While the pace of health care inflation has slowed a bit in recent years, prices of health care and health insurance are still going up – just a little more slowly than in the past. The rising cost of health benefits is still a major headache for employers. For several years, employers have tried one technique after another to try to hold down health care costs: self-insuring to cut back on the profit margin of health insurance companies, favoring plans that aggressively manage expensive services, and increasing employee cost-sharing.
Now, some employers are trying to see if a technique that most use for employee retirement benefits could work for health insurance too. They’re moving away from a defined benefit approach – where the employer pays for health insurance, minus employee premiums and cost-sharing – toward a defined contribution approach. They are offering their employees a fixed dollar contribution toward health insurance and leaving it to employees to pick the plan. This is analogous to moving from a pension plan to a 401(k). In some cases (especially with lower paid employees), the employer expects their employees to find insurance on the health insurance exchanges set up under the Affordable Care Act (a/k/a Obamacare). But in many cases, the employer has arranged for a private exchange, usually set up by an insurance broker or benefit consultant.
The private exchange has entered into arrangements with various health insurance companies to offer their policies on the exchange. The employee can take the dollar contribution from their employer and shop for a plan among those offered on the private exchange. If you’ve seen one private exchange, you’ve seen one private exchange. That is, there is great variety in these exchanges. Some offer a greater range of insurance plans than have typically been available through a single employer. This can be a benefit to employees, allowing them to choose the coverage that best fits their needs – but can make the decision at open enrollment time a much more complicated matter. Employees need to make an educated choice taking many factors into account: the provider panel, the premium cost (if any) above the employer’s contribution, and cost-sharing requirements (deductibles, copayments and coinsurance).