Private Exchanges Emerge as Alternative to Corporate Employee Benefit Plans
Employers are reconsidering their role as primary provider of healthcare benefits to employees and their dependents as costs continue to climb and compliance related expenses associated with the Affordable Care Act (also known as “Obamacare”) add to the burden.
Pharmacy giant Walgreen recently announced plans to move 120,000 employees from a company-sponsored plan to the Aon Hewitt Corporate Health Exchange in 2014. As part of the move, Walgreen Co. will provide eligible employees with payments for the subsidized purchase of a plan on the private-exchange marketplace.
Sears Holding Corp. and Darden Restaurants announced plans earlier to implement a private exchange provider for healthcare benefits, also through Aon Hewitt.
Many companies began experimenting with private exchanges eight years ago, when accounting changes forced public corporations to disclose their future health-care obligations. The move toward private exchanges has gained momentum since passage of the Affordable Care Act.
In a Wall Street Journal interview, Helen Darling, president of the National Business Group on Health, speculates that the recent economic recession may also be a contributing factor in the private-exchange boom. She reports that employers are beginning to “let go of the idea that they could provide benefits with no constraints.”
Private exchanges such as Aon Hewitt generally offer policies from a host of insurers. Contracting companies give employees a fixed dollar amount with which workers can shop for insurance through the private exchange. Qualified employees select the plan best suited to their medical needs and budget. The goal of private exchanges is to create competition that lowers costs for employees in their expanding role as healthcare purchasers.
Time Warner Inc. announced plans this month to move its retiree benefit program to Extend Health, a large private Medicare exchange run by Tower Watson & Co.
Extend Health will also begin providing retiree medical benefits for 110,000 International Business Machines Corp. (IBM) retirees in 2014. IBM told its retirees that its current coverage plan will end on Dec. 31, 2013. In a recent employee notice, IBM reports:
“Health care costs under IBM's current plan options for Medicare eligible retirees will nearly triple by 2020, significantly impacting your premium and out of pocket costs.”
So far, Extend Health reportedly has signed up over 300 companies, and has jumped from three corporate customers at the end of 2007 to 76 at the end of 2010. About one third have joined Extend Health in 2013 year alone.
Private Healthcare Exchanges from a Policy Perspective
Large employers like IBM and Time Warner are embracing private exchange programs in an effort to get out of the healthcare business.
Aside from the cost of healthcare premiums, employers who manage their own employee benefit plans must shoulder the burden of plan maintenance. By shifting the plan management to a private exchange, the employer is freed from many of the internal embedded costs associated with benefits personnel, communications programs, enrollment, and complaint management. While the premium contributions will remain a line item expense in the corporation’s income statement (and may not change significantly), the operating costs will be assumed in large part by the exchange.
More importantly, employers will be relieved in full or in part of the legal and fiduciary liability that accrues to plan sponsors and administrators.
Private healthcare exchanges allow corporations to adopt the defined contribution model now commonly used in 401(k) pension plans to the employee benefits market. Rather than providing a “defined benefit,” employers will simply contribute a fixed sum to employees for use in acquiring health insurance.
If healthcare costs continue to climb as expected, private exchanges will also shelter corporate sponsors from having to deliver the bad news to current employees or retirees that their increasing premium payments may purchase a declining level of coverage. The employer’s obligation will be to provide a subsidy, leaving employees with the burden of determining how to allocate their healthcare budget.
In addition to Aon Hewitt, other large employee benefits consulting firms such as Towers Watson and Mercer are carving out a niche for themselves in the private exchange market.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.