Analysis: Benefit firms create tremors for insurers in U.S. healthcare shakeup

By Caroline Humer and Lewis Krauskopf
Reuters, September 20, 2013

American companies are sending shockwaves through the healthcare industry by moving a rapidly growing number of employees onto privately run online exchanges for their medical coverage.

In a business already bracing for major change because of President Barack Obama’s healthcare reforms, the decisions are threatening to shift more power in the market to the benefit consulting firms opening many of the exchanges.

“It’s important to the insurance companies to sell through the private exchanges to maintain their biggest customers,” said Mike Nugent, managing director of the healthcare practice at business consulting firm Navigant Consulting.

The exchanges received their biggest boost yet when Aon Plc insurance broker said on Wednesday it signed up 18 companies to participate in its Aon Hewitt Corporate Health Exchange, including the country’s largest drug store operator Walgreen Co, resulting in coverage for an estimated 600,000 people next year.

The announcement drove up the shares of Aon and other benefits consulting firms, such as Towers Watson and Marsh & McLennan, which owns Mercer, one of the largest consulting firms in the world.

All three have easily outpaced the broader market in the past year, with Towers Watson shares up 79 percent and Aon up 42 percent.

Corporations are hoping the move to the private exchanges will keep healthcare spending in check and force employees to manage more of their own healthcare costs. Companies still directly pay a portion of the premium and deduct premium payments from employee wages for the difference between the employer contribution and the cost of a plan, but employees can choose a plan from a menu of low to high cost offerings.

Insurers have been preparing for this possible shift to private exchanges. In some cases they are investors and in other cases, like Aetna Inc, they are building their own.

But plans offered by large, household name insurers such as UnitedHealth Group, Aetna and WellPoint Inc are likely to be among the most prominent choices for consumers selecting a plan on a private exchange, Windley said.

Some experts say moving to an exchange prevents companies from “over-buying” insurance. Alan Cohen, chief strategy officer of private exchange company Liazon, said that based on the 200,000 transactions processed at his companies, employees spent on average 25-30 percent less when they chose the plan compared with what the company would have spent.

On the other hand, the Aon exchange and others shift the risk associated with providing health insurance to the insurers from the large companies that have traditionally being bearing the risk, or self-insuring, which can be more profitable.

Self-insured members generate $4 of pre-tax profit monthly, compared to $18 in pre-tax profit for each fully insured member, according to Credit Suisse analyst Ralph Giacobbe.

The coming year is the first time in which a significant number of larger employers will use private exchanges for their workers’ benefits. Companies, which start unveiling benefit plans this month, are sending at least 1 million employees to private exchanges in 2014 versus a few hundred thousand now.

More growth is expected in 2015 with nearly 1 in 3 large companies saying they were considering a move. By 2015, 6.5 million people could be on these exchanges for active employees, according to forecasts by analysts at William Blair.

The possible market is much larger. About 170 million people received employer-based health insurance in 2012, 156 million of whom were under 65.

Aon, Towers Watson and Mercer already dominate the market for consulting for the top 1,000 U.S. companies about benefits, putting them in a position to promote their exchanges.

The expansion of private exchanges is expected to add significantly to revenues of the benefit companies. Rates from exchange contracts bring in more revenue per employee than current administrative ones, according to William Blair analysts. Also, once the exchanges are established with a fixed cost base, new corporate clients become highly profitable, according to William Blair.…

Although these private insurance exchanges which resemble Obamacare’s state insurance exchanges are just getting off the ground, they seem to be providing an out for employers who are tired of managing their employee health benefit programs and who want relief from the seemingly uncontrollable increases in health care costs. What an opportunity this provides for the benefits consulting firms.

These consulting firms are not replacing the insurers, but they are inserting themselves as another layer of administration in our system already greatly overburdened with administrative waste. Their administrative costs are not counted in the 15 to 20 percent allowed for the insurers under Obamacare. No, these costs are in addition to the administrative waste of the insurers and the waste of the administrative burden that insurers place on physicians, hospitals and other health care providers. It is part of our uniquely American health care system that is designed to finance administrative services while seeming to pay for health care services only as an aside – an exaggeration but it does emphasize the priorities of these administrative corporations.

Since health care policies should be designed to take care of patients, in this case employees who are moved from employer benefit plans to these private exchanges, we should look at the impact that this will have on the employees.

*  Since employee health benefits and the costs to administer them are paid by employees in the form of forgone wage increases, this additional layer of administrative costs will be borne by employees with no commensurate increase in health care services.

*  This shift from defined benefit health plans to defined contributions is one more example of our current trend of shifting risk and costs onto the backs of employees.

*  When employees select their own plans, they will buy the plans with the lowest premiums since most of them and their families are healthy. That means plans with high deductibles and spartan health benefits. For those who develop serious medical problems, financial hardship will be an inevitability because of excessive out-of-pocket costs, and impaired access is very likely because of the shift to narrow networks of providers.

*  The private exchanges will not be eligible for the subsidies provided for plans in the state-run Obamacare exchanges, so low and moderate income individuals will not be receiving the same help that those who enroll through the state exchanges will have. Those employers now selecting the private exchange option will be contributing to the employees’ premiums, though, unlike the state exchanges, that contribution will not be equitable since it is not based on income.

*  For employers who currently self insure and thus have lower administrative costs, the administrative costs will be much greater in the private exchanges, but those extra costs will be borne by the employees, either directly of indirectly.

*  The benefit consulting firms are entering these ventures with visions of great profits. This is one more sad saga of the American approach of scooping up profits from patient care dollars while designing health coverage to maximize business goals and minimize health care services.

*  These business intermediaries seek even more profits by catering to Wall Street investors, pushing up the price of their shares while appeasing Wall Street by demonstrating that they will limit as much as possible the diversion of revenues to patient care.

Not only do we need to remove private insurers from their nefarious role in all of this, it appears that it is time to remove the employers and their benefit managers as well. By switching to a single payer financing system and funding it through equitable taxes, we can be sure that everyone would be paying their fair share, including members of the business community, while nobody is wasting funds on the middleman money managers.