What's your client's exchange strategy? Nearly half of employers indicate a preference for moving their employee benefit program to a private benefit exchange and adopting a defined contribution strategy in the next three years, according to the 2012 Aon Hewitt employer survey.
Defined contribution has proven its value in 401(k) plans, but are exchanges the silver bullet many claim them to be? In reality, the current exchange mania is a lot like the Wild West gold rush, and few really understand what's involved.
So whether you're advising pioneers at the front of the wagon train or those content to let others first explore new territories, you must be prepared to help clients thoughtfully choose their strategy. The good news is there are lots of choices. The bad news is there are lots of choices.
Help your employer clients carefully consider their choices related to selecting a private exchange sponsor, and also their motivations for doing so in order to confidently pursue an exchange strategy.
Why move to a private exchange?
Nine out of 10 employers will respond to this question in one of three ways:
1) Manage/limit the employer's share of health care costs through a defined contribution strategy
2) Better manage and/or offload the day-to-day management and regulatory compliance headaches of the benefits plan
3) Improve the engagement of employees in their health care choices
The first two are true to some degree, but neither is as simple as it might sound. The third response is likely the best reason to opt for a private exchange. Let's look at each of these separately.
A defined contribution is not a long-term strategy to control costs. Health care costs will continue to increase and unless employers opt to pay the penalties for not offering affordable coverage, they will need to increase their contributions accordingly. At best, employers will be able to better budget for health care benefit costs. Also, the rules of defined contributions can be far more complex than most imagine.
Choices must be made to ensure the exchange solution supports company-specific needs and characteristics, (e.g., companies with employees located in different states need to ensure fairness and cost efficiency, as well as market competitiveness across multiple markets).
When it comes to management responsibilities, in an exchange environment, the employer retains responsibility for key decisions, including evaluation, vetting and selection of the exchange sponsor and the amount of DC subsidy.
While off-loading day-to-day management may sound appealing, in doing so employers surrender much of their autonomy to make strategic plan design and vendor changes. These decisions are made by the exchange sponsor and negotiated directly with the health plan providers in advance. It is one reason some employers are considering building their own private exchange.
Better employee engagement in health care choices should be the driving decision for moving to a private exchange. By their very nature, exchanges offer more choices. And with more choices comes better choices by employees who choose coverage best suited to their needs - particularly if the exchange provides tools to help employees understand their options in light of personal and family needs.
The win-win element for the employer is that, typically, employees will opt for higher deductibles or lower-cost benefits compared with a traditional benefits program with limited options.
On the flip side, standard insurance models indicate that more choice eventually results in increased cost. So, it's yet to be seen if employers will find their costs increase or decrease with an exchange model.
Private exchanges can deliver significant value; but to help clients effectively assess the options and make good, long-term choices, you need to help them understand their motivations.
What is the DC strategy?
The defined contribution strategy is a critical aspect of choices. As noted previously, a defined contribution approach will not save employers from rising health care costs. Rather, savings will come from employees opting for the most appropriate level of coverage or choosing lower cost plans due to reduced employer contribution.
Reduced employer subsidies may also motivate individuals to participate in a wellness management program, which then needs to be managed as part of the exchange.
Most importantly, employers must consider how to transition from the current strategy to a contribution strategy without creating big winners and losers in the process. Not only is health care inflation fully transferred to the employee, but also the added cost of choice due to risk segmentation within a relatively finite population.
Consider the calculation required by a DC strategy and whether the exchange platform will support this. There are limitations to some platforms and there is still little in the way of standards or consistency in these nascent, but rapidly proliferating solutions.
Regardless of the planned defined contribution strategy, employers must consider the possibility that the exchange will fail to reduce health care costs and consequently the employer must decide whether to increase its contribution or pass along those costs to the employee.
Opting for the latter may impact recruitment and retention, as the value of your contribution will be very transparent in the exchange environment.
Again, choices need to be made on the front end that anticipates potential consequences on the back end.
What will be the benefit options?
Once a decision has been made to shift to a private exchange, employers must consider specific offerings:
* Single versus multiple carriers?
* Medical only versus multiple benefits, such as dental, life and disability?
