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Health care exchanges enabling employers to move toward giving cash allowances to workers for medical coverage

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Health care exchanges enabling employers to move toward giving cash allowances to workers for medical coverage

For decades, employers have followed a near-universal model in providing and funding health care coverage to their employees and retirees.

Under that model, employers have offered employees and retirees a fixed number of plans to choose from, with employers paying a certain percentage — often around 80% — of the premium.

In the case of large employers with 500 or more employees, companies typically self-fund the coverage.

But that model is starting to change, amid continued and unsustainable cost increases, employers and consultants say.

More employers are turning to a new and growing model: private insurance exchanges.

Rather than employers paying a fixed percentage of the premium or, in the case of self-insured employers a premium equivalent intended to match a percentage of total claims costs, private insurance exchanges use a defined contribution approach.

Under a defined contribution approach, employers provide a fixed amount of money that employees or retirees can use to select coverage from commercial insurers offering coverage through the exchanges.

If the money employers provide employees and retirees doesn't cover the premium charged for an exchange plan, the employee or retiree will have to pay the difference.

Conversely, if the employee or retiree opts for a plan that costs less than the money or premium credit provided by the employer, the difference can be applied to cover out-of-pocket expenses, such as deductibles and copayments.

The private insurance exchange/defined contribution model is the “wave of the future. They make so much sense,” said Vince Ashton, president and CEO of HealthPass New York, a New York-based health insurance exchange.

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For some employers, the future is now. Such well known employers as Aon P.L.C., Darden Restaurants Inc., Sears Holdings Corp. and United Parcel Service Inc. now utilize private insurance exchanges .

“It was a choice issue. We knew the plan choices would be better than what retirees had before,” said Al Rapp, corporate health care manager at UPS in Atlanta. In January 2012, UPS shifted coverage for about 8,000 Medicare-eligible retirees age 65 and older from a single self-insured UPS plan to an insurance exchange Aon Hewitt Navigators. Now the retirees, depending on where they reside, can choose from nearly three dozen plans.

There are several factors propelling employer interest away from the traditional way of providing coverage and toward private exchanges.

One factor is cost predictability. Typically, with private exchanges, the coverage offered is fully insured and employers are not exposed to unexpected costs if, for example, there was a surge of costly claims.

“The employer is going to know its costs,” Mr. Ashton said.

At the same time, through an exchange approach, employees and retirees will have a much greater financial incentive to use health care services more carefully compared with more traditional ways of providing coverage.

For example, if a retiree selects a plan with a low premium but high out-of-pocket expenses, the individual has a strong incentive to use health care services carefully.

To bring costs more under control, employees and retirees “have to be more actively involved in managing costs.

There has to be greater accountability,” said Greg Besio, executive vice president and chief human resources officer with Aon P.L.C. in London.

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“If my maximum out-of-pocket expense goes from $500 to $5,000, I'm going to be become a lot more thoughtful” in using care, Mr. Besio said.

Still, private insurance exchanges aren't for all employers. “Culturally, very paternalistic employers may not be prepared” for such a change, said Maureen Scholl, CEO for exchanges with Aon Hewitt in Lincolnshire, Ill.

And for those employers that opt for exchanges, the first-year transition can be challenging.

For example, the myriad plans available through exchanges can be overwhelming for retirees who for years have had only one or two health care plans from which to choose and now may have dozens.

“You have to provide a lot of hand holding. Retirees need help in understanding what is the right policy for them,” said Rob Panepinto, managing director of the exchange solution division at Connextions Inc. in Orlando, Fla.

To that end, private insurance exchanges employ staffers to help employees and retirees choose plans appropriate for their medical needs.

Through offering advisers at open enrollment, “we can help people identify the right plan for them,” Ms. Scholl said.

“We make sure no one is left behind. We make sure everyone gets a fair chance” to enroll in a health care plan that best meets their needs, said John Connor, founder of Transition Assist, a Norwell, Mass.-based exchange.