"It's the cost, stupid"

By Barbara Gniewek, PwC

“It’s the cost, stupid” was an article published in a prominent medical journal almost a decade ago, which identified the cost of care being delivered as the main culprit of runaway health care costs.  Simple, right?  But in a time when everyone was pointing fingers at the uninsured, insurance companies, drug companies and others, the reason health care was costing so much was the price of services. 

Now, fast forward to a new way of delivering employer sponsored benefits -  Private Exchanges - and not much has changed. While recently conducting evaluations for a few clients I kept hearing that catchy phase – “It’s the cost, stupid”. Our work with these clients included evaluating proposals from various exchanges – which can be very challenging as every exchange uses their own assumptions, even when a fixed set is provided.   As part of our evaluations, we keep driving to understand the cost.

The key to pulling the trigger on an exchange is understanding the reasonableness of the projected savings, the services the exchange is (or isn’t) providing, and the cost, which is an amalgamation of several different fees:  technology fees, administration / outsourcing fees (not always), vendor fees (including ASO fees or insurance costs) and commission / consulting fees (if using a consulting / broker exchange, which most employers are at this point).  In addition, several exchanges may also collect fees from carriers to offset the cost to employers via overrides.  While employers see the value proposition of an exchange typically hinging on the promise of savings, the real story on cost suddenly caught my attention.  Why? Because the economies of scale one would expect on an exchange, like decreased consulting and streamlined plan administration, do not automatically seem to port (transfer), especially as you go up-market (larger employers). 

This became very obvious when evaluating proposals on behalf of a very large employer.  Since, we’ve helped several employers evaluate exchange offerings we have become familiar with the cost of the technology as well as the cost of the benefits administration.  We have even worked with other consultants/brokers and know the cost of their services. So, when we saw the exchange fees broken out on a PEPM basis in these proposals, we were surprised to see that the consulting fees were significantly higher under a private exchange (for the consultant model) than they were for off-exchange strategy, financial and communications consulting services.  We’re not talking a 20% increase, but more than double, or triple the existing spend in this instance.   

Incredulous, we dug in. We asked, why does it cost more?  Most clients and I expected that the amount of work is actually less on the exchange because so much is built into the platform and therefore should show some group purchasing savings.  However, the answer we heard was “we still have to do a lot.” “A lot” included securing proposals (albeit through an expedited process), pricing by region (model already built and part of the exchange offering), and providing change management and communication efforts (already built into the PIX platform).  On an on-going basis it means vendor and renewal management.

Well, while I understand that implementing an exchange can result in additional costs to set up contributions and rates regionally, it’s harder to understand why an employer would pay more when so much should be built in.  This cost becomes an even bigger issue in subsequent years, when the communication / change management and pricing/contributions should be less intense efforts.

The good news is by drawing attention to it we have been able to facilitate significant reductions in fees, for many clients.  The bad news could be for those early adopters that chose to go with their incumbent: you might be paying too much.  So, when looking at exchanges and the promise of savings they offer, it is very important to understand how this is determined and what assumptions are being used.  Exchange vendors are more than willing to provide information about any expected savings, but may not be forthcoming about their sources of revenue.  If you already signed up, be sure to check your costs as you renew your exchange contract.   Remember, it’s the cost, and I encourage you to really dig into what an exchange is charging and what services you are getting.  Depending on your size, the difference could be very significant.

Whitepaper: Tackling the Tough Questions about Employer Benefits and Private Exchanges

View the results of a recent employer member survey (December 2014) which discovered a number of “pain points” employers have with health benefits and strategies they are either using or are considering as a way to reduce that pain. The survey also provides insight into whether employers perceive exchanges as a potential solution for these issues. AUTHOR: The Alliance - a business coalition located in Madison, WI - is a member of the National Business Coalition on Health.

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What ERISA Fiduciary Concerns Exist in Private Exchanges?