* Individual versus group fully-insured versus group self-insured?
* Which employee populations will be using the exchange?
* Full-/part-time active, pre- and post-65 retirees, 1099 contract workers?
* Will a wellness program be linked to the DC strategy?
These decisions will significantly impact the selection of an exchange platform and its complexity. The more complex the offerings, the more flexible the platform must be.
To maximize the value of expanded plan choices, employees will need a lot of support in the decision-making process, particularly if they're transitioning from a plan with limited options. Psychosocial research suggests that less, not more, health care choice is preferred by employees.
This is in sharp contrast to the earliest exchange pioneers with their "build your own" health care plan concept. At the same time, consumer research shows that selecting health care options is viewed more like dating (right fit) than shopping (choice) by consumers.
Only time will tell how successful the exchange model with vast choices will be. Consumerism advocates cite the coming retail revolution of employee benefits. The rapid change to digital delivery in music/entertainment and finance/banking suggests it is plausible.
The consumer model has come a long way and is significantly shaping how the employee chooses benefits.
That said, "shopping technology," including interactive tutorials, will not eliminate the need (or desire) by individuals to talk to someone about their choices. Extensive choice raises the communications hurdle higher, considering that most Americans still have relatively low health care literacy.
To accommodate expanded communication needs, decision support options may include online chat, recommendation engines and avatars; the technology is getting better all the time.
But the bottom line is that an exchange should deliver support options that are right for employees based on how savvy (or comfortable) they are technically and their access to the Internet in a private setting.
How will it impact technology?
Before employers select a platform, they should consider how a move to a private exchange will impact current HR technology:
* What are the required time and resources to replace or augment the current platform?
* Is the right team in place?
* Are there existing contracts that preclude the employer from moving forward in the desired time frame? If so, can the current provider support the new strategy?
In addition to understanding if the exchange can support the DC strategy and if the appropriate plans can support employees as they make new and different health care decisions, employers must also think about the many administration-related functions:
* How does the exchange help in compliance with the ACA?
* How will billing and payroll deduction processes work?
* Who is administering COBRA?
* How will life events be managed?
* Is there specific reporting that is needed/wanted?
* What are the contractual requirements of the exchange?
* How will the exchange interface with payroll/HRIS?
What's the best process?
As you help client make sense of the myriad of issues surrounding their choice of private exchanges, they will likely look to you for guidance on which exchange sponsor to choose.
You should be fully transparent about any financial interests you may have in a specific platform. If you are unable to represent a full line of options, consider stepping away from the advisory role at this stage.
In evaluating exchange sponsors, clients can expect to hear cost estimates that range from free to $200+ per participant per year, depending on the services chosen. In truth, there will always be some cost, whether in higher premiums or pure administrative service fees.
At this early stage of exchanges the evaluation process is not a simple task, and they may find limited options for talking with others who have experience with an exchange.
If you believe your client would benefit from some independent expert assistance, be aware of any financial interests a consultant may have in a specific exchange or technology which would limit their ability to be fully objective and represent a full range of options.
The Wild West days of private exchanges will eventually get less wild, but it won't happen overnight and there will inevitably be some pioneer casualties along the way. Help your client avoid being one of the wounded by ensuring they make a fully informed decision to enter the private exchange marketplace and understand the many choices they have and the impact of the decisions they will make.
Marcucci is a 30-year veteran financial and operations executive and founder of GruppoMarcucci. Reach her at
EMPLOYERS EXPECT COST INCREASES UNDER ACA
By Tristan Lejeune
While employers can calculate - or at least try to - the number of employees who will be newly eligible for health insurance coverage under the Affordable Care Act on Jan. 1, they have no way of knowing how many will actually elect coverage.
More companies are foreseeing a negative cost impact from the ACA, according to research from Mercer released in June.
Nearly a quarter are still uncertain how they will track wage earners who work variable hours.
In the survey of nearly 900 employers, 9% of respondents say ACA will have little or no cost impact on their bottom line (adding less than 1%), down significantly from the 25% who thought so in 2011. Two years ago, 15% expected costs to rise significantly; today, that number is 19%.
