How Do Health Exchanges Fit With Your Health and Welfare Benefits Strategy? by Randall K. Abbott

How Do Health Exchanges Fit With Your Health and Welfare Benefits Strategy? by Randall K. Abbott

Public and private health exchanges have created new opportunities and new decisions for employers as they consider how they will deliver health care coverage to their employees and retirees in the years ahead. Until recently, employers have had only one avenue for providing health benefits: a selfmanaged group benefit plan. Now, with the advent of the public exchanges (also known as marketplaces) under the Patient Protection and Affordable Care Act (PPACA) and the growing availability of private exchange arrangements, companies can consider which of the three approaches (self-managed, private exchanges and public exchanges) adds the greatest value for the organization and for the employee or retiree. Deciding on an appropriate strategy requires an understanding of the opportunities, value and fit for both the organization s health and welfare benefit strategy, and its broader total rewards strategy. These new benefit delivery options introduce the need to consider the best benefit delivery opportunity for unique segments of the population. With the goal of connecting people with value, one must examine each population cohort and determine which channel provides optimal value. Over the last few years, it has become clear that a private Medicare exchange connecting Medicareeligible retirees to the individual Medicare insurance market delivers great value. For part-time workers (those working under 30 hours a week), certain low-wage workers, COBRA participants and pre-medicare retirees, the emerging public exchanges hold promise thanks to guaranteed-issue coverage, a plan choice, favorable underwriting for older ages, and the potential availability of subsidies that reduce premiums and improve benefits at the point of care. While the new public marketplaces have gotten off to a highly publicized rocky start, many employers are watching them closely as an avenue for these population segments in 2015 or beyond. For employers with significant very-low-wage populations, the expansion of Medicaid can create an opportunity to channel these workers to the new Medicaid programs without penalty. For active employees (actives), the question facing employers is, How can I sustain my health plan beyond 2018 in the face of the excise or Cadillac tax on high-cost plans? This is a known business risk for 60% of large employers in 2018, with even higher percentages following shortly after the tax launches. These employers must consider the best 60% of large employers in 2018 face a known business risk. way to achieve a high-performance health plan (one that reduces cost and the rate of future cost escalation, and improves workforce health, and the efficiency and quality of care delivered). An employer facing this question has two choices: 1) build on its own health benefit platform to achieve the needed level of performance using aggressive plan design, increased employee engagement, more effective care and condition management, state-ofthe-art pharmacy management and robust provider contracting, or 2) seek to buy a high-performing private exchange solution that does the work for it. As an employer faces the build or buy decision for a health benefit plan covering actives, the discussion quickly moves to a strategic one that strikes at the core principles of the employer s role in providing health benefits: who the plan will cover, how it will subsidize those enrolled, and how the decision will change its deal or value proposition with employees. Nearly half of the employers surveyed by Towers Watson in the late summer of 2013 indicate that these decisions will be made within a total rewards context. Recognizing the strategic nature of this discussion, it is important to take into consideration the tangible economic value of transitioning to a high-performance private exchange, and how such a transition changes the employer role, affects employees and changes the broader employee value proposition. A high-performance private exchange provides an employer with the opportunity to acquire the best available programs and resources to help assure the long-term affordability and sustainability of its health benefit offering. It introduces highly engaging benefit designs, robust consumer empowerment tools, best-in-market contracting arrangements, optimal care and condition management, and embedded incentives for wellness and personal health improvement. 2 towerswatson.com

