This fall, tens of thousands of U.S. workers will learn that they’re getting their health benefits next year in a radical new way: Their employers will give them a fixed sum of money and let them choose their plan from an online marketplace.
The approach, which gained a high profile last year when it was adopted by Sears Holdings Corp., and Darden Restaurants Inc.,has the most momentum among small and midsize employers. But interest is growing among companies of all sizes, research shows. Accenture PLC projects that around a million Americans will get employer health coverage through such marketplaces next year, and the number will increase to 40 million by 2018.
More health-industry players are launching the online employer marketplaces, known as private exchanges, that let employers offer their workers a range of choices to shop from. Companies now jumping in—including benefits-consulting firms like Xerox Corp.’s Buck Consultants, Marsh & McLennan Cos.’ Mercer and Towers Watson & Co., as well as insurance brokerages such as Willis Group Holdings PLC and Digital Insurance Inc.—are betting that 2014 will be the start of a ramping up over the next few years.
Insurers are creating their own versions, with Aetna Inc. planning to launch a “proprietary” marketplace model next year. WellPoint Inc. already has one, while UnitedHealth Group Inc.’s Optum health-services arm owns an exchange operator.
The private exchanges for employers are separate from the government-operated marketplaces that are being created in each state under the federal health law, which will serve individual consumers and small companies.
Employers hope the exchanges will trim costs and make their health spending more predictable. But some experts say workers could be squeezed by the fixed-sum approach if the dollars allotted each year don’t keep up with the rising cost of coverage. “Is the defined contribution going to increase with premiums, and how much is it going to go up? It is a question,” said Paul Fronstin, director of health research at the nonprofit Employee Benefit Research Institute.
Tequila maker Tanteo Spirits LLC, which has 20 employees, switched to the new approach in June. The New York firm said its contribution is big enough to pay for a rich health plan, as well as vision and dental coverage, for each employee. “We wanted to be really generous,” said Neil Grosscup, chief operating officer. He wants the sum to rise as quickly as premiums, he said, but the company will “be able to look at our budget for 2014 and dictate how much we can actually spend on it.”
At least a few bigger employers are also moving: Bob Evans Farms Inc., which owns about 560 restaurants and has around 34,000 employees including part-timers, will start directing workers to an exchange from Xerox’s Buck unit that will start next January.
In a statement, provided through Buck, the company, which is based in Columbus, Ohio, said the setup offered “an opportunity to more cost-effectively deliver a competitive employer-sponsored benefit program while providing expanded plan options.” Through Buck, the firm declined to comment on details of its setup.
Operators of employer health-insurance marketplaces say many workers pick cheaper coverage than they previously had and that is one way the exchange approach can save money.
In an exchange run by Liazon Corp. that has around 60,000 people enrolled, about 75% of the workers have chosen less-expensive plans, accepting bigger deductibles and other out-of-pocket charges, as well as smaller choices of health-care providers and restrictions such as primary-care gatekeepers. “They want value for their money,” said Alan Cohen, Liazon’s chief strategy officer.
At a.i. solutions Inc., a 450-employee firm that started using plans offered through Liazon in March, employees picked their coverage using a tool on the site that asked in-depth questions about their health needs and expectations, as well as their appetite for risk, said Christy Fenner, the Lanham, Md., firm’s director of human resources. The aerospace-engineering company gave workers a set amount of money, which was larger for those covering spouses and families, and let them opt to spend some of their own cash for pricier coverage if they chose.
Sears and Darden, which said they will use the exchange from Aon PLC’s Aon Hewitt again next year, said they believe the approach has helped hold down costs, though both said that wasn’t their main goal. They also said that workers generally liked the new setup. Darden said the sums it provides, which are pegged to a midlevel plan, will go up this year in parallel with the premium increases for that plan. Sears said it is still working to determine its contribution for next year.
In general, health-insurance marketplace operators said, they have seen employers provide annual increases that were approximately in sync with premiums. In recent years, though, the cost of employer coverage has been rising at a relatively slow rate—4% for a family plan in both 2012 and 2013, according to Kaiser Family Foundation polls.
ConnectedHealth LLC said employers have made increases in roughly the 2%-3% range on average. Bloom Health Corp. said the average boost between 2012 and 2013 was about 5%. “It’s cost predictability” that employers want, said Simeon Schindelman, Bloom’s chief executive.
Some employers are opting to use exchanges, but without the fixed-sum contribution approach.
Also, the private-employer exchanges themselves vary widely. Buck’s setup generally involves offering health plans from just one insurer in a particular location. The company chose the lowest-cost carrier available in each geographic area, an approach that it said pushes down costs. Marketplaces from individual insurers are also typically stocked only with different flavors of their own plans.
But most of the employer exchanges are expected to offer an array of carriers. Those operators argue that the competition among insurers should reduce the cost of coverage over time.
Date: September 3, 2013