Private Exchanges Change the Game

When Walgreens announced recently that it would offer its employees medical, dental, and vision benefits through a private exchange, insurers took notice. Here was a major employer with a significant number of white-collar employees on its payroll, shifting to a new and relatively unproven benefits model.

Is Walgreens’ move a bellwether for a new healthcare benefits paradigm? Oliver Wyman’s private exchange experts say yes, and have identified five key facts that matter for insurers and other industry players.

PRECEDENTS FOR GROWTH

How fast will private exchanges grow? We believe there are some strong precedents in the growth of independent retirement accounts (IRAs), health maintenance organizations (HMOs), and consumer-directed health plans (CDHPs), all of which grew more quickly than many in their respective industries predicted. Based on this and other factors, we predict that 40 million Americans will receive health insurance through private exchanges by 2018, an increase of more than 10-fold over today, and more than will be on the public exchanges. More than 30 companies have already developed private exchange offerings that will be in-market for 2014.

Source: Oliver Wyman analysis

1Why should insurers be paying attention to Walgreens?

Historically, when big shifts in employee benefits are first introduced, many employers hold back until some prominent company makes its move. If that works out alright, the others jump in. IBM played that role in 2006, when it froze its defined-benefit pension plan. Now it looks like Walgreens may be opening the door for defined-contribution health benefits on private exchanges. We’re expecting to see private exchanges grow very rapidly, from just under three million lives today to about 40 million by 2018.
2Why so fast?

The main reason is that private exchanges present a seamless, employee-friendly way for companies to move from defined-benefit health benefits to defined-contribution. Instead of paying for employees’ benefits directly on a product-by-product basis, employers can now give employees a fixed amount of money to shop with. No longer are employer benefit costs tied to medical cost growth, which historically has greatly outpaced inflation.
3Will the move affect all employees equally?

Actually, more than 60,000 employees are ineligible for the new exchange. Walgreens is planning to provide them with assistance in navigating the public exchanges, Medicaid, and other government programs. Other employers are making similar moves: For example, Trader Joe’s is ending health benefits for employees who work fewer than 30 hours per week and giving them $500 per year to spend on the public exchanges. We can expect to see this sort of approach at many employers who move to private exchanges.
4What’s in it for insurers?

The main thing is that when the market shifts — as it seems to be doing — you don’t want to be left behind. But there may be other advantages. Walgreens, for instance, shifted from a self-insured (SI) plan to fully insured (FI) plans when it chose a private exchange. That goes against recent trends, and it’s too early to know whether others will follow suit. If they do, it’s good news for insurers, who make substantially greater profits from FI.
5What advice would you give insurers about private exchanges?

The most important thing is to remember that selling insurance on an exchange is selling in a retail marketplace. The new battle is not for the employer account, but for the individual employee. Choosing the right exchange partners is necessary, but not sufficient, to win. Insurers need to realize how little they know about retail — and start reshaping their businesses now.