Volume Seventeen, Issue Seven October 2014 In This Issue Private Health Exchanges In this seventh issue of the McGraw Wentworth Benefit Advisor for 2014, we review private exchanges. Private exchanges are a new option employers can use to cover their active employees. Employers will need to consider private exchanges carefully. The exchange may offer valuable support in communication and enrollment services. However, a move in this direction requires a thoughtful vendor evaluation for cost and services offered. In addition, the defined contribution approach must be evaluated. Finally, a well-managed implementation process is critical. We welcome your comments and suggestions regarding this issue of our technical bulletin. For more information on this Benefit Advisor, please contact your Account Manager or visit the McGraw Wentworth web site at www.mcgrawwentworth.com. Although private exchanges for active employees are still relatively new, they are generating a lot of interest. According to a recent Trion Benefits U survey, 48 percent of employers are considering them. Employers may find private exchanges beneficial if they can get their employees to consider the exchange as the party responsible for the cost of the health plan. If employers can effectively limit their involvement in the health benefits to simply their defined contribution, it may make benefits management easier. They may increase that contribution annually based on specific metrics such as CPI or business performance. The employee cost depends on the price of the exchange options. If employers increase their contributions by 3 percent and the average exchange premium increases by 12 percent, employees will be upset, but with whom? If employees get upset with the exchange, they may pressure the exchange to manage their plans more effectively. However, employees currently view the employer as responsible for health plan offerings and funding. If the employee continues to view the employer as responsible after moving to a private exchange, it will put the employer in a difficult spot. As part of moving to the private exchange, the employer delegates control of health plan management to the exchange. Employers need to trust the exchange is capable of managing plan cost better than the employer. Exchanges will gain momentum if the employer is able to get employees to understand the exchange is responsible for plans offered and cost for coverage. In researching whether a private exchange will work for their organizations, employers need to consider the functions the exchange offers. Some employers choose a private exchange because it fills a specific need, such as providing benefits administration tools and communication assistance. Other employers are launching private exchanges because of the wide range of benefits available which employers may not be able to obtain or manage directly. Employers reluctance to launch private exchanges is usually tied to the fact they are not certain whether these exchanges will save them time or money. Employers are skeptical that Continued on Page 2
Volume Seventeen, Issue Seven October 2014, Page 2 a private exchange will be more effective at managing health plan costs over the long term. Also some health plans will work only with specific private exchanges. If you are tied to a specific medical carrier, your private exchange options may be limited. Some employers may wait a year or two before deciding on an exchange. With new options and technology, some exchanges will not run smoothly at first. These employers may want to evaluate the functionality of the exchange once most glitches are worked out. Employers need to understand private exchanges and decide whether they are a good fit in their organizations. Upper management will likely hear the buzz and catch the key marketing messages. You should be ready to have an informed discussion of the pros and cons for your organization. This Advisor will address: Important considerations in determining whether a private exchange is right for you The basics of private exchanges The potential services private exchanges offer Different types of private exchanges and considerations with each type Moving to a private exchange is a complex decision. Employers need to understand fully the value an exchange provides and whether it fits their needs. Important Considerations in Determining Whether the Exchange is Right for You Employers need to understand the benefits the private exchange is going to offer. At this point, certain industries are gravitating toward private exchanges. Restaurant chains and retail organizations, for example, seem very interested in the exchanges since they will have to cover a number of newly eligible employees when the employer mandate applies in 2015. What s more, they typically have significant turnover, widespread locations and limited resources at a centralized HR department. They need communication and benefits management support. The private exchange offers a wide-range of benefits. This variety is important when you have a wide range of employees. All private exchanges have invested heavily in developing their programs. They are very motivated to increase enrollment through intense marketing. Upper management will be interested in these private exchanges. You should understand the potential benefits and possible challenges involved. A private exchange paired with a defined contribution approach is often compared to a 401(k). This analogy is really oversimplified. Private exchange health plans are still employer-sponsored group health plans. For self-funded or fully-insured experience-rated organizations, rates will still be determined by utilization. Employer cost is not limited to the defined contribution. If you are self-funded, you will pay for the claims under the plan. For most employers, a private exchange is not a way to escape or blend claim experience. According to a recent study by Bloom Health, 67 percent of participants in a private exchange select a cheaper plan than the one the employer previously offered. Exchange statistics show, pre-private exchange, the value of the employer-sponsored plan was 80.4 percent. Once the private exchange was launched, the average value of the plan selected was 71.9 percent. Average cost savings based on these plan differentials was approximately $800 per employee per year. NOTABLE THOUGHTS WHEN OUR MEMORIES OUTWEIGH OUR DREAMS WE BECOME OLD. BILL CLINTON Continued on Page 3
