The Promise of Private Benefit Exchanges
Much has been said the past two years about expected growth in the use of private benefit exchanges. These were envisioned and used prior to the ACA and introduction of public health exchanges but have now taken hold and are on the rise.
To be clear on the meaning, a private benefit exchange (PBE) is simply an online marketplace where employees can choose from a wide array of medical, dental, life, disability and voluntary benefits. A private exchange is usually offered by an employer as a convenient, economical way for employees to choose benefit plans and employers to pay for these plans.
Several studies suggest private exchanges will likely represent the way 30-50% of employers offer benefits by the year 2020. Source Media Research, in conjunction with Employee Benefit Adviser, recently created a Private Exchange Index tracking monthly enrollment and use of private exchanges. They gather data from the eight biggest private exchange software vendors to compile their monthly reporting. As of July 2015, they report 1.5 million employees enroll through a private benefit exchange with a total of 3 million lives covered. In the month of July alone, 300 companies moved to an online benefit exchange adding another 50,000 lives. A highly publicized addition was Time Inc., the media organization, which recently moved all of its 5,000 onto a private benefit exchange.
Many employers see the value of eliminating paper forms, multiple system data entry and the delivery of benefits education that was wasteful and labor intensive. Increasingly employers are also seeing a bigger benefit - cost savings. Like the shift in retirement benefits from defined benefit pension to defined contribution 401k, the move from traditional cost sharing to a lump sum defined contribution will begin to shift employee behavior.
With employees in the role of “consumers” determining how to spend their “defined contribution”, choices may surprise us. While in the past employers have been paternalistic in determining what they would spend on each benefit, we may find employees more frugal or using their dollars differently. The change may also reduce the over-insurance that occurs when employers pay the bulk of or the total for certain employee benefits and employee enroll in benefits they don’t use.
It is too soon to tell but reasonable to predict that if employers cap the funds they spend and employees use these dollars more efficiently, the overall spend will likely be less than the traditional approach that has been in place for decades. This could contribute to the ultimate goal we all have…bending the cost curve of benefit expenses.