Building a Better Benefits System
- Principle #1: Give Them Money and Let Them Shop
- Principle #2: Provide True Price Transparency
- Principle #3: Provide Meaningful Choice
- Principle #4: Offer Guidance in the Form of Decision Support
- Principle #5: Optimize the Shopping Experience
- Principle #6: Ensure a Cultural Fit Within the Organization
- Principle #7: Refine, Iterate, and Improve
The creator of one of the first private exchange platforms lays out what we mean by the concept of a “benefits store” (also known as a “benefits marketplace” or “private exchange”) and the seven key principles that define one.
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Access to health care has long been an emotionally and socially charged issue. During the Progressive Era of the early 1900s, President Theodore Roosevelt believed that “