Volume Seventeen, Issue Seven October 2014, Page 3 It is important to note, the savings from buying a lower value plan, are employee savings. In a defined contribution approach, the employer s contribution is set. The menu in private exchanges typically offers plans with more cost-sharing than benchmark employer plans. Employees will be challenged by some of the costsharing if they have significant health care needs. The move to more cost-sharing may reduce the claims paid by the plan. When employees have to pay more of the cost, they will use the plan less. Over time, if costs are managed properly, employers may be able to pull back some of the defined contributions. Employees may simply view this change as a significant cut in their employer-sponsored benefits. Employers have been managing the benefit process for a long time. Employees will not easily remove employers from the equation. If employees have to pay more or select a lower benefit option, they will consider this an employer benefit cut, not necessarily an issue with the exchange. The Basics of Private Exchanges A private exchange creates a marketplace for employees to purchase benefits. The exchange determines which benefits it will provide. Some exchanges have only medical and dental options. Others have medical, dental and a host of other benefits. All exchanges typically limit the carriers offered for each type of coverage. Standard and ancillary benefits private exchanges typically offer are as follows: Standard Options Medical coverage Dental coverage Vision coverage Life insurance Critical illness Accident benefits Short and long term disability Ancillary Options Auto/home insurance ID theft Group legal plans Pet insurance Online discount marketplace Most exchange marketplaces are accessed via the Internet. Some require electronic enrollment. In these situations communication with employees is solely online and via e-mail. Others have call centers offering telephone support and enrollment options. Employers must consider how employees will enroll in plans via the exchange. Will all employees have an option that works for them? Exchanges allow employers to step back from the responsibility of plan design. The employer focus is the funding level they will provide employees. Predefined exchanges menus may offer 5 or possibly even 10 different medical plan options. The exchange sets these plan options. Since the exchange sets the plan options, it can develop powerful tools to explain them to employees. The exchange may also have tools to help employees choose the best plan for their anticipated needs for the next plan year. The private exchange can work as a benefit administrator, enrollment vendor and even as a benefits outsourcing organization. Because these exchanges have standard benefits, they can offer a higher level of support and better tools than vendors usually offer. Their tools often include educational videos to help employees better understand their benefits. The Exchange may even offer benefits outsourcing services such as COBRA administration, notice distributions and SPD distributions. Exchanges may be limited in how they interact with non-exchange vendors. The exchange may not be able to communicate with your payroll system or your human resources information system. If you offer non-exchange coverages, the exchange will likely not manage data trading with these carriers. Many exchanges charge a fee for each member every month to access the exchange. These fees vary widely. Some carriers will actually pay the fee for using certain private exchanges. The more functions the exchange offers, the higher the fee. Continued on Page 4
Volume Seventeen, Issue Seven October 2014, Page 4 The Potential Exchange Services Offered The exchange provides a benefits administration system. Its function depends on the exchange. Some exchanges actively manage the data transmissions needed to administer the plans. This means they work with the insurance carriers and your payroll/hris systems to transmit enrollment data. Some exchanges take a more passive approach in electronic data interchanges. The exchange may provide data related to elections in the exchange format. The exchange may charge additional fees to provide data in a format that will be used for various vendors. At a minimum, the exchange to should manage data exchanges with all the carriers offered by the exchange. Some exchanges may also provide a number of compliance services. They may administer COBRA, provide required notices and possibly even handle the employer reporting requirements under Section 6056. Because they provide outsourcing services, not just a benefit administration/enrollment system, these exchanges cost more. Typically, the exchange will bundle the enrollment system and benefit options under a defined contribution approach. Some exchanges are taking a modular approach. This approach will allow you to buy all exchange services or just the services you need. This is a unique approach. Most exchanges will require you purchase the whole suite of services, not just benefits administration. Exchanges offer varying levels of benefits, services, and functions. Before you consider an exchange, it may make sense to identify the services that you need the exchange to handle. For private exchanges, it is critical to examine the mechanics of the exchange: What medical carrier(s) does the exchange offer? If your organization is closely tied to your medical carrier and that carrier will not work with a certain exchange, that exchange may not be right for you. How will new enrollee data be sent to the Exchange? How will changes in employee status be communicated? Will it be a feed from payroll system or will you need to adopt a more manual process? If the process is electronic, make sure you can meet the data formats required. What exact functions will the exchange provide? This is key because the exchange may replace current systems or processes. You may find the exchange can t replace a benefit administration system if all benefits can t be enrolled via the exchange. If the exchange can t pass enrollment data to your COBRA administrator, a new process must be created. Thus the exchange may add a layer of administration instead of streamlining the process. What are the rules of the exchange? What kind of flexibility will the Exchange allow? It is important to understand this up front. Most employers are used to changing or modifying their health plans. Exchanges are not likely to permit this practice. This will also be an issue if you have union employees. If your bargaining agreement requires you to provide specific benefits, a private exchange may not be an option for your union employees. Will the exchange require a defined contribution approach? This approach means employers set the amount they give each employee to purchase benefits through the Exchange. If your organization currently funds family coverage at higher rate than single coverage, the move to defined contribution could shock employees with families. Some exchanges will allow different funding levels for employees electing single and employees electing family coverage. Some exchanges require a defined contribution per employee. Employers need to think about going to a private exchange carefully. Exchanges will have set rules and requirements. Some employers will not be able work within these rules. Continued on Page 5
