Last Wednesday, September 18, 2013, Walgreen Company (“Walgreen”) announced its plan to move approximately 160,000 employees to Aon Hewitt’s private health exchange (the “Aon Exchange”) in 2014. This move marks a significant decrease in risk for Walgreen as the company will shift to a defined contribution model for funding its employees’ health insurance. Under the Aon Exchange defined contribution model, Walgreen will provide its employees a fixed amount of money to be used in purchasing health insurance. Walgreen currently self-funds its employees insurance, whereby Walgreen assumes the cost of certain covered employee medical expenses, for its approximately 180,000 drugstore-based employees. Self-funded plans potentially expose Walgreen to the risk of unexpectedly high claim amounts in a year. Moreover, Walgreen’s move will afford its employees more health plan options, with 25 plan options being offered to its employees on the Aon Exchange in 2014. Walgreen currently offers its employees two health plan options under its self-funded model. The move to the Aon Exchange is expected to help lower out-of-pocket costs for employees and eligible retirees under 65 years old, with plan premiums as low as $5 a month.
The Aon Exchange is the nation’s largest multi-carrier private health care exchange. Aon expects that 18 large employers will participate in the Aon Exchange in 2014, with an anticipated 600,000 U.S. employees and their families covered under plans on the exchange. The Aon Exchange reportedly only provides fully insured group plan options. In addition to health coverage, the Aon Exchange offers a wide range of administrative services including benefit experts and advisors.
Private Health Exchanges versus Public Health Exchanges
Private and public health exchanges contain some similarities; both are on-line marketplaces that sell health insurance to individuals. However, there are marked differences between the two models. Public health exchanges take two forms: (1) individual exchanges (“Individual Exchanges”), where individuals may purchase health plans, and (2) Small Business Health Options Program exchanges (“SHOP”), where small businesses may procure health insurance for employees. Public exchanges are state or federal government operated exchanges and may only offer certified Qualified Health Plans. Private exchanges are sponsored by private organizations such as insurance companies, brokers, and agencies. Private exchanges may offer a wide variety of plan types. Additionally, private exchanges take two forms: (1) multi-carrier exchanges, where multiple insurance companies’ plans are offered, and (2) single-carrier exchanges, where a single insurance company offers its plans. Until 2017, public exchanges will only be open to individuals and small employers, whereas private exchanges are already open to large employers.
Employees covered through group plans are ineligible to receive premium tax credits under the Affordable Care Act (“ACA”). Additionally, only employers with 25 or fewer full-time equivalent employees making an average of around $50,000 a year or less are eligible for premium credits for plans obtained through SHOP. Therefore, Walgreen and its employees that receive coverage through the Aon Exchange’s fully insured group plans will be ineligible for premium credits under the ACA.
Reports indicate that the interest in private exchanges is growing, with 28 percent of nearly 800 large and mid-size employers expecting to participate in private health exchanges in the next three-to-five years.
Why Private Exchanges?
Multi-carrier private exchanges, such as the Aon Exchange, offer many advantages for large employers. By shifting from a self-funded to fully-insured model, employers:
- shift the risk of unexpectedly high claims to plan issuers;
- may better estimate yearly expenditures with predetermined contribution limits;
- receive lower premiums through competition between plan issuers;
- may allow employees to pay their portion of premiums on a pretax basis through “cafeteria plans” pursuant to Internal Revenue Code Section 125;
- may shift the 2018 excise tax on high premium plans (the “Cadillac Tax”) to plan issuers;
- may avoid the ACA $2,000-per-worker penalty;
- receive flexible health plan options across multiple carriers;
- receive greater certainty in plan options and administration, compared to public exchanges;
- reduce administrative costs of the employer self-funded model, such as employee education, eligibility, enrollment administration, or customer service costs;
- provide potentially higher worker satisfaction with more nuanced options; and
- may avoid the uncertainty of ACA defunding, exchange data security breaches, fraud, and the looming risk of government shutdown, all of which may affect the success of public exchanges.
Why Not Private Exchanges?
Multi-carrier private exchanges like Aon’s may also involve distinct risks for employers. For example, fully insured plans on the exchange may be subject to risk adjustment as a result of adverse selection, which ultimately may result in higher premiums. Additionally, by participating in multi-carrier private exchanges, large employers:
- may not receive health plan benefit uniformity across states;
- may subject their employees to varying insurance costs across states, costs unaccounted for by the employer’s predefined contribution level;
- may inundate their employees with numerous plan options, resulting in decreased coverage or insufficient plan choices, ultimately leading to employee dissatisfaction;
- may dissatisfy their employees due to a less involved employer role in plan selection and benefit advocacy; and
- may lose the low pricing of plans procured through group purchasing with fewer issuers.
There are a multitude of additional risks and benefits involved with private exchanges unmentioned here. Nonetheless, the advantages of having ascertainable and limited pre-claim contribution amounts may be the underlining benefit pushing midsize to large employers to private exchanges over the coming years.
Private exchanges are not only attractive to employers, but have also garnered the attention of the investment community. On the same day of the Walgreen-Aon announcement, Benefitfocus, a software company specializing in private exchanges, experienced a 102 percent rise in share price, with share price increasing from $26.50 to $53.55 in a single day. There may be any number of reasons for the share price increase, but the expected and current buy-in of large employers to the private exchange model seems to be a significant factor.