By Christopher V. Goff, J.D., M.A. (Employers Health)

As a result of the Patient Protection and Affordable Care Act and rising medical costs, the health insurance marketplace is undergoing major changes and reforms. For proactive employers seeking to control rising health care costs, private health insurance exchanges may present a way for employers to curb further health care cost increases, reduce their administrative burden and increase benefit choices offered to employees. In spite of numerous potential advantages arising from participation in a private exchange, employers should pause to consider how potential fiduciary liability, arising under the Employee Retirement Income Security Act of 1974 (“ERISA”), may be implicated by their participation in a private exchange. 

Enacted to create minimum standards of protection for pension plans and welfare plans, ERISA standards seek to ensure that plan interests are protected and establish a fiduciary relationship between the plan and its participants. As a result of the use of a functional approach to determine fiduciary status, any individual or entity having discretion under the plan may be deemed a fiduciary. Thus, a decision to delegate certain duties constitutes discretion and preserves fiduciary status, even in spite of contractual agreements to the contrary. Despite the existence of various private exchange structures and services, the selection and retention of a private exchange, communication of a private exchange offering to plan participants, and plan management of funds deemed under the plan sponsor’s control represent key areas in which the plan sponsor remains an ERISA fiduciary. Just as similar duties are retained by plan sponsors under historical employer-sponsored benefit strategies, these areas of responsibility persist under a private exchange strategy. 

A plan fiduciary must act with prudence, loyalty and in the best interest of plan participants. In the face the complex and evolving private exchange market, the duty of prudence may necessitate the consultation of an expert. Plan sponsors who have historically relied on independent third parties to help them evaluate and select a plan administrator may now find themselves in a compromised position. Why? Many of the organizations that have traditionally operated in a “trusted advisor” role are now operating private exchanges. Therefore, plan sponsors are heading down a slippery slope with respect to their fiduciary roles if they turn to a third-party advisor with dual personalities: 1.) a purportedly independent, objective advisor; and 2.) a private exchange.

Plan sponsors must consider fiduciary implications when evaluating a private exchange strategy. The old adage, “if it sounds too good to be true, then it probably is,” has application to the wishful thinking of the human resources professional who anticipates “offloading” ERISA fiduciary status to a private exchange. Moreover, the selection of an advisor to assist a plan sponsor in navigating the private exchange landscape must be carefully considered given the nature of private exchange providers and their dual personalities. 

Private Exchanges 2.0: Can they convert people from informed purchasers of health benefits to engaged consumers of health care services?

By Barbara P. Gniewek (PwC)

Employers continue to struggle to control the cost of health care benefits, a struggle that has existed for at least the past 30 years, with a brief reprieve in the late 80s and again in the mid-90s due to someone named Hillary.  Even with many efforts from managed care, wellness, HDHPs and ACA, employers are still struggling to control health care costs with annual average cost increases between 5 and 10%.

While some employers have had more success than others in managing costs using traditional approaches, collectively they win/or lose every year at renewal time.  The corporate bottom line absorbs or passes on the cost increases, and our health care expenditures have swelled to about 18% of the GDP and are expected to rise to 20% in the next 5 years or so.  While we spend more than any other country on healthcare, we are ranked 27th of the 34 industrialized nations in terms of health care quality. As a citizen I know we have the, or one of the best health care systems in the world, we just don't distribute it equally, and our incentives are not aligned.  As an employee I'm insulated to the cost of care and I don't act as a consumer even though I have a high deductible plan.  I'm not engaged, and I know better.

So the newest solution for employers is private health exchanges, or those selling them would suggest (which is often the benefit advisor).  But the exciting piece of private exchanges is that they can have the infrastructure to really move people from informed purchasers of health benefits to engaged consumers of health care services.  That is a critical piece to change / challenge the current health care economy.  While today’s exchanges have some of the attributes for this transformation, the 2.0 version of exchanges will deal with care delivery, thru value based designs, out-comes based wellness, care management incentives, and true high performing networks will drive enhanced consumerism.  With these market changes, we can possibly change the care delivery system from treating illness to building / managing wellness, engaging people to better understand the impact of their lifestyle on their health, and how to manage their genetic anomalies.  This is how we might be able to finally bend the health care cost curve.

