Obamacare is going to kill traditional employer-provided insurance. And that’s probably a good thing. IBM, Time Warner, and now Walgreens have made headlines over the past two weeks by announcing that they plan to move retirees (IBM, Time Warner) and current employees (Walgreens) into private health insurance exchanges with defined contributions from employers.
Retiree health benefits—like lifetime pensions—have been shrinking in the private sector for decades (only about half of large employers still offer them, down from 80 percent 20 years ago), so it’s no surprise that the relatively few companies like IBM that do offer generous post-retirement health benefits are trying to find ways to keep them affordable.
Moreover, data from existing surveys indicates that employers are quickly moving to high-deductible plans with health savings accounts, away from more expensive plans with high premiums, but low deductibles and co-pays. Notably, when employees are offered a “defined contribution” – a fixed amount of money from their employers with which to shop – they also (although not always) opt for more high-deductible options.
Let’s give credit where credit is due. Obamacare has undoubtedly accelerated interest in private exchanges by spurring investment and discussion of the public insurance exchanges mandated under the law. That’s the carrot, so to speak, attracting companies towards private exchanges.
The “stick” is Obamacare’s “Cadillac Tax”, which will hammer companies with a 40 percent excise tax beginning in 2018 if their plans cost more than a fixed amount – an amount that is set to grow more slowly than medical inflation traditionally has. Combined, these forces are driving companies toward a “defined contribution” strategy where they will offer employees a set amount with which to shop for insurance through an online marketplace – an exchange. (The other alternative would be to just move your employees en masse into high deductible plans, perhaps while kicking in some money for an HSA.)
The basic exchange concept is the same between public and privately run exchanges: an electronic marketplace where individuals can shop from a variety of insurance plan options.
But as the Obamacare exchanges get up and running, we’ll increasingly see a bifurcation between private exchanges and public exchanges. Public exchanges – with attendant public subsidies and Medicaid coverage – will cater to relatively low-income uninsured, especially populations that flip back and forth between Medicaid and private coverage. But the exchanges will also be highly regulated, and are likely to offer plans – at least at the silver and bronze end – that offer coverage experiences somewhere between Medicaid and commercial coverage, in terms of access and rates paid to providers. Longer waiting times, smaller networks, and a “gate-keeper”-like experience in terms of access to specialist care are more likely face consumers entering state exchanges (at least the cost-sensitive ones).
Let me be clear: I’ve got nothing against tiered networks or high-deductible health plans. But standardization on the public exchanges will come with some very real trade-offs, and people who were expecting to be able to buy employer-style coverage (low deductibles, large networks of physicians) are going to be in for a rude shock. And many uninsured people who don’t qualify for subsidies on the exchanges may find more affordable plans outside the exchanges. Caveat emptor.
Private exchanges, if they are designed well, may have some critical advantages over their Obamacare-mandated counterparts. First, while the federal law sets the regulatory “floor” for qualified health plans (QHPs) available for subsidies on state exchanges, states can set additional requirements and regulations for state-based exchanges – adding costs and limiting consumer choice.
For instance, in a recent Manhattan Institute study of insurance rates that have been released by state exchanges, we found that Vermont (which has a very restrictive exchange) will have only 2 carriers and will see significant rate increases in 2014 for even basic insurance coverage – 133 percent for 27 year olds, 104 percent for 40 year olds, and about 55 percent for 64 year olds. State rates will vary, but in the 13 states plus D.C. we’ve examined so far, premiums for individual insurance are increasing by an average of 24 percent.
Real experimentation and competition is more likely to thrive on private exchanges. This is because the more relaxed requirements of private exchanges (especially for companies who self-insure, and thus are exempt from state insurance mandates) will allow insurers and employers to offer a wider range of plans for employees. Private exchanges can also offer wellness and prevention options tailored to the needs of specific populations, and sophisticated “decision support” tools that allow employees to decide how to best trade off premium costs and deductibles based on their current and (predicted) future health needs. Private exchanges, in other words, can offer more personalized options and customer service tools than standardized public exchanges are likely to do.
Also, while public exchanges can only offer health insurance, private exchanges can offer additional types of coverage – potentially offering one-stop shopping for health, life, dental or disability insurance – becoming an Amazon.com of insurance. Consumers could opt for high deductible health insurance plans, for instance, while also purchasing disability or other catastrophic coverage to offset health care costs if and when serious illness strikes. Consumers who are used to bundling services like internet, cable, and phone services (or comparison shopping on Amazon) will appreciate one-stop shopping for insurance in a familiar retail environment.
Ultimately, private exchanges can offer more competition and choice, but will have to work out real challenges too. How to reassure employees that they’re not being “dumped” into an exchange without any real tools for shopping effectively? Can insurers successfully adapt to a “retail” environment, where they have to market directly to employees? Exchange operators (at least in a multi-carrier exchange) will have to grapple with potential adverse selection against plans offering richer benefits that attract sicker enrollees, but are prohibitively expensive for the healthy population.
