Gauging Trajectory of Private Exchange Growth

A pair of healthcare industry experts say widespread employer adoption of private exchanges for health benefits is on the horizon and approaching fast.

The future of private health insurance exchanges is bright, but it is more like the dawn of day than the noontime sun.

"We were expecting a lot more for 2015. We got about 50% of where we thought we were going to go," Bill Brown, manager of digital distribution at Highmark Inc., told me last week.

The Pittsburgh-based BlueCross BlueShield affiliate has marketed private exchanges to employers for three years, which is a relatively short time span in the employer-sponsored insurance market, he says. "Our brokers and our employer groups still don't know that much about private exchanges. They're still nervous about it."

Highmark's experience mirrors the national market for private exchanges, according to Michael Thompson, a principal at PricewaterhouseCoopers LLC. In December, the New York-based consultancy released a national survey of employers that assessed employer activity in the private exchange market.

"A lot depends on what your expectations were for this year. If you were expecting explosive growth, it's fallen short of those expectations," Thompson says. "Many people believe 2016 will be the turning point."

Several factors dampened employer enthusiasm for private exchanges this year, Brown and Thompson say.

In 2014, the nearly disastrous rollout of the Patient Protection and Affordable Care Act-spawned public exchanges prompted employers to second guess private exchanges. "Year One of healthcare.gov scared a lot of people away. This year, [open enrollment for the public exchanges] went a million times better than Year One. Now, employers are ready to listen about private exchanges," Brown says.

The Highmark executive said one of the prime selling points of private exchanges, digital enrollment, is also a prime perturbation point. "People are nervous about data security after Target and Anthem," Brown says, referencing major data breaches at the Minneapolis-based retail giant and Highmark's fellow BlueCross BlueShield affiliate. "That's one of the biggest things employers are worrying about."

He says federal regulatory "grandmothering and grandfathering of the small group market" for PPACA compliance has also slowed the uptake of private exchanges. "They don't have to go from their current insurance product to an ACA-rated product this year. Those groups want to stay in the group coverage they have already."

Thompson says some employers, particularly those with more than 1,000 workers, have already adopted health benefit capabilities featured in private exchanges such as digital enrollment and multiple health plan choices for employees.

"You can have employers that have been very aggressive with their health benefit strategies. They may find that a private exchange does not advance their health benefit strategies. Some employers question where the value is in the equation. There is an opportunity where private exchanges offer something employers aren't offering already."

Widespread employer adoption of private exchanges is nearly inevitable, Brown and Thompson both believe.

"Digital enrollment is going to dominate the market sooner rather than later," Brown said. "The Baby Boomers are moving out of the market, and the Millennials do almost 80% of their transactions on their phone or tablet. The sky's the limit for the digital space."

While large employers may already have many of the capabilities featured in private exchanges, employers with fewer than 100 workers are in an entirely different administrative situation, Brown says. "The private exchange brings something they don't have." He notes that adoption of a private HIX generates several value propositions for small businesses, including online enrollment, analytics, billing and financial functions on one platform, and cost savings from replacement of paper-based processes.

Thompson says the primary driver of private exchange growth is the potential to create value for employers and their workers. "Employers are asking, 'Can we change the nature of the decisions employees are making?'… There are employers who have struggled to advance their health benefits strategy." He points out that the challenge of maximizing the value of wellness programs and achieving a level of employee engagement that helps workers make value-based decisions in health plan selection.

If private exchanges can prove their effectiveness to employers, they will become "the stewards" of employer-sponsored insurance across the country, Thompson says. "Employers generally don't want to manage health benefits themselves; but, before they turn it over, they want to see a better track record."

Private exchanges can perform the full range of health benefit functions that have historically been the bailiwick of insurance companies and employer human resources departments, he says. Those functions include changing health plan design over time, providing enrollment tools, helping workers to access healthcare services, and fostering engagement in wellness programs. "It's an entirely new role in the healthcare system," he says of the emerging private exchange market.

Given the uncertainty about the trajectory of private exchange growth in recent years, health insurance carriers such as Highmark have been facing a daunting business development challenge.

"There's a fine line between waiting for the change and forcing everybody into it," Brown says of Highmark's group clients. Established insurance carriers also need to be wary of losing business to competitors such as innovative start-up companies. "You don't want them to advance too far and leave you in the dust."

Highmark hedged its bets on private exchanges, Brown says. "We have a little bit of a mix. We had upstarts develop the technology, but it's been kind of a cooperative growth." Highmark's primary information technology partner for private exchanges, Seattle-based Array Health, has similar business relationships with several BlueCross BlueShield affiliates. "They decided that working with multiple carriers was the way to go."
 
Highmark set the foundation for its private exchange strategy about five years ago, Brown says. "We didn't know whether these new private exchanges would take off four or five years ago." Other commercial insurance carriers, healthcare consultancies and insurance brokers were launching their own private exchanges and "we realized, in midstride, that these guys were going to do this, whether we did it or not."

Private exchanges are a great example of the necessity for established insurance carriers to adapt to the changing healthcare industry landscape, he adds.

"Technology changes quickly, and healthcare has been pretty darn slow to change in the past. We need to become more nimble in the retail world and in the Millennial world. If Millennials can't access something on their phone from us, they're going to leave us behind."