Are private exchanges the future of employee benefits?

Most benefit industry professionals agree that the concept of employee choice, which is at the essence of the private exchange, is a viable option for employers looking to control  health care costs, retain and attract employees and cater to an increasingly consumer driven world. But that’s  where agreement on the topic ends. 

See related: What is a private exchange, anyway?

See related: One-third of employers eyeing private exchanges

Joe Markland, president of HR Technology Advisors — a company assisting brokers and their clients on the technology side of benefits — says he disagrees with advisers who think private exchanges are the future of employee benefits. For starters, he says benefit advisers, brokers and agents should not be in the private exchange business, as so many are creating their own branded platforms.

“Brokers risk losing business if they go into an employer with  a proprietary exchange or benefits-only technology and do not consult the client first on what technology they want to use on HR and payroll,” he says. “The private exchanges are combining the insurance products and the technology and that should be a separate decision. So the brokers who go in with a packaged private exchange run the risk of being a bad adviser to their client and therefore losing business.”

‘In a different direction’

Markland’s own research shows that in 2013, 90% of 330 employers he surveyed want a benefits and payroll technology combination. That’s up from 55% of employers that said the same in 2011.

He says employers will soon demand this integration of benefits, payroll and HR administration and “private exchanges are going in a different direction” because they keep the benefits selection separate.

Technology companies like ADP, Paychex and Ultimate Software, which already have business with most employers on the payroll side, can add benefit selection capabilities to their portals, according to Markland. This would essentially create a private exchange in the same medium employees use to log on to request time off and HR supervisors manage employee address changes, for example. ADP has the most market share of such companies at 46%.

“ADP is going to be the biggest platform that enrolls people with employee choice  in two years,” he predicts, adding that ADP isn’t going out to market their company as a private exchange. Rather, employers and advisers will ask for this integrated approach as his aforementioned research suggests they want.

ADP did not immediately comment on their capabilities.

Just one option

Nancy Thompson, senior vice president and director of sales at CBIZ Benefits & Insurance Services Inc., says it’s an “aggressive” position on ADP. She says private exchanges are just one option that advisers should be bringing to the table of solutions for clients that need to deal with Affordable Care Act compliance and rising health care costs. She thinks integration of HR, benefits and payroll is not headed in the direction of a total takeover, even within a few years.

“While integration is desirable … there’s no guarantee that will work for every employer,” she says, noting that a private exchange platform designed specifically for benefits like Liazon’s would handle plan design and compliance issues with a sophisticated level of expertise. The compliance issues around employee choice are very nuanced, “if certain insurance products are chosen in a private exchange cafeteria plan, they become subject to ERISA and 5500 prep and discrimination testing may apply,” she says.

Thompson adds that the main driver of a private exchange is the defined contribution model that drives health costs — largely one of the biggest spends at any company — down. “The administrative solution on the back end with integration, you can demonstrate some ROI sure, but the conversation an adviser or employer’s having with the CFO is around defined contribution and plan design,” she says.

CBIZ has partnered with technology company Liazon on the firm’s own proprietary exchange solution, something Thompson says is crucial “in light of the competitor’s all being in the space.” She notes that her firm stays “agnostic” by asking first what their clients need in terms of a culture of benefits and only present the private exchange if it’s a suitable option to consider.