Its goal? Quite simply to bring forward a suite of solutions built specifically with the best options to help the employer deliver high-performing plans that optimize efficiency (lowest cost of delivery) while maintaining engaged consumers (participants) and a healthy workforce. Also, staying below the excise tax threshold is key, and we expect employers that deliver on these objectives will also stay below the threshold for the foreseeable future. Certainly, an employer can amass these capabilities on its own. Some have already done so, and some will be able to do so with concerted and focused effort. But for those employers that have struggled to manage current costs, failed to mitigate cost trend, or are simply tired of continuing to deploy their scarce internal resources, time and money to achieve this goal, the private exchange premise for actives offers a valuable alternative. That being said, use of a private exchange strategically shifts the traditional employer role in active worker health benefit delivery. While the employer remains the plan sponsor and maintains all customary obligations under state and federal law (including ERISA and the PPACA), the employer cedes considerable day-to-day control of the program to the exchange operator. Typically, the exchange has predefined plan design options; assumes many day-to-day plan and vendor management activities; and takes on a major portion of communication, administration and member servicing. This can be welcome news to many employers weary of the health benefit management role, but does require a fundamental rethinking and acceptance of a different role in tandem with a private exchange partner. As big a change as moving to a private exchange is for employers, it is just as big for their active employees. Strategically, the employer will want to carefully consider its employee communication and change messaging, including how the employer role and financial commitment will shift. Employees often find the participant experience and the often-expanded benefit choice and carrier options of a private exchange an improvement over a former self-managed plan. However, the employer s decisions associated with its financial commitment to subsidizing benefits can play an important part over time. As a result, many active employee private exchange assessments include a discussion of defined contribution (DC) approaches that cap or control the employer s subsidy either initially or over time. For an employer that reduces or plans to reduce its subsidy over time, a DC approach can impact employee reactions to the change, especially if the employer subsidy is reduced or lags annual cost increases in future years. While the decision to employ a DC strategy is independent of the decision to use a private exchange, it can be facilitated by a private exchange offering of multiple plan choices and multiple carrier options (typically referred to as multicarrier/ multi-option exchanges). Should the employer s health care offering be insured or self-funded? Public exchanges and private Medicare exchanges both utilize fully insured, individual Virtually all large employers elected self-funding many years ago. Few are willing to assume the additional risk premium and adverse cash flow associated with transitioning back to insurance, nor are they willing to lose ERISA preemption in exchange for one-year term-insurance cost certainty. insurance products. For actives, group arrangements prevail with both insured and self-funded options. Virtually all large employers elected self-funding many years ago. Few are willing to assume the additional risk premium and adverse cash flow associated with transitioning back to insurance, nor are they willing to lose ERISA preemption in exchange for one-year terminsurance cost certainty. This is especially true since all active private exchanges rate groups on their own actual experience. As a result, any short-term premium rate advantage will be rated accordingly at the next renewal. Nonetheless, some employers are prepared to assume the added 6% to 11% insurance risk premium and loss of ERISA preemption in exchange for a year of fixed costs. The availability of private exchanges for active workers unquestionably introduces a new opportunity and new 3 towerswatson.com

decisions for employers. This opportunity for Medicareeligible retirees, in existence for nearly a decade, has won strong votes of confidence from both employers and retirees who have transitioned from a traditional employer-sponsored plan to a private Medicare exchange. Employers and retirees benefit from a more attractive risk pool and the availability of enhanced federal funding for Medicare Advantage products. Retirees typically enjoy more choice, concierge-style decision support and often equal or better benefits for equal or less money. Those employers with traditional group plans covering Medicare retirees should actively explore this approach as part of their strategic planning. Private and public health benefit exchanges must now be factored into strategic planning for health and welfare benefits along with the traditional selfmanaged approaches. As these exchanges emerge, many will offer benefits beyond health coverage alone, giving rise to a new opportunity for delivering nonhealth benefits as well as voluntary benefits. However, the greatest potential for the exchanges lies in connecting unique population cohorts to the greatest value as an employer aligns its health and welfare strategy to the post-reform health landscape. For employers covering active populations, achieving a high-performance health plan is an immediate imperative. With fewer than 48 months remaining until open enrollment for 2018, prudent employers need to carefully examine the business risk they face relative to the excise tax, understand the liability and Private and public health benefit exchanges must now be factored into strategic planning for health and welfare benefits along with the traditional self-managed approaches. determine whether they are best served by building their own high-performance plans or accessing a highperformance private exchange. After understanding the risk, they need to assess the organization s ability and appetite to build the needed solution or examine the opportunity to access a high-performance approach using a private exchange. These important decisions must be made within the broader context of total rewards and the essential core principles of employerprovided health care described earlier. These are new opportunities and new decisions, and the time for thoughtful assessment is now. About the Author Randall K. Abbott is a senior consultant and a North American practice leader in Towers Watson s Health and Group Benefits practice. He has over 35 years experience consulting to some of the largest and most complex employers in the nation. A nationally recognized strategist, he has been deeply involved in the assessment of public and private exchanges since their inception. Randall Abbott can be reached at randall.abbott@towerswatson.com. Key Strategic Questions to Consider Are we committed to providing health benefits? What is our projected risk under the 2018 excise tax? Can we build the high-performing health plan needed to play beyond 2018? Should we consider using either public or private exchanges for certain segments of our population? Where can we best connect unique populations for greater value? If we transition to a private or public exchange, or use a hybrid model, how would our role change? Would this role-change be consistent with our total rewards strategy and employee value proposition? Would we use this shift to change the deal with employees or retirees? How would we effect this change and communicate it effectively? Would we use the shift as an opportunity to change our health benefit financing and risk transfer arrangements? What would the real, long-term economic value of change mean to the organization? To employees? To retirees? 4 towerswatson.com

Towers Watson services We are committed to helping our clients develop the strategies and tactics to achieve their objectives regardless of the approach chosen. For those that wish to continue self-managing their plans, we provide the insights and analyses to optimize health plan performance. For those that wish to utilize a public or private exchange for some or all of their population segments, we offer OneExchange, a high-value private exchange platform. For those desiring a hybrid solution, we will develop the right combination of solutions to achieve their goals. We also offer consulting assistance to help with analysis, scenario planning and strategy development. For more information, please contact your Towers Watson consultant. About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management. Copyright 2013 Towers Watson. All rights reserved. TW-NA-2013-35171 towerswatson.com