentially good candidates for a private exchange:

• Are you looking to monetize your health care commitment in the form of a defined contribution?

• Are you looking to spend less time on plan and insurance carrier management and more on improving the health of the employee population or other core business needs?

• Are you comfortable giving up some control on managing plan design and insurance carrier relationships?

• Will your CFO prefer a predictable annual health care budget?

• Do you believe that health benefits should be part of Total Rewards?

• Do you want compensation-like rate of cost growth without cost-shifting to employees?

Conclusion

Changes to the health care delivery system that will return us to the days of a $70 maternity claim are behind us. External forces and the advances in life-saving treatments will continue to provide significant headwind to even reducing the rate of increase of health care cost from current levels.

A private exchange model, properly executed and scaled across private-sector companies, may ultimately drive systemic reforms of the health care system through innovation and efficiency. By developing a consumer-based health care marketplace where there is competition for health plan enrollment and ease of movement across insurers, free markets will create lower price points for coverage as well as act as a governing mechanism to prevent large increases in premiums.

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Employees are able to use an employer's health care subsidy to choose the plan options and insurance companies that best meet their needs. Designs would be constant from year to year rather than frequently and unilaterally changed as a result of unanticipated spikes in an employer's cost. Faced with a consumer-based, price-sensitive environment, insurers will be forced to compete for membership to a degree they have not experienced in the large employer market. Transferring accountability to the insurance companies — those who are most able to drive reductions in unit cost and eliminate waste in the system — and rewarding those who are successful in doing so with improved profitability, will have positive impact on cost, outcomes and customer experience.

Aon Hewitt, in developing the first multicarrier, multiemployer private exchange on a national scale for large employers, is at the forefront of this fundamental shift in the way employers provide health care benefits to employees. It is a grand experiment in an environment where grand experiments are needed to keep American businesses competitive in a global marketplace.

Rob Malley is the national health exchange design leader for Aon Hewitt. He can be reached at rob.malley@aonhewitt.com.