On the surface, private exchanges seem right in line with American consumerism: Provide an open platform and let each employee pick the exact plan that meets their needs. And for employers, a defined contribution approach to health care coverage seems like a great way to wash their hands of all the compliance headaches. This may very well be the future, and many are racing to market with exchange platforms. But most have built their platforms in the hopes they will come. Right now, the barrier of entry is too high. Not only do these platforms not have the critical mass to make them affordable, there are a number of other hurdles that Advisers need to be aware of before offering these solutions to clients, including:
- Pioneers have a chance to get slaughtered. Private exchanges available now are largely untested technology tools and many times are being developed by startup companies.
- Insurance carriers don’t want to be side-by-side. That means that exchanges will be limited to only those carriers and plans that agree to participate in a particular platform. Choosing the right “store” for each customer will be critical.
- Carriers don’t operate under universal enrollment feeds. This makes the administrative processes under these platforms extremely complex. Advisers need to make sure the platforms they are pitching have this workflow properly designed. Otherwise the worthy goal of taking the last major paper-based process paperless will end in disaster.
- Technology expertise is not a given. Carriers and consulting houses are experts in health care, not necessarily technology. For an exchange to work, the underlying technology has to be designed by experts.
- Technology won’t replace human interaction altogether. The idea that HR won’t have to help employees in these new platforms is pretty optimistic thinking. You can have all the online tutorials and comparison charts you want, but most will still want to talk their enrollment options through with a person. HR and advisers must prepare accordingly.
- Defined Contribution is not as easy as it looks. The gaming rules can get pretty complex, leaving employers with burdens they didn’t anticipate. Do you require the money to be spent on certain minimum levels of coverage? Do you provide tiered contributions based on whether someone completes a health risk assessment? Do you provide different contributions for smokers vs. non-smokers? What is the right level of contribution to still be in compliance under PPACA? Advisers need to be ready to advise employers on the complexities of setting up each employer’s system.
- The concept of Defined Contribution is not a long-term strategy to control cost. If a sponsoring corporate plan decides not to increase their contribution to keep pace with general medical inflation, then there is a huge risk that the lower paid employees will go to the Public Exchange to take advantage of the Government Subsidy. A family of four who makes $88,000 or less is eligible for the Government Subsidy, so this will apply to a great number of a plan sponsors employees. The effect would be the Plan Sponsors own underwriting pool would go into its own “death spiral” as the young healthy leave their plan for the Public Exchange.
Mangan is CEO of United Benefit Advisors (UBA), the nation's leading independent employee benefits advisory organization with more than 270 offices throughout the U.S., Canada and the U.K.
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