When I was in graduate school, many of my colleagues and I were intrigued with the concept of “managed competition.” The idea, originally championed by Alain Enthoven, was that employers or groups of employers would allow their employees to choose from among a number of health plans competing on premium and quality. Then, ideally, consumers would be engaged shoppers and competition for their business would lead to better value. This concept also surfaced through “health insurance purchasing cooperatives” and in Medicare as “premium support.”
Despite the academic appeal of Enthoven’s concept, however, many employers moved away from offering employees a choice of multiple health plans as the benefits of becoming self-insured became readily apparent. Federal laws that allow self-insured plans to avoid state regulations, including mandated benefit offerings, helped keep costs down and made these arrangements particularly attractive to many employers. From 2001 to 2010, the number of individuals covered by self-insured plans grew 24 percent, from 55.6 million to 69.2 million.2
But now the pendulum appears to be swinging in the other direction. As states and the federal government enter year three of public health insurance exchanges (HIXs), findings from the Deloitte Center for Health Solutions 2015 Survey of US Employers suggest that many employers are also reconsidering their health benefit strategies. One way they are doing this is through private insurance exchanges (PIX)—online marketplaces that allow employers to shift health insurance coverage away from a defined benefit to a defined contribution. Like the managed competition models of the past, private exchanges present employees with a range of benefit packages (and sometimes plan sponsors). The employer makes a fixed contribution, so employees spend less of their own money if they choose a plan with a lower premium and more if they choose a plan with a higher premium. While many employers began using private exchanges for their retired population, many are considering expanding private exchanges to their active employees.
There is a wide variety of private exchange models. They are created by private sector companies, including health insurance companies and brokerage or consulting firms. The exchange can offer a variety of plans with different premiums, co-pays, deductibles, and coverage options. PIX platforms tend to have consumer-support tools, such as physician finders, user-friendly questionnaires to help identify appropriate plans, cost calculators, and access to ancillary offerings like health savings accounts (HSAs).
A key question about this new version of managed competition is whether private exchanges will drive competition and lower health care costs for employers and employees. The employer respondents are positive about private exchanges. In particular, employers believe they could help decrease costs and provide employees similar coverage but with higher quality and lower cost. Many employers believe that private exchanges could simplify the employer’s role in health care.
Of employers who have adopted private exchanges (11 percent of the respondents), only 8 percent say they are not satisfied with their current private exchange and only one out of five say it has not reduced costs.
Employers cited other benefits. For example, 45 percent of the respondents have seen higher employee satisfaction due to greater control in how they spend their employer’s contribution. Many people like choice, especially if they get the information they need in a clear way. Ideally, private exchanges could leverage some of the best lessons learned from behavioral economics about choice architecture to optimize consumer and employers’ outcomes.
This may only be the beginning of the shift to private exchanges. Thirty percent of surveyed employers that have not adopted one say they are interested in moving to private exchanges, and the majority of those interested (62 percent) say they are likely to move in the next 1-2 years.
As employers increasingly shift their focus toward private exchanges, health plans (and others designing and offering private exchanges) need to understand what they want and what concerns they have. Importantly, almost three-in-four of the surveyed employers prefer or may be open to an insurance carrier-sponsored exchange. As Deloitte recently explained in Private exchanges: Wolf at the health plan’s door?, health plans that ignore the private exchange market run the risk of being left behind.
- Health plans may have less direct access to employers: Private exchanges are aggressively selling the value of their models to employers with an increasingly full suite of end-to-end benefits services. As more and more employers move to private exchanges, access to those benefits may be increasingly controlled by the exchange sponsor.
- Plans may have less access to consumers as they shop: Most exchanges today equip employees to choose a plan one time per year. As private exchanges expand capabilities to support consumers year round, health plans may become further insulated from the consumer, which may shift any opportunities for providing additional products and services to the exchange.
- Health plans may have a harder time differentiating themselves from the competition: Driving to simplify product comparisons for the consumer, some private exchanges have established standard benefit design specifications. Less variation in benefits means less product differentiation opportunities for plans and more price competition.
- Unbundling some services further reduces profit and differentiation: Under some private exchange models, health plans may have a harder time demonstrating value. Certain models carve out pharmacy services, medical management, and/or wellness services. “Unbundling” may make the health plan a commodity that competes only on the remaining product components. This could strip out opportunities for profit and may make health plans less appealing to employers.
Despite facing these threats, private exchanges may be an important new opportunity for health plans and providers. An insurer can bring novel offerings to market, supported by an exchange platform. For example, Fairview Health Services and North Memorial Health Care partnered with Medica, a Minnesota-based health plan, to develop an accountable care organization-based group product offered through the “My Plan by Medica” private exchange.
Based on what employers have reported to us, private exchanges appear to be an increasingly popular platform for employers to deliver health care benefits to their employees. Will they continue to demonstrate value and make employers happy? It may be too soon to tell if private exchanges will fulfill their potential, but if they do, they may significantly impact health plans’ role and value in employer-sponsored health care.