Health Care Exchanges: The New Paradigm for Employer-Based Health Coverage. by Kenneth L. Sperling, CEBS

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1 Innovations in Health Care Health Care Exchanges: The New Paradigm for Employer-Based Health Coverage by Kenneth L. Sperling, CEBS Nine out of ten employers surveyed plan to respond to the Patient Protection and Affordable Care Act (PPACA) by moving to either a more requiring philosophy toward employer-sponsored health care or a corporate exchange. The choice between the two will depend on how much the company believes its core value proposition to employees is built around health care benefits. For companies that do not believe plan design drives engagement, would like to move to an environment where liability is fixed and administrative burden is reduced, and would like to enhance the choices available to employees, the corporate exchange will emerge as a vehicle to achieve these objectives. The Patient Protection and Affordable Care Act (PPACA) is perhaps the most significant piece of social legislation since the enactment of Medicare in For the first time, both employers and individuals will be required to offer and purchase health insurance coverage or face financial penalties. State- and federally based health exchanges will be constructed to offer an efficient marketplace for individuals and small businesses to purchase this coverage, with federal subsidies available to assist lowincome individuals. Insurance companies will no longer be able to refuse coverage based on an individual s medical history, nor will preexisting medical conditions be used to determine the availability or price of health insurance. These are fundamental changes to the health insurance system as we know it in the United States; PPACA hopes to create a viable and competitive individual insurance market where one does not exist today. Beginning as early as 2014, there will be an alternative to the employersponsored system that currently provides health insurance coverage to 170 million Americans... over half of all U.S. citizens. 1 At the same time, employer health care costs continue to escalate at double-digit rates, threatening U.S. companies ability to compete in a global marketplace. Since the day PPACA was signed in March 2010, corporate leaders have been focused on two concurrent paths: the tactical path of what I need to do to comply with the law both now and in the future, and the strategic path of what I want my program to look like when the law s major changes take effect in The first decision is a binary one: Am I in or am I out? Do I believe that health benefits are a core element of the employment deal with employees and that there is a direct connection between health benefits and the larger goals of attraction, retention and productivity? Or is my responsibility as a corporation to pay for talent and give my employees access to the most competitive and tax-efficient options to purchase health insurance on their own? BENEFITS QUARTERLY, First Quarter

2 The Four Decision Paths The binary decision of whether or not to offer health insurance coverage is best evaluated by splitting each decision into two possible directions, or paths, that an employer can follow. If the decision is to remain in the game and continue to sponsor health insurance coverage, the employer has two options: continue managing the cost of the benefit on an annual basis by trying to close the gap between top-line health care trend and what the business can afford by changing plan design, increasing payroll contributions and managing vendor contracts. Or, become more requiring with employees in order to access a very substantial subsidy or comprehensive benefit. This house money, house rules strategy would require completion of a health risk questionnaire, biometric screening and/or achievement of specific health outcomes to have the lowest payroll contributions or the richest benefit design. About half of employers Aon Hewitt surveyed indicated this more requiring path was likely going to be a part of their long-term strategy. If the employer seeks to move away from providing health care benefits, there are two additional paths. One is exiting completely by terminating the plan, paying the free rider penalty and sending employees shopping in the state and federal exchanges. Aon Hewitt s recent survey of 540 employers indicates very few employers are seriously considering this strategy due to the far-reaching employer relations consequences, and the belief that a weakening of the employer-sponsored system will likely trigger a rise in the employer penalty, thus eliminating any financial benefit to the employer. The second path, and one that is attracting increased attention from the other half of the employer community, is to continue to subsidize health insurance but have it delivered through a private or corporate exchange. What Is an Exchange? An exchange can best be described as a shopping mall for insurance. In a traditional shopping mall, the mall owner collects rent from store owners to occupy space in the mall. Why would a store owner pay rent to the mall owner? Because the mall represents an efficient place for people to go shopping it brings foot traffic and potential buyers into the stores. The mall can bring more traffic than a store owner can get from opening a standalone property, so the rent is worth the volume delivered. Since there is more than one store in the mall, retail prices have to be com- petitive or the shopper will just buy from a different store. A health insurance exchange is very similar. The exchange manager contracts with insurance companies and brings foot traffic in the form of individuals or employees wishing to purchase insurance. The more volume, the more attractive participation in the exchange becomes for the insurer. The exchange manager collects a fee or commission based on enrollment. Insurers must offer competitive prices, or consumers will buy from a different insurer. It is this competitive, efficient marketplace that the drafters of the health reform bill hope will drive down health insurance costs. The Retiree Exchange A Model That Works Today The exchange concept as an alternative to traditional employer-sponsored health insurance works only if all participants are able to purchase coverage. This is the primary reason health insurance exchanges have not developed for actively employed individuals, and why they have developed for Medicare-eligible retirees. The Medicare Supplement, Medicare Advantage and Medicare Part D markets do not ask medical questions or deny applicants coverage based on preexisting conditions. A viable individual marketplace exists, with hundreds of competing plans offering significant value. The exchange serves as a centralized place to help seniors pick the plan that is best for them, complete the enrollment process and, in some cases, offer ongoing customer service and advocacy services. The success of exchanges in this market, combined with the changes in the tax treatment of government subsidies available to employers that provide retiree health coverage, has started a major shift toward exchange delivery as a preferred employer strategy. Nearly three-fourths of large employers are considering or already making changes to their retiree health care benefit programs, according to Aon Hewitt research. The economics of providing traditional employer-sponsored coverage are changing, and employers will seek the most cost-effective and tax-efficient models in increasing numbers. Retiree health exchanges are particularly attractive to companies that have fixed their health coverage subsidies, through FAS 106 (now ASC ) caps or defined dollar/service-based formulas. Once an employer contribution is fixed, managing retiree health benefits offers no return to the company. The wide variety of individual products in the open market allows retirees to use their employer subsidy to 18 BENEFITS QUARTERLY, First Quarter 2012

