Businesses Turn To ‘Private Exchange’ Health Insurance

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Fed up with the unpredictable cost of health insurance for his small business, Mike Sarafolean last year made a dramatic change: Instead of picking a plan to offer workers, he now sends them to a "private exchange" or marketplace where they compare and choose their own insurance. And the amount his company pays toward coverage is capped.

The move puts his St. Paul-based company on the leading edge of a nascent trend that could shape how more employers offer and pay for health benefits in the coming years.

It's part of an ongoing evolution in job-based health benefits that's gradually shifting cost and responsibility to workers.

The private exchanges, mainly run by former insurance executives and employee-benefit consulting firms, operate in more than 20 states.

While representing a tiny fraction of workplaces, the movement may be about to grow. One of the nation's largest employer benefits consulting firms, Aon Hewitt, said Wednesday it will launch an exchange aimed at large employers. It hopes to have at least 100,000 workers enrolled by early next year.

Proponents say the effort shields employers from unpredictable premium increases because they'll choose how much to increase their contribution each year, and that may be less than premiums actually increase. If so, workers would make up the difference.

Tempering such increases, proponents say, would be competition among insurers, because workers would have a wider choice of plans, rather than the one or two currently offered by many employers.

"We're trying to create a retail marketplace that is competitive," says Ken Sperling, who's overseeing the Aon Hewitt effort. Employees would be able to choose among several carriers. "Insurers would have to compete for their business."

The exchanges, which have some similarities to state-based programs mandated by the federal health overhaul law, also save employers money partly because workers, when given a variety of choices, are likely to choose less generous benefit plans, which will carry lower premiums, proponents say. "Most companies are overinsuring their employees right now. We want to right-size that," says Curtiss Butler, chief marketing officer at Liazon, which also operates a private exchange.

Others, including Carmen Balber of the advocacy group Consumer Watchdog, caution that private exchanges potentially could be used by insurers to "cherry pick" employers with younger and healthier workforces. Balber also said private exchanges potentially could steer workers toward policies with low premiums, but high annual deductibles and other charges. Such policies are more profitable for insurers but can leave unprepared consumers on the hook for thousands in medical costs each year.

Private exchanges "absolve the employer from having any responsibility for providing benefits or getting a good deal for consumers," says Balber.

Frustrated by premiums

Sarafolean, CEO of Orion Corp. of Minnesota, which provides services for people with disabilities, doesn't see it that way.

Before he made the switch, Sarafolean said he had a limited number of insurance choices to offer his 70 workers: "I had to buy a plan that would make sense and fit for most people. Now, they make choices that fit for them."

For the past few years, his company faced "double-digit premium increases every renewal." To slow those increases, Sarafolean said he had switched to a policy with large annual deductibles: payments by employees of $4,500 for individuals or $9,000 for families before insurance began paying most medical costs. His employees paid about $90 a month toward their premium.

A little more than a year ago, Orion received a 40% renewal increase, prompting him to move to Minneapolis-based Bloom Health, which set up private exchanges in Michigan, Minneapolis and Indiana.

Now, his company contributes from $125 a month for younger workers to $350 for older ones to special health reimbursement accounts, which workers then use to buy an insurance policy.

By making the change to a flat contribution and a private exchange, the company is saving 10% on its previous year's cost of insurance, he says. Many of his workers also spend less, he says.

He's not sure what he will choose in 2014, when state-based insurance marketplaces, also called exchanges, are set to open as part of the health care law approved by Congress last year. Initially, those state-based exchanges are aimed at individuals and small companies that are shopping for insurance. States can decide later in the decade whether to open them to large businesses.

Sperling, who is overseeing Aon Hewitt's private exchange, compares the flat-payment change to one that gained speed in the early 1990s: Employers abandoning pensions in favor of offering workers 401(k) plans for retirement savings.

But just as 401(k) plans transferred the risk of market downturns to workers, the flat-payment model would shift risk to workers if rapidly rising health costs outpace increases in employer contributions.

"From a consumer point of view, it makes me nervous, because as premiums go up, it's simply a mechanism to cost-shift," says Sabrina Corlette, research professor at the Health Policy Institute at Georgetown University in Washington, D.C. "That said, if it allows a small employer to continue to offer insurance … it's not a terrible compromise."

The model has been compared with a proposal by House Budget Committee Chairman Paul Ryan, R-Wis., to cap government payments for future Medicare enrollees, giving them a set amount to buy coverage from private insurers. Under Ryan's plan, the government contribution would grow with general inflation, which is less than medical inflation, saving taxpayer dollars, but substantially increasing beneficiaries' costs, according to the Congressional Budget Office.

Getting rejected

Unlike most of the private exchanges, the Bloom Health model, which serves about 25,000 people, sends workers to buy their own policies on the so-called individual market, rather than through a group health policy.

However, insurers selling individual policies in most states can reject applicants with medical problems, a practice that will end in 2014 under rules in the health care law.

Bloom CEO Abir Sen says his company offers its services only in states where rejected applicants can qualify for special state-run, high-risk insurance programs, which generally cost at least 25% more.

Gabrielle Smith, a 16-year employee of Orion who has an auto-immune disease, worried that under Bloom, she would be unable to get insurance, "or it would be so in excess of what I could afford." Smith, 48, did get coverage through Minnesota's high-risk pool but found that she still was able to lower her deductible by $1,500 a year from the $4,500 deductible plan formerly offered at Orion. She now pays $45 a month for her premium.

"I haven't heard anyone who is unhappy with the current insurance, because it was all individualized," says Smith. "Some of the younger employees with no medical conditions (found low-cost plans that) don't require any money out of their paychecks."

Other private exchanges, including Buffalo-based Liazon, which covers about 25,000 employees in 23 states, and the new Aon Hewitt model, send workers to group policies, which can't reject applicants with health problems.

The exchanges vary in other ways, too. For example, Bloom and Aon Hewitt offer a variety of insurers, while Liazon contracts primarily with one main health insurer in each region.

All the exchanges plan to collect revenue by charging employers a monthly fee, receiving commissions from insurers, or both.

It's unclear how the advent of state-based exchanges will affect programs such as Bloom, Liazon and Aon Hewitt, or whether there will still be a demand for their services by small businesses.

"As of 2014, why will the private exchanges be needed?" asks Paul Fronstin of the Employee Benefit Research Institute, a non-profit research group based in Washington, D.C.

On their websites, the private exchanges say what sets them apart from future state exchanges will be their level of customer service. By opening now, private exchanges also could be in a position to bid for contracts to run state exchanges, a move Sperling says Aon Hewitt would consider.

But Balber at Consumer Watchdog counters that the state exchanges may be better for consumers than private onesbecause states can choose to actively monitor the quality and cost of the insurers allowed to participate. In theory, private exchanges could do the same, but Balber is skeptical. "To presume a private exchange is going to examine trends in premium increases and pressure insurers to lower prices is unlikely."

Kaiser Health News ( is an editorially independent news service of the Kaiser Family Foundation, a non-partisan health care policy organization that isn't affiliated with Kaiser Permanente.

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