Are Private Benefit Exchanges Really the Next Best Thing?
Private exchanges have gotten a lot of press in the last couple of years and industry experts keep saying that private exchanges are the next rage in employee benefits as the best way to decrease costs and to increase employee choice. But there hasn’t been a lot of action with exchanges despite some lofty predictions offered by those same experts. Or at least not a lot of action that’s visible.
Before I delve into if these are the next best rage or not, let me try to explain what a private exchange is, and more importantly, what it is not.
Let’s start with the name. The term “exchange” doesn’t really mean much to anyone so let’s change that and use the phrase marketplace (the insurance industry is notoriously bad at naming things). A private exchange, then, is a benefit marketplace that employers use to offer multiple benefit options to their employees. Think Amazon or Travelocity. These marketplaces are not related to any government entity or public program like Vermont Health Connect (a public exchange) set up by the Affordable Care Act. Most often employers offer subsidies, or contributions, to offset the cost of the benefits in the marketplace.
The idea in creating a marketplace is that an employer sponsors the marketplace and provides an employee with a set dollar amount – a defined contribution – that the employee can then use to select benefits that are appropriate for them. Once the contribution is used up, the employee is then responsible for the balance of the purchase.
The advantage to the employee is that they have a choice of benefits available to them that meet their needs. The advantage to the employer is that the contribution is not tied to a premium percentage, but a defined amount, which can then be indexed however they’d like.
If this all sounds familiar to you, then like me you’ve probably been in benefits a long time. Yes, these arrangements are what we used to call cafeteria plans.
So, what’s the difference you might ask? The difference is that more choices can now be offered as insurance carriers are more comfortable with this concept and technology has allowed for easier enrollment and decision-making. What once was a cumbersome “shopping” experience has been made easy and employees are more informed about the choices available so that they make the right decisions.
It all sounds great, right? Employees have more choice, employers limit their financial exposure and it’s easier for everyone. So why hasn’t adoption taken off?
Well, of course it’s not as easy as it seems on the surface. Despite the advantages, there is a lot of change management that has to occur and typically organizations that aren’t completely fed up don’t have revamping benefits at the top of their list. There are also the questions of setting up the marketplace and structuring the contributions – what benefits do you offer? How many choices should be included? How much do we contribute? Do we offer everyone a set amount? Or tier it – single, two person, family?