Think of employee-benefit private exchanges like a company cafeteria. Instead of providing food options, however, the employer gives employees a menu of employee benefits and insurance plans from which to select.
More than three million workers signed up for private exchanges in 2014, according to consulting firm Accenture. By 2018, more than 40 million people are expected to opt for coverage through private exchanges. That will eclipse the number enrolled in federal or state programs.
Even with the surge in participants, consumers often are unfamiliar with how they work. The following Q&A is a quick primer for employers:
1. What size companies are best suited for private exchanges? At the moment, mostly large companies, such as IBM, Time Warner and Walgreens, have shifted to offering their employees private exchanges. They're so new there aren't enough of them yet to become widely used by small and mid-size companies.
2. How do benefits compare for employees in a private exchange versus a traditional group plan? Private exchanges allow employees to choose a health plan that best suits their needs and the needs of their families, often having a myriad of plans and carriers from which to select from. Employers provide employees with a pot of money to use when purchasing the plans. Data shows employees perceive the money they receive from their employers as their own money, thus creating more responsible buying and utilization habits. In theory, this helps lower costs.
3. What are the advantages of a private exchange for the employer? For the employee? A private exchange allows employers to offer more options for employees' health insurance needs, while at the same time regain control over their healthcare spend and avoid the administrative burden of managing a benefits program.
The primary advantage for employees is options. Instead of being forced to pick from a limited number of plans that were chosen by their employer, employees now have control and better opportunity to select plans that fit their utilization trends and price points.
4. What are the disadvantages for employers and employees? For many small and mid-market employers, exchanges don't offer quite the competitive environment that one would think. The threshold is typically for companies with more than 5,000 employees. An employer that is smaller can expect more limited options, unless it wants to participate in an exchange with other employers.
A disadvantage for employees is also one of the biggest advantages: The buying experience. While it is certainly advantageous to have more options and better control over what is purchased, there is often a steep learning curve associated with buying healthcare. While exchanges have support tools that help employees select the best options, this often cannot replace the support and intimacy of the personal counsel of a benefits adviser or an HR professional.
5. What is the cost compared to traditional group plans? “The advantages of private exchanges are likely to be modest and considerably less than advertised,” according to the Department of Health Care Management at University of Pennsylvania's Wharton School. There aren't enough carriers willing to compete yet on a singular platform that would create the competitive environment needed to truly drive lower costs.
To compare specific costs or to determine whether a private exchange indeed makes sense, benefits advisers have the resources to evaluate and analyze the differences.