3 buy the coverage that suits their needs. Very often, individual Medicare Advantage or Medicare Part D plans can be purchased at lower rates than the employer can offer comparable coverage due to the federal subsidies available to issuers of these plans. By replacing the traditional retiree medical plan with an exchange platform, employers are not abandoning their retirees quite the contrary. For the same dollar subsidy, the employer is providing more choice, greater value and, in many cases, enhanced customer service. The Corporate Exchange The Next Innovation in Health Care Benefits As mentioned previously, the reason the exchange concept has not become prevalent in the non-medicare market is the lack of guaranteed access. As long as insurers can deny coverage based on medical history or preexisting conditions, an employer cannot use the individual market in place of employer-sponsored coverage. Even in states where high-risk pools exist, the cost of coverage is prohibitive for most. Regardless of whether the mandate for individuals to buy insurance coverage holds up under judicial review, the ability of insurers to medically underwrite will expire in The individual health insurance market will become viable at this point, though it may take a year or two for the insurer community to become comfortable with the new risk pool entering the state exchanges and nonexchange plans. The viability of the individual health insurance market also allows exchanges to develop in the private sector, similar to what has evolved for Medicare retirees. The corporate exchange concept has the potential to transform the way in which employers provide health coverage to employees, and over time create a competitive, efficient and consumercentric marketplace in which employees can choose coverage that follows them from employer to employer. Aon Hewitt, which already offers a retiree health exchange called Aon Hewitt Navigators, is now developing a first-of-its-kind exchange for active employees and their dependents. Here s how the new exchange will work: On behalf of each company wishing to join the exchange, Aon Hewitt would solicit group-specific insured rates from both national and regional plans that have contracted to provide coverage through the exchange. The employer would then decide how much credit to provide employees to purchase coverage. This credit would likely differ based on the Over time, jumping off the health care trend curve can create significant cost savings and increased shareholder value. employee s family status, with higher credits given to employees wishing to purchase family coverage (similar to today s model). The employee would then take this credit and enter the exchange through a centralized portal with both Web and phone support. The employee would see various plan options expressed in metallic levels similar to how the state exchanges will operate bronze for the least expensive plan, followed by silver, gold and platinum options, each representing richer levels of coverage and increasing prices. While a bronze plan from one insurer will be the same coverage as bronze coverage from another insurer, their prices may be different reflecting their own competitive positioning, network size, provider discounts or assumed care management program effectiveness. The employee chooses a metallic level and insurer that best meets his or her health insurance needs and personal budget. If the employee has a credit of $500 per month, for example, and picks a plan that costs $600 per month, then he or she would pay the additional $100 through pretax payroll deductions. As in today s model, the employer would decide how much to increase the credit amount each year. However, rather than being a hidden subsidy, where all the employee sees is that his or her own contribution is increasing, the employee can see the explicit employer contribution increasing as well. The employee can make the decision whether to drop down to a lower level of coverage and avoid an increase in BENEFITS QUARTERLY, First Quarter

