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A recent article “Is a private exchange the right fit for your company?” in Employee Benefits News, by Paul Rooney, the Managing Partner at EBS Capstone, dove into the topic of private benefit exchanges and the “overstated” benefits that the companies that support them use to promote them to their clients.

Rooney began his article by aptly stating some of the advantages of a private exchange, but went on to mischaracterize the actual strategy behind the private exchange and why it’s a successful platform for companies to deliver a comprehensive benefits package to their employees.

Private Exchanges Are Not For Everyone

Let me start by saying that private exchanges aren’t a fit for every company out there. We believe that there are three major concepts that a company must buy into in order to be a viable candidate that can best utilize our exchange, Lawley Marketplace.

First, they must be willing to go into a defined contribution model. Simply put, this model involves giving each employee a set amount of money to shop for their benefits with, rather than determining a percentage of the plan that they will pay. This grants employees the freedom to decide how they’re going to spend the employee and employer contributions on benefits that are important to them, while allowing the employer to stay in control of their benefits budget; not their costs. That last part is important and we will return to it later.

Secondly, the employer must be willing to offer more choice to the employees. Offering a diverse selection of insurances, not just medical, allows the company’s management to step away from choosing the plans they feel will present the best middle ground for everyone and presents several options, ensuring that every need can be met in the most effective way possible.

Shifting Responsibility to the Employee

Combining these two concepts gives employees a lot of responsibility, making the final piece the most important component in the process. The technology and logic behind the private exchange holds the entire platform together. By giving employees a sum of money to shop with and more options to choose from, the responsibility shifts to the employee, the actual consumer. Because of this, our decision-support technology is essential. By completing a profile using personal and dependent information (such as expected medical procedures and costs, risk tolerance, and preferences) the system will put together a recommended benefits package that fits the unique needs of each employee and their family.

Rooney’s first salvo is to state that this sort of idea has been around for years, which is half-true. Yes, online enrollment platforms and Human Resources Information System (HRIS) systems have been available to companies for some time, but he goes on to provide a counterpoint to his own argument when he says, “many large plan sponsors have been offering online enrollment and employee education for years”.

While HRIS and online enrollment systems help the enrollment process run smoothly for the employer and employees, they do not provide decision support tools or an avenue to offer more choice to employees. They are strictly a way for employees to select their coverages and employers to administrate the plans. HRIS systems, in particular, tend to not be very cost-effective for small to mid-size businesses.

Don’t Forget Education

Employee education is still important under the private exchange model, probably even more so given the higher number of options. What Rooney fails to include is that this doesn’t replace or undermine that, but it actually supplements it. The model helps by giving the employee the responsibility of choosing what’s best, engaging the employee and turning them into a consumer rather than a passive participant in the health care process. They’re forced to determine what they want and need and make the decision which ultimately will help educate them on the different plans and how to most effectively use them.

Rooney’s next point is to mischaracterize what a defined contribution can mean to a company. He argues that “the number one benefit of a defined contribution plan offered through a private exchange is purported to be cost savings”. Coming back to our earlier point, the intent of the defined contribution model is to allow the employer the freedom to control their benefits budget. The company uses what they spend on benefits, not just health insurance, and the devises a number to allocate to each employee based on the tier of coverage that they select. This number can then change how the employer sees fit and free of the increases that they see from the insurance carrier.

This doesn’t mean that the increases are ignored by the company or even factored in to how they contribute, but it allows the company to see past these and not make the decision of what plans to offer because of the cost to them. Instead of eliminating a highly priced plan that some employees value and may need due to cost, they can now offer a spectrum and allow the employee to make the decision on what is most appropriate.

Rooney’s next point is to say that this platform does nothing to effect the underlying drivers of health care expenses, which I disagree with. By helping to create a more educated employee who understands their benefit package, you’re promoting a system where those same employees understand that it is necessary to shop for the correct treatments and prices based on the providers available.

The next point of contention is with that idea that private exchanges drive employees to the lower cost options available, which is to undermine what the technology helps the employee to do. The technology’s job is to determine best coverage levels for the employee based on their expected costs and habits, their appetite for risk (higher deductibles), and their preferences (whether or not they’re allowed to contribute to a Health Savings Account). This helps the employee avoid choosing the wrong plan if they heed the advice of the platform. Choosing the lowest cost option is a situation that could occur outside of the exchange environment as well, but in this case they are lacking the guidance that the process provides.

Private Exchange Implementation Experience is Key

His last issue is with implementation process. This can be a legitimate issue for a client that uses a broker who has not fully committed to the private exchange strategy. Without internal dedicated specialists to guide a company entering in to the exchange, efficient communication, and clearly laid out responsibilities (that both sides have agreed to), the implementation process can be very hectic and lead to issues.

All in all, to avoid the pitfalls that Mr. Rooney describes in his piece, the responsibility ultimately falls on us, the benefits broker, to make sure that the advantages are communicated properly. It is not just a solution for “innovative employers”, but one that can be right for any employer looking to offer a Fortune 500 feel in their benefit package.

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