The advent of private health insurance exchanges may provide employers with the opportunity to shift from defined-benefit healthcare coverage to defined-contribution. That's a paradigm shift that can be likened to the corporate shift from defined-benefit pension plans to defined-contribution plans such as 401 (k) retirement accounts.
For private exchange operators such as Aon Hewitt and Highmark, the defined contribution health insurance model is a way to address employer concerns about healthcare costs.
What we can expect to see is employers offering premium assistance through health savings accounts. Employees would have the option to select from a menu of essential benefits available through the HIE and would use the defined contribution option to help cover premiums and other medical expenses.
The model would enable employers to cap their healthcare costs. This would improve control of current expenses and future liabilities, while offering opportunities for employees to customize their healthcare benefits.
So, it may come as a bit of a surprise that employers are hesitant to embrace this new model.
A new whitepaper, the second in a series by analysts from Booz & Company, takes a look at the evolution of healthcare exchanges and the implications for healthcare industry stakeholders. This one focuses on how defined contributions may influence HIE development.
Ashish Kaura, a partner in the North American health practice at Booz & Company and a co-author of the white paper, says there's a "strong defined-contribution bias" in the Patient Protection and Affordable Care Act in terms of the "kinds of functionality exchanges could provide" to enable side-by-side product comparisons and advice on plan selection.
The whitepaper looks at defined contributions in single-carrier and multi-carrier private exchanges. Minoo Javanmardian, PhD, a partner in the North American health practice at Booz & Company and a co-author of the whitepaper, explains that for multi-carrier exchanges, a private exchange operator like ADP would act as a broker to sign up multiple payers to provide a range of product options in the exchange.
The operator would also serve as an intermediary between employers and insurers. In the single-carrier model the health plan offers its products directly to employers, who play more of a role in product design.
The whitepaper notes that employers generally like the private HIE model because it is flexible, can be customized to address the needs of any employer group, and can offer a broader range of retail products, such as dental and life insurance, than state or federally run public exchanges.
A recent Booz & Company research study indicates that more than 50% of surveyed employers would gravitate to multi-carrier exchanges while less than 30% prefer the single-carrier option. However, less than 20% are interested in a pure defined-contribution model.
It's true that defined contribution exchanges have had spotty results. Kaura points to Massachusetts, which as part of healthcare reform built a small group business exchange around defined contribution. It never took off.
Kaura says employers want a system that functions well and is easy to administer and understand. Some of the Massachusetts problem could be attributed to the administrative back end of managing and providing products through multiple carriers. "Some of the administrative challenges can get very complex very fast," he says.
Among the other challenges: It's a new idea so there are questions around tax implications, the effect of the ACA on minimum benefit requirements, and what defined benefits mean in terms of the ability to retain and attract the best talent.
In terms of defined contribution exchanges, the emerging single-carried players include the Bloom Health-WellPoint-Michigan Blues-Health Care Service Corp. partnership, Highmark, and Towers Watson. On the multi-carrier side there's ADP, Aon Hewitt, and Walgreens.
Javanmardian explains that these defined contribution HIE are just beginning to develop so there hasn't been a lot of testing to understand the market and how it will operate.
The million dollar question: How will employees react?
Kaura says the answer could depend on employer size. For small and mid-size employers who don't already offer health insurance benefits, defined-contribution plans could provide a means to offer the benefit because costs will be more predictable.
The same goes for small and mid-size employers that face a significant cost burden by offering health insurance. Defined contribution will provide a way for those employers to continue to offer insurance.
Kaura says large Fortune 500 companies are looking at the defined-contribution model and trying to figure out where the market is going. "They may not want to be the first to adopt that model but they would like to be the second or third."
Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
