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The pros and cons of private health insurance exchanges


Private health insurance exchanges pack pros and cons for employers and employees that require both sides to make some choices.

At least so far, the advantages seem to outweigh the disadvantages when it comes to private health insurance exchanges, according to several consulting firms and health insurers that have established private exchanges or are in the process of doing so.

“Anytime you change the status quo, you create unease; but in the case of exchanges, you're essentially shifting certain burdens from employers to the exchange, which for some companies, especially smaller ones, is a very good thing,” said Shawn Nowicki, director of health policy at HealthPass New York, a 12-year-old private commercial health insurance exchange.

HealthPass, which covers some 30,000 lives linked to 3,700 businesses, is open to New York state-based companies with two to 50 employees as well as sole proprietors.

“An exchange is a marketplace where you bring buyers and sellers together and create competition and efficiency,” said Ken Sperling, national health care exchange strategy leader in the Norwalk, Conn., office of Aon Hewitt.

“Since the employee is given the choice of myriad health insurance options that are very competitive, he or she can make a decision that best meets their particular needs, which we view as offering superior value over a traditional employer-sponsored plan,” Mr. Sperling said.

Other observers share this view.

“An employer-provided plan may provide an employee with two or three different plan designs, none of which may meet the needs of the individual,” said Sherri Bockhorst, principal, health and productivity, at Buck Consultants L.L.C. in St. Louis. “Additionally, those plans are often times offered through a single vendor, further restricting the choices for the employee.”

Buck Consultants has established a private exchange for retirees aimed mainly at companies that are ending or have ended company-provided retiree benefits, and is working on developing an exchange for active employees.

Private health insurance exchanges obtain their revenue through commissions or fees, Ms. Bockhorst said.

Generally, employers provide a specified dollar amount toward the coverage, and the individual selects from packages offered by the exchange.

“Employees have more control—only they make the decision about whether to pay more for a richer plan or pay less for a less-rich plan,” Mr. Sperling said. “And they have a user experience that feels more like a shopping experience akin to an or Zappos.”

The key downside for the employee is having so many options that selecting one is a bit like tossing darts.

“It's the tyranny of choice,” Mr. Nowicki said. “That's why the exchanges are being careful with regard to how much choice they offer. There are different purchasing models—beginning with a clearinghouse approach where the employer takes all comers and any carrier can offer a plan, to more of a selective contractor approach where the employer agrees to work with all carriers, but then whittles down the choices in the end.”

Another potential downside is how individual health insurance may affect cost.

“If you push an individual product to employees that might not be in the best of health, you will definitely see some winners and some losers,” Ms. Bockhorst said. “Clearly, the benefit of group insurance is lost for less healthy employees and their dependents.”


Ken Dallafior, senior vp of group sales and corporate marketing, at Detroit-based Blue Cross Blue Shield of Michigan, cited an advantage for employers.

“If you're in an industry that is highly competitive in terms of recruiting and maintaining talent, you have better control of the process and the plans that are offered to employees, which can affect your talent objectives,” he said. Blue Cross Blue Shield of Michigan is one of three insurers that established Bloom Health Corp., a nationwide private exchange based in Minneapolis.

Another benefit for employers is administrative: Since the premium billing and enrollment burdens happen within the private exchange, there is less administrative burden for employers.

“The exchange sends a consolidated bill, minus the employee contributions, and then divvies up the employer contribution among the different carriers,” Mr. Nowicki said. “In essence, you're taking the administrative burden off `Joe's Pizzeria' and transferring it to the health care exchange.”

Mr. Sperling agreed that employers benefit by being able to “jettison low-value activities such as vendor management and plan design, to focus on things that really matter like employee health and productivity.”

For retirees using Medicare Advantage plans, there is “a competitive marketplace that makes the employer's subsidy and their own contributions go much further, in terms of the coverage they buy and the value they can obtain,” Mr. Sperling said. “You have an entity—the exchange—that will help them navigate through the choice-making process.”

Aon Hewitt last year announced that it would establish a health care exchange for corporate clients based on its existing retiree exchange model, a rollout an Aon spokesman said is expected in 2013.

As for insurers, “they're not winning or losing big pockets of employees,” Ms. Bockhorst said. “Some are already well-positioned in the individual market, while others have always focused on the group side and don't have individual products filed or marketing plans and distribution channels in place.”