4 payroll contributions, or keep the coverage he or she has today for an additional cost. The introduction of consumer choice is a much more satisfying outcome than employees feeling the company has unilaterally taken more money out of their paychecks. For the employer, this movement to a defined contribution approach toward health care benefits allows for greater alignment with total rewards, and the subsidies can be set to increase at a compensationlike rate of trend (2% to 3%) versus a traditional health care rate of trend (7% to 10%). Over time, jumping off the health care trend curve can create significant cost savings and increased shareholder value. If the exchange concept performs as designed, the lowering of the employer s rate of trend would not necessarily be cost shifted to employees. The exchange will be a competitive environment where insurers have strong motivation to increase operational efficiency, eliminate programs that have little return on investment and look for opportunities to reduce top-line cost. These motivations do not exist in the current self-insured world, where the accountability for higher-than-expected costs reverts to the employer, not the insurer. If a true consumer market can be created, efficiencies will translate into lower premiums and subsequent lower rates of increase over time. Ultimately, the corporate exchange will transition from a group-based model to individual policies once the individual marketplace becomes stable and competitive likely some time after At this end state, the employer will no longer have group programs (except those necessary to meet PPACA requirements), filing requirements or fiduciary responsibilities. The individual would have access to the universe of plans available in the exchange and, if terminated from the company, he or she would lose the employer subsidy but not the underlying coverage. As the insurance contract will be between the THE AUTHOR Kenneth L. Sperling, CEBS is Aon Hewitt s Global Health Care Practice leader based in Norwalk, Connecticut. He led Hewitt s health care reform team, continues to advise government agencies in the implementation of PPACA, and is a co-developer of Aon Hewitt s corporate exchange. He has over 30 years of industry experience. individual and the carrier, coverage may continue. For the first time, the employer-based system would be able to provide true portability of coverage. CO- BRA would no longer need to exist. 2 Changing Employee Behavior An important advantage of the corporate exchange is that it helps employees see the value of their coverage, and could persuade employees to take more responsibility for their health. Currently, employees may choose relatively rich coverage because it is subsidized by the employer and few other options are available that are perceived to offer greater value. Since employees do not see the employer subsidy, they don t realize how much money is actually being spent to pay for that insurance. In an exchange, employees clearly see the employer s share. Their first reaction may be surprise at how large that amount actually is they may realize for the first time that the employer is paying for the lion s share of their health coverage. They will also see that if they choose a more expensive health insurance option, they ll pay more out of their paychecks and, for some options, a lot more. This may lead to the light-bulb moment the realization that the most affordable coverage comes with deductibles and cost sharing, and if they want to reduce their exposure they ll need to start paying attention to what things cost and the behaviors that generate health care expenses. That may mean using the decision-support tools available for choosing the right doctor, getting the right treatment and doing the right things such as exercising, losing weight or stopping smoking. Healthy employees can benefit, as well, by taking advantage of the range of options available. When employees are in their 20s and relatively healthy, for example, they may choose less expensive plans. In their 30s and 40s, they may want to increase their coverage, and in their 50s and beyond, they may want to invest in plans that will protect them even more. If the exchange is successful, where do the savings go? Some goes into the pockets of employees, who are buying more cost-efficient plans and reducing their paycheck contributions. Some goes to employers, which can pocket the savings or reinvest in other programs within the company that can drive employee engagement such as increased 401(k) match, paid time off, training and development, tuition reimbursement or wellness programs all programs that may better engage the workforce than a larger contribution for health insurance. 20 BENEFITS QUARTERLY, First Quarter 2012

5 House Money, House Rules or Corporate Exchanges: Which Is Best? Aon Hewitt s retiree exchange is already in place, and the corporate exchange for active employees will be operational once a critical mass of employers has signaled a willingness to participate. For nine out of ten employers surveyed, the future holds either a movement to a more requiring philosophy toward employer-sponsored health care or a corporate exchange in either case a significant movement away from the annual trend mitigation strategies many employers use today. The choice between the two will depend on how much the company believes its core value proposition to employees is built around health care benefits. If there is strong evidence that benefit design, steerage mechanisms and integration across benefits impact the health of the workforce, and the company-branded benefit significantly impacts attraction and retention, then keeping the current employer-sponsored model is in strategic alignment with the business. However, if the company does not believe plan design drives engagement, would like to move to an environment where liability is fixed and administra- tive burden is reduced, and would like to enhance the choices available to employees, the corporate exchange will emerge as a vehicle to achieve these objectives. Even though employers are large purchasers of health care, individually they have very little control over the health care market. They have no control over supply the number of hospital beds, doctors or MRI machines in a market. They have little control over demand, even though utilization levers and wellness programs have been trying to reduce demand for health care for years; these have demonstrated mixed success. The only thing an employer can do within its span of control is to create a competitive market for health insurance and, by doing so, create opportunities for insurance companies willing to drive the system toward greater efficiency. The rewards should be worth the risk. b Endnotes 1. U.S. Census Bureau, Income, Poverty, and Health Insurance in the United States, The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time under certain circumstances. International Society of Certified Employee Benefit Specialists Reprinted from the First Quarter 2012 issue of BENEFITS QUARTERLY, published by the International Society of Certified Employee Benefit Specialists. With the exception of official Society announcements, the opinions given in articles are those of the authors. The International Society of Certified Employee Benefit Specialists disclaims responsibility for views expressed and statements made in articles published. No further transmission or electronic distribution of this material is permitted without permission. Subscription information can be found at iscebs.org International Society of Certified Employee Benefit Specialists BENEFITS QUARTERLY, First Quarter