Failure to Launch – Why Exchanges Aren’t Living Up to the Hype

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By Ryan Glushkoff

Not only did the arrival of the Patient Protection and Affordable Care Act (ACA) bring more work for benefits professionals nationwide, but it also brought insurance exchanges further into the public view. Private exchanges have been successfully used for employer-sponsored Medicare retirees for years, but until the launch of the ACA, their use never reached the active employee segment of the employee benefits market.

Under the ACA, the market for private exchanges was forecast to explode. According to Accenture in 2013, private exchanges would have 40 million members by 2018 and Aon Hewitt predicted that one-third of employers would offer their group-based health benefits via a private exchange in the next three to five years.The value proposition of private exchanges seemed to have the right ingredients: more employee choice and decision making help through online technologies, less administrative burden through a vendor-provisioned solution, and more cost savings through increased carrier competition.To meet these rosy forecasts, new vendors rushed in from all corners of the employee benefits market. From technology providers and carriers to brokers and consultants, everyone put together a private exchange offering and seemed to think that demand in private exchanges was about to explode. But like most ideas, the reality didn’t live up to the hype.  

The reality is that, based on available information, there are now between 5 million to 8 million total enrollees covered by private exchanges according to Mike Gaal at Milliman (source). But according to Accenture in 2013, there should be 19 million enrollees on private exchanges right now, which means that the original estimates were off by more than half. So that begs the question: why are private exchanges suffering from failure to launch syndrome? Let’s explore four potential reasons.  

First, the initial catalyst for driving interest in private exchanges is that it would drive down healthcare costs and insurance premiums.  The idea was that health plans and insurance companies would compete side by side in a marketplace setting which would drive down costs.  This never materialized in the private sector, particularly in the fully insured segment. Health plans refused to compete side by side, so the underlying promise of impacting healthcare costs evaporated along with employer’s interest.

Second, the current model of customized employee benefits management and administration on a per employer basis works just fine for most organizations. From an employer’s perspective: it’s not broke, so why the rush to fix it? In many ways exchanges are a feasible solution without an urgent problem, which is why we’re seeing slow adoption of private exchanges.

Third, there is still confusion about what an exchange is and what it is not. The difference doesn’t lie in the user experience, but in the financial performance for those involved. A hard to forecast financial performance combined with a lack of buyer’s urgency makes for a lack of buyers.

And lastly, private exchanges may be suffering because of their association with public exchanges. Several state exchanges have reported operational difficulties in the last year, and some insurance carriers have withdrawn their participation. As news of public exchange woes comes out, the brand of “insurance exchanges” – whether public or private – has suffered.

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