Exchanges are interesting for that reason, and creating a lot of buzz in the employer benefit space.  This is a big trend, and a disruptive influence for employer benefits to be sure, but may be what we need to bend the health care cost curve, a real game changer.

In a World of Private Exchanges, Will Employers Matter?

By Laurel Pickering (NEBGH)


“Whoever has the gold makes the rules.”

The only way the healthcare industry will change is if the people that pay the bills tell it to change.” - Craig Barrett, Former Chairman and CEO, Intel Corporation

Employers pay the bills for roughly half of U.S. total healthcare spending.  That gives them leverage – when they choose to use it – to drive change and value in the healthcare system. 

But what happens if more employers turn to private exchanges, leaving employees with decisions about which health plan to choose?  What will happen to employer leverage?  Or – to put it bluntly – in a private exchange scenario, does the employer matter?

Healthcare-focused business coalitions were created to consolidate and focus employers’ leverage with health plans and other service providers they contract with.  Examples of the kind of leverage employers can exert include:

  • Convincing major health plans to work together to figure out how to reimburse providers for better depression treatment, a project currently underway by the Northeast Business Group on Health;
  • Pressuring all hospitals in one state to complete the Leapfrog Hospital Survey by increasing  deductibles for hospitals that didn’t fill it out, an initiative by the State of Maine’s Division of Employee Health and Benefits;  
  • Influencing health plans to develop transparency tools to help employees make better decisions and get more from their healthcare dollars as they pick up a greater percentage of costs; 
  • Lobbying health plans to administer value-based plan design because it increases compliance with prevention and treatment;
  • Offering employees the ability to get higher quality, more efficient care in another country, causing local providers to improve their outcomes and decrease cost.

In a private exchange scenario, plans may compete for employee market share, and in theory, this competition should create better products at lower prices.  But where will market influence come from?   Who will pressure plans to act outside of their financial self- interest in the name of value, quality and better health?  Who will keep their collective feet to the fire?

So far, the exchanges are choosing plans they’ll work with based on price, with little attention to performance or other factors.  Will that change?  Will private exchanges become a force for better healthcare quality and value? 

Employers will still “hold the gold”.  Will they now have to influence exchanges, too?

Stay tuned.

The ever changing value propositions of PIX

By Barbara P. Gniewek (PwC) & Jonathan Har-Even (PwC)

While private exchanges are jockeying for market share and trying to meet the growth expectations of the street, many ask, why would you choose a benefit strategy that includes a private exchange (PIX)?  While it is obvious that the answer has to do with cost savings to the employer, just how those cost savings are achieved is very different depending on the PIX.  In fact, the models are changing and evolving quickly as are their value propositions.

While the value proposition of retiree health is pretty straight forward (fixing the financial liability, shifting the administrative burden), the value proposition for active health is not so clear.  Private exchanges for actives are not just for employers who are looking to cut back on their benefit stewardship / responsibilities in the provision or design of benefits, nor are they only for industries with a lot of part-time / transient workers.  Employers across industries are investigating the potential value of PIX to determine if they are a reasonable approach to providing benefits that will allow them to attract and retain critical workforce segments.

The “promise” of private exchange savings includes:

  • Financial savings:  through increased consumerism (employees right-sizing their benefits options by buying down), defined contribution health care, the power of group purchasing (lower insurance premiums, ASO or PBM fees), carrier competition and insured rates

  • Network savings:  best in class networks, high performing networks, use of narrow networks, contracting with ACOs, utilization of consultant cooperative purchasing arrangements

  • Integrated care management and/or wellness programs

  • Reduced HR cost through a shift of administrative responsibility

Interestingly, many PIX cite saving through several of these approaches.  Additionally, some exchanges are selling the concept of a consistent experience over the various life stages of employment:  part-time, full-time, retiree.

