Pro’s and Con’s of Private Exchanges: Are They Worth The Risk?

When I heard The Alliance was doing an exploration into private exchanges and was looking for employers to participate in an advisory panel, I raised my hand to volunteer. Private exchanges are a topic I’ve had an interest in for some time, and this seemed like the perfect opportunity to learn more.

A Panel Approach

The Alliance hired a consultant to facilitate the discussion, conduct research and provide education for the benefit of all of us involved in the research. The panel consisted of 12 individuals representing 10 Alliance member companies. We were there for the same reason as The Alliance: Together we had a genuine interest in discovering what value private exchanges could bring to employers.

Our conversation got off to a great start. Employers in the room talked about the need to engage workers in their health, to change the way we offer benefits and to reduce claim volatility that can occur in bad claims years. Ways to address the cost of health care became a big part of this discussion. We then dug deep into the various private exchange models being offered on the market today, and realized that private exchanges are not the silver bullet solution to any of these needs.

Risk Sharing Issues

A moment of enlightenment for me was the realization that private exchanges do not provide a platform for risk sharing. In today’s private exchange model, you are either self-funded and take on your own risk, or you are fully-insured and you pay to transfer your risk to an insurance carrier. Either way, your plan is underwritten and renewed based on the risk of its population, so there is no “smoothing out” of claims as I would have hoped. Any risk that is transferred is actually transferred to employees that select a plan with lower coverage, not the exchange.

In another discussion, we reviewed the potential benefits of private exchanges. Today’s models can be described as technology platforms that allow employees to select from a handful of standardized plans. We discovered the number of plans available to workers would be based on the size of the employer. For example, a “dual choice” between two different insured plans is only available to a very large employer. In addition, plans can self-fund and even bring along their own TPA. Most exchanges make supplemental products available (i.e. accident and pet insurance) at the employer’s option. Wellness features are typically built in.

Get to the Bottom of Costs and Advantages

Panel participants realized that today’s private exchanges are not offering anything that self-funded employers can’t already accomplish. For example, many of us make a dual choice offering available to employees, and many of us already define the contribution we make toward employee benefits. We offer wellness programs. And we do this today without paying a commission or Administrative Services Only (ASO) fees to large consulting firms. So any employer looking at a private exchange for health benefits must work to get to the bottom of the true costs and advantages.

None of this is to say that private exchanges don’t bring value to certain types of companies. Larger employers with a workforce spread out across many states may find value in this model. And, today’s private exchanges may evolve to offer additional value to employers in time. But this discussion made me realize how much value Alliance members gain simply by buying health care together from the same regional providers through a cooperative we control. The private exchanges that are in existence today are a ways off from being able to achieve that.

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