Also, exchanges will have to establish that they can offer true savings for employers taking into account an employee’s total compensation package, i.e., including health benefits and cash wages. Employers who benefit from slower health care cost growth would pass along the savings to employees in the form of higher cash wages, but the overalls cost of labor would decline. Whether this is a winning formula for attracting and keeping highly skilled labor in a competitive market is an open question.
This is because health care costs have (usually) risen much faster than wages, meaning employees prefer to have more compensation in the form of tax-free benefits rather than taxable wages. If costs keep going up unchecked, that preference is unlikely to change.
While the battle over Obamacare rages, the larger trend market trend is clearly toward more consumer responsibility and engagement in health care, and less employer paternalism. Private insurance exchanges are an evolution, not a revolution in that regard. Today, 23 percent of employers who offer health coverage offer high-deductible health plans, and 17 percent offer health savings accounts. The combination of high-deductible plans with HSAs is one of the few options proven to slow the growth of health care inflation while still providing protection against catastrophic costs.
Moving employees into a private insurance exchange in a defined contribution framework will support and extend this trend, and it may cause less backlash than if an employer simply shifted all of its employees into high-deductible health plans at a single stroke. In this sense, employee choice takes the sting out of the more or less inevitable transition into a CDHP environment.
If companies are going to move towards private insurance exchanges and defined contribution arrangements it makes sense to try the model now, while medical cost inflation has slowed, meaning that employees won’t face double digit premium increases anytime soon.
If they work well, private exchanges are also likely to shift consumer attitudes in a direction favored by conservative health care reformers like Paul Ryan. Critics have always derided competition and consumer choice in health care because consumers ostensibly lack information on price and quality that they need to make informed choices. That critique may have rung true even a few years ago, but it isn’t true anymore. Companies like Castlight and United Health offer digital tools that can instantly transmit cost and quality information to employee’s cell phones and tablets when they are searching for high quality, affordable providers. This makes high deductible plans attractive even for consumers with chronic illnesses, not just the “healthy and wealthy.”
And once employees shop comfortably in a private (or even public) exchange, they’ll be much more likely to feel comfortable shopping after they’ve enrolled in Medicare and have the opportunity to shop for plans with “premium support” or some other defined contribution mechanism. The overall insurance market will be much more oriented towards individual sales, and people may stick with the same insurer for decades.
Liberals are apt to greet these trends with skepticism – but if they do, they can also thank Obamacare for giving them a big shot in the arm.
For all of the heated rhetoric surrounding Obamacare, on both sides of the aisle, it is largely trying to remake U.S. health care markets from the margins – by focusing on the relatively small number of people in the individual insurance market. If CBO projections hold, about 25 million Americans may eventually find coverage on the exchanges – compared to over 150 million in the employer-based market.
One specific reform that conservatives and liberals could embrace in debt and deficit negotiations is to create or phase in a standard deduction or tax credit for health insurance, regardless of where the insurance is purchased. A standard deduction would accelerate the adoption of private exchanges, and ensure that individuals and families can carry their coverage with them when they change jobs – or even move from public to private exchanges. (Under Obamacare, that isn’t an option – since individuals would have to drop public coverage to receive employer coverage, and vice versa.)
Another advantage of a standard deduction is that it wouldn’t distort labor markets, or encourage companies to cut back on hours for low-wage workers to avoid Obamacare’s employer penalties for firms that don’t offer “qualified health plans”. In the long run, phasing out the employer deduction and creating a truly portable tax credit would lead to higher wages, slower health care inflation, and more fluid labor markets.
While the debate over Obamacare isn’t likely to subside anytime soon, a few targeted changes to the tax code that have had bipartisan support in the past could make private insurance exchanges an even more powerful engine for cost control and innovation in health care delivery, while leaving public exchanges as a fall back for those without access to employer-based portals.
Consumers could, on their own, decide which model they preferred (or could rely on traditional insurance brokers). But regardless of where they purchased their insurance, they could keep it. Obamacare may – intentionally or not – kill traditional employer-provided insurance. But that might be a good thing for employers, employees, and America’s fiscal future.
INVESTOR’S NOTE: Obamacare’s “Cadillac Tax” will have significant implications for large and small employers at risk of being impacted by the tax. Companies with legacy retiree health coverage are also likely to continue to move their employees to private Medicare exchanges. Companies that offer benefit management services, like Aon Hewitt (AON) and Towers Watson (TW), stand to gain from the increasing interest in offering defined contribution plans in an exchange environment. The growth of competitive private exchanges will also challenge health insurance companies like Aetna (AET) and United Health (UNH) to offer targeted products to more cost sensitive employees.