In addition to some of these savings, many exchanges provide other valuable services to employers including on-going consulting services, compliance, and benefits outsourcing.  However, these are often provided at fee, or commissions are collected to fund these enhancements.

As new entrants come into the PIX marketplace and existing players refine their offering, they are enhancing capabilities that are reflective of their competition:  moving from single to multi-carrier, adding broader administrative capabilities to support greater HR outsourcing, adding employee advocacy capabilities.  This is creating a rather fluid value proposition, one that can be customized to meet a specific employer needs.

Private Exchanges - One size does not fit all

By Barbara P. Gniewek (PwC)

Private exchanges may represent the biggest disruption in employer sponsored benefits since employers began offering health benefits as a competitive advantage.  And while many employers are considering (not adopting, but considering) an active benefit strategy that incorporates these exchanges, one thing is clear -- as much as private exchanges allow employees to right size benefits to meet their needs, private exchanges can also allow employers to right-size their benefit strategies to best meet their HR / Corporate needs.

Private exchanges have been around for years, but the competitiveness and interest in the PHIX market has increased as large consultancies have jumped in with their own exchanges to ensure a future revenue stream by competing against the public exchanges.  Brokers and carriers are following quickly and the once quiet exchange market made up of technology companies and independent private exchanges is getting very crowded.    But the interesting thing is that each of these exchanges can meet the very diverse needs of employers.  Its not just about moving towards a defined contribution and getting out of the business of providing health benefits, but can mean a reinvestment in benefits by creating real choice, enabling consumerism, and building on effective cost management strategies -- or anything and everything in between.

Oh, and while making sure you understand the value proposition of the various exchanges (and they are changing / evolving) so you can understand which might best meet your needs, make sure you understand the revenue stream, because it can be very convoluted.

What is "the profile" of an employer that offers a private exchange?

By Michael Thompson (PwC)

Defining the profile of a “private exchange employer” seems like a straight forward question but the answer is not so straight forward.  When PEEC looked at interest in the considering private exchanges http://www.thepeec.com/, we found broad interest across industry, geography and size of company.   The following values stand out in companies that are seriously considering private exchanges for their employees over the next few years:

  • Focus on Choice – The clearest distinction in a private exchange is the ability to offer a myriad of plans and networks as well as ancillary products.  For some employers, buying into a storefront can simplify the offering of choice and enable a dynamic market place that can satisfy the needs and values of a diverse employee population.
  • Focus on Consumer Experience – Private exchanges can offer a unique consumer experience, initially during enrollment and then ultimately in supporting employees and their families to manage their health and healthcare needs.  Many of the consumer programs and tools that employers and health plans incorporate into their strategies can be utilized across plans in a private exchange.
  • Focus on Defined Contribution – While a private exchange is not necessarily tied to a Defined Contribution strategy, it can help an employer implement defined contribution based strategies. Early experience is showing that consumers that are given a pool of money will tend to spend the money more prudently consistent with their needs and values.
  • Focus on Delivery System Value – Some employers may find that a private exchange can help them accelerate their strategy to offer more value based choices.  For example, private exchanges can help to accelerate delivery-based strategies related to centers of excellence, accountable care organizations and “best in location”.
  • Focus on Stewardship – Some employers may be looking to delegate management of their programs to a steward that incorporates a “best practice model” based on a specific point of view.  Much like an investment manager for the 401(k), the private exchange becomes the steward to manage this portfolio of health and welfare offerings over time.

Although these values are not unique to employers considering private exchanges,  some employers may see private exchanges as a way to accelerate their company’s health strategy.  If they do move to a private exchange, they should 1) “lock in” the gains they are already achieving in their current health strategy, 2) evaluate a diverse private exchange marketplace with a clear understanding of what their values and priorities are, 3) ensure there is clear transparency and value associated with the financing of the private exchange and 4) understand that their oversight responsibilities as plan fiduciary do not go away with moving to a private exchange.   Why else would you move to a private exchange?