Actuarial Notes

A Practical Guide to Private Exchanges

By Karen Shelton and David Petta · Society of Actuaries · 2015

Study guide: Exam GH-101

An article in the May 2015 issue (no. 78) of the Society of Actuaries Health Section's Health Watch on private health insurance exchanges, which are separate from the public exchanges established under the Affordable Care Act. It focuses on the private exchanges and their impact on employers who may be considering offering coverage to their employees through this channel.

On the syllabus

Elements of a Private Exchange

  • A chart sets public against private exchanges on who sponsors, who can enroll, types of coverage, plan designs available and who pays for coverage.
  • Employee Choice: private exchanges often offer more plan design options than traditional employer-sponsored plans, often labelled like the metallic levels of the public exchange.
  • Employer Subsidies: often a defined-contribution approach where the employee can "buy-up" for lower cost sharing or "buy-down" for lower premiums.
  • Ancillary Product Offerings: dental and vision alongside medical and pharmacy benefits, as a "one-stop-shop".
  • Online Enrollment and Decision-Making Tools.
  • Benefits Administration: enrollment, eligibility, customer service and billing.

Different Models and Approaches

  • The two most distinct differences between models are carrier approach (single-carrier versus multi-carrier) and funding methodology (self-funded versus fully insured).
  • A fully insured, multi-carrier model includes a risk-adjustment mechanism that is "net-zero-sum": the premium transferred to carriers with higher risks equals the premium paid out by carriers with lower risks.
  • Advantages listed: increased employee choice, cost-savings potential, increased consumerism, decision-support tools and customer service, simplified benefits administration, shifted financial and regulatory risks and cost predictability under a fully insured model, and improved cost transparency.
  • Disadvantages listed: additional expenses for exchange operator financing and carrier-assumed risk, less control over plan design and clinical management, the need to increase the defined-contribution amount over time, and member concerns such as loss of plan-sponsor support.

Cost Impacts via the Private Exchange

  • The potential cost savings of a multi-carrier private exchange come from two primary areas: carrier best-in-class pricing and increased carrier competition.
  • Carrier Best-in-Class Pricing
    • Illustrative Example I: a second carrier 10 percent cheaper in one region, chosen by 50 percent of the employees there, gives a net plan-cost saving of about 1.8 percent.
  • Increased Carrier Competition
    • In a fully insured, multi-carrier model carriers compete for business directly from the employee through price, networks, customer service and brand identity.
  • Items Increasing Costs
    • Moving from a self-funded to a fully insured model brings premium tax, insurer tax, state-mandated benefits and insurer risk charges, and the exchange operator charges for running the exchange.
  • Member Buy-Downs
    • Early experience indicates members tend to enroll in options with higher cost share and lower premiums, with a majority choosing a high-deductible health plan (HDHP).
    • Reasons: there is no cross-subsidization between gross premium rates, so each plan's rates carry the full impact of member selection; and employers using a defined-contribution approach require the member to pay the full additional cost of the more generous plan.
    • Illustrative Example II: the payroll contribution difference between a 60 percent Bronze and a 90 percent Platinum plan moves from 65 per month under the traditional approach to 300 per month under the private exchange.
    • Items to consider in setting the defined-contribution amount: current funding approach, variations by coverage tier, member impact, financial goals and competitive pressures.

Exchange Outlook

  • Private exchanges include approximately 1.7 million group plan enrollees (2 percent of employers), according to the Kaiser Family Foundation, and most major surveys expect this to grow to 20 to 33 percent by 2018.
  • Growth in HDHP enrollment increases consumerism, which puts pressure on providers and facilities to provide higher-quality care for a lower price.

End Notes

Sources