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Adoption of Private Health Exchanges by Employers Expected to Grow Rapidly

VBCC - November 2014, Vol 5, No 9 - AVBCC 2014 4th Annual Conference
Wayne Kuznar

Los Angeles, CA—Private exchanges as platforms for employer health insurance plans under the Affordable Care Act (ACA) are growing rapidly —they are already utilized by big corporations and have made some of the biggest strides in the smaller- and medium-sized corporate marketplace. Private health exchanges are already offered by several large global companies, including Walgreens, UPS, Sears, Xerox Corporation, Time Warner, Williams-Sonoma, Panera Bread, and Chico’s.

Alex Jung, Principal of Global Strategic Advisory Services at Ernst & Young, LLP, shared her assessment of the changes in the health insurance marketplace at the Fourth Annual Conference of the Association for Value-­Based Cancer Care.

Ms Jung explained that healthcare is a corporate investment to oncologists. Approximately 50% of the United States is covered by the private insurance sector (ie, employers). Of the 167 million people who have coverage under private insurance markets, corporations have been looking to decrease the costs of benefits that represent 70% of their operating budgets. “That’s why people’s salaries have stagnated so much,” Ms Jung said. “You don’t see real income growth in this country, because of the cost of benefits, and, primarily, healthcare.”

With the signing of the ACA, employee benefits consultants entered the arena. Companies such as Aon Hewitt provide private exchange offerings in 2 distinct types: risk-based plans and self-insured plans. The profit margin varies significantly between the 2 offerings, thus making it a key variable in sizing the potential market opportunity, according to Ms Jung. “Exchanges in the private sector are going to be what we see as the primary source of coverage for employees in this country,” she said.

According to Ms Jung, the huge, traditional employee benefit consultant Aon acquired Hewitt Associates to invest in the infrastructure in these private exchanges. “When Aon acquired Hewitt Associates, they didn’t do it because they wanted to acquire the employee benefits outsourcing business,” said Ms Jung. “They did it because they wanted the platform—the systemic platform for administering health plans—because they had the vision that they would eventually convert that platform into a platform that would administer private exchanges for employers.”

What started as an “experiment” between Aon and Walgreens has branched out to the middle market and small employers. Despite their lower risk tolerance, the fastest growth in the private sector is for the middle market and small employers. Companies such as Towers Watson and Buck Consultants are faring well in this market. “The private exchange is actually growing fastest at the bottom of the pyramid, which is employers under 100 employees,” said Ms Jung. “That’s largely because they can’t afford the premiums that they’re being charged for private insurance.”

That said, the forces that drive private exchanges are the huge benefit consulting firms that can have enormous influence on the employer plan sponsors that are traditionally relied on for private insurance, said Ms Jung.

Insurance companies have been relegated to the status of intermediaries that are trying to define their role in the future, because they are getting commoditized, she said. Although employers are traditionally risk-averse, the adoption rate of private exchanges will be quick, within a predicted 3- to 5-year span (Figure). “You have mobile and digital platforms that will accelerate the adoption rate,” Ms Jung noted.

Figure

According to her, although private exchanges are small today, industry dynamics have primed the market for rapid growth. Given the size of the addressable market, private exchanges could be a $67-billion market by 2025, Ms Jung said.

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Last modified: November 21, 2014
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