The rise of private health insurance exchanges

The Rise of Private Health Insurance Exchanges

September 2013

Contents Executive Summary............................................................................................................................3 Overview ...........................................................................................................................................4 Private HIX Models ............................................................................................................................4 Some of the Major Reasons for Setting Up Private HIXs ......................................................................5 Private vs. Public Comparison.............................................................................................................5 Payor Considerations for Private HIX Participation ..............................................................................6 Major Players Strategies in the Private HIX Marketplace – Some Examples ..........................................6 Challenges .........................................................................................................................................8 Outlook .............................................................................................................................................8 References.........................................................................................................................................9

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Executive Summary Health Insurance Exchanges (HIXs) are becoming a new norm for individuals, employees and employers to compare and purchase health insurance coverage at a reduced cost. HIXs are categorized into Public HIXs and Private HIXs. Public HIXs are to be governed by states or the federal government. On the other hand, Private HIXs are largely constituted by payors, led by Payor concerns over the launch of public exchanges, employers terminating their insurance and routing employees to public HIXs, and employees demanding more choices for health insurance coverage. Private HIXs can be further divided into two broad segments – single-payor exchanges and multi-payor exchanges. Comparison between Public and Private HIXs reveals some significant advantages with the private exchanges like flexible options offered such as, ability to serve both small- and large- sized employers and helping employers with defined contribution towards employee healthcare costs. Payors need to consider certain factors like opportunity identification, ability to compete, strategic positioning and customer engagement before making a decision on entering a Private HIX. Private payors like WellPoint, consulting firms like Towers Watson and insurance brokerage firms like Willis have entered the private HIX marketplace. Payors are collaborating with each other to form a Private HIX or they are participating in the private HIX platforms offered by vendors. The private HIX marketplace also brings in some major challenges such as margin pressures, increased cost of service and loss of direct relationship with customers for payors. Employers believe to predict and reduce their cost of healthcare through the use of Private HIXs in the future. At present, employers in the retail and hospitality industry are the major customers of Private HIXs, however they will be joined by industries such as manufacturing, financial services and technology in the near future.

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Overview The Patient Protection and Affordable Care Act (PPACA) has opened up better opportunities for Health Insurance Exchanges (HIXs) to operate in the US, where consumers can compare and purchase health insurance coverage on these online marketplaces. The Congressional Budget Office has estimated that approximately 24 million people would purchase the coverage through state Exchanges by 2019.

Private Health Insurance Exchanges (HIXs) can operate with or without defined contribution (i.e. contributions made by employers for employee health insurance). However, defined contribution remains a more popular model. Private HIXs with defined contribution are a medium where employers can purchase health insurance for their employees who, in turn, can choose a health insurance plan from the ones offered by the participating payors.

Private HIX Models

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Some of the Major Reasons for Setting Up Private HIXs

As per a Benfield Research survey of 114 employers (with at least 5,000 employees) 41% employers found the cost predictability feature of the private HIX the most attractive, followed by 20% who liked its opportunity to reduce costs and 10%, its ability to reduce administrative costs.

Private vs. Public Comparison

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Payor Considerations for Private HIX Participation Opportunity identification – Payors need to estimate the potential consumer populations in the market and define consumer profiles that can be targeted for profitability.

Determine ability to compete – Payors need to conduct a due diligence of their existing structures and the risks involved in entering a highly price competitive market and being able to make profits.

Strategic positioning – Payors need to develop a thorough understanding of the public exchange dynamics and private exchange opportunities and choose the best option to position themselves for profitable growth and customer satisfaction.

Customer engagement – Payors need to develop customer engagement processes (such as customer support centers) for the exchange for enabling customers to select plans and benefits and providing customer support.

Major Players’ Strategies in the Private HIX Marketplace – Some Examples

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Challenges Payors entering the private HIX market-place will come across some major challenges such as profit margin pressure with greater choice and due to fierce competition, greater expenses due to additional customer support for employees as they are new to the concept of private HIX and the fear of losing direct relationship with customers as the exchange administrator gaining greater influence for managing relationship.

Outlook According to the Congressional Budget Office 5 million people will purchase exchange-based coverage through their employers by 2019. This presents an enormous business opportunity for private HIXs. Employers hope that private HIXs will lower costs and make their spending on healthcare more predictable. Most of these private HIXs are to offer an array of carriers, thus increasing competition and cost of coverage over time. “It makes it easier to get over the hurdle of increasing your annual contribution to health benefits by only 2 or 3 percent when the [cost-increase] trend is running at 7 percent� – Eric Grossman, Exchange Business Leader, Mercer.

Employers with a high concentration of low wage employees from industries such as retail and hospitality are currently more interested in the private HIXs. However in the future, industries such as manufacturing, financial services and technology would also be interested in private HIXs.

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References •

Corporate Wellness Magazine

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Mercer

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SHRM

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Managed Care Magazine

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Bloomberg News

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Bloom Health

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PR Newswire

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The IHCC

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Towers Watson

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PR Web

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Benefits Pro

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Willis

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Biz Journals

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Health Leaders Media

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CFO.com

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Employee Benefit Research Institute

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Articles Factory

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Distilinfo.com

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