Volume Seventeen, Issue Seven October 2014, Page 5 Different Types of Private Exchanges and Considerations with Each Type Exchanges are a hot topic in benefits management. Different types of organizations have decided to expand their business models to sponsor private exchanges. Most of the exchanges geared toward employer-sponsored group health plans are relatively new. Primarily, three different types of organizations sponsor these private exchanges. 1. Insurance carriers 2. Brokers 3. Technology firms The firm sponsoring the exchange will often provide some insight into the issues to consider. If the insurance carrier sponsors the exchange, the employer must choose from the medical options that the insurance carrier offers. These insurance carrier exchanges typically focus on smaller employers allowing them to offer their employees significantly more benefit plan options. The carrier would have to affiliate with voluntary benefit carriers to widen its range of benefit options. One of the advantages of using a carrier exchange is that it is built to trade information with the carrier s eligibility system. However, the carrier would need to exchange data with the employer s systems and affiliated carriers for voluntary benefits. Another concern with carrier-sponsored exchanges is the integrated NOTABLE THOUGHTS LUCK HAS A PECULIAR HABIT OF FAVORING THOSE WHO DON T DEPEND ON IT. relationship between the exchange and the carrier. If your plan receives a significant renewal increase or has service issues with the carrier, you will need to replace the carrier and the exchange. Brokers offering exchanges typically partner with a technology firm to deliver them. These exchanges tend to focus on large employers. The exchanges may have only one or more than one medical plan carrier. Much will depend on the selected carriers willingness to participate in the Exchange. This participation varies across the country. Even if an exchange can get more than one carrier to participate, the employer will generally have to choose one carrier for medical plan coverage. Just like insurance carrier run exchanges, to access a brokersponsored exchange, you will need to have a relationship with the broker. If, at some point, you want to change brokers, you will also need to replace your private exchange. Technology firms develop the technology platform for the exchanges they sponsor. They sometimes sell that technology to brokers or even insurance carriers. They may even coordinate with carriers to offer coverage through the exchange. The appeal of AUTHOR UNKNOWN technology firms is that they are not necessarily tied to a specific carrier or broker. If you decide you are unhappy with an exchange vendor, you may not have to unseat your health insurance carrier or your broker. Also, if you are unhappy with either your carrier or your broker, you may not have to unseat your exchange to make changes. Examples of each exchange vendor are as follows: Insurance carriers sponsoring exchanges Blue Cross Shield of Michigan CIGNA Aetna United HealthCare Brokers sponsoring exchanges MMA (Marsh & McLennan Agency) Mercer Towers Watson Aon Hewitt Technology firms sponsoring exchanges Bswift Benefitfocus Array Health ISelect Continued on Page 6
Volume Seventeen, Issue Seven October 2014, Page 6 The type of vendor sponsoring the exchange affects your health insurance carrier options and possibly even your broker relationship. Concluding Thoughts A new way to purchase health care is emerging the Exchange. Public exchanges, now referred to as the Marketplace, were introduced as part of health care reform. These Marketplaces provide access to individual insurance plans, potential government subsidies and Medicaid. Private exchanges are entirely different from public exchanges. Employers have used them over the last 20 years as a way to cover post-65 retirees. When many employers discontinued their post-65 retiree group coverage, they contracted with private exchanges to help their retirees purchase coverage. These exchanges help retirees get quotes for various types of individual Medicare coverage and explain how different options work. Once retirees choose an option, the exchanges help them enroll. Many employers offer health reimbursement arrangement funds so that their retirees can pay for individual coverage with pre-tax dollars. The concept of private exchanges is now being applied to employer-provided group health plans for active employees. The general idea is that the exchange provides an online marketplace offering a host of benefits. The exchange allows employers to fund benefits through defined contributions. Employers set their funding and employees then choose from the plans available considering their cost after the employer contribution. While this seems similar to how employers approach benefits today, there are key differences. One significant difference is that employers give control of their health plan offerings to the exchange. Employers trust the change will better manage their health plan costs. The decision to move to a private exchange requires careful consideration. Please contact your McGraw Wentworth Account Director with any questions. MW Copyright McGraw Wentworth, a Marsh & McLennan Agency LLC company. Our publications are written and produced by McGraw Wentworth staff and are intended to inform our clients and friends on general information relating to employee benefit plans and related topics. They are based on general information at the time they are prepared. They should not be relied upon to provide either legal or tax advice. Before making a decision on whether or not to implement or participate in implementing any welfare, pension benefit, or other program, employers and others must consult with their benefits, tax and/or legal advisor for advice that is appropriate to their specific circumstances. This information cannot be used by any taxpayer to avoid tax penalties. 3331 West Big Beaver Road, Suite 200 Troy, MI 48084 Telephone: 248-822-8000 Fax: 248-822-4131 www.mcgrawwentworth.com McGraw Wentworth 250 Monroe Ave. NW, Suite 400 Grand Rapids, MI 49503 Telephone: 616-717-5647 Fax: 248-822-1278 www.mcgrawwentworth.com http://www.twitter.com/mcgrawwentworth http://www.linkedin.com/company/mcgraw-wentworth http://www.facebook.com/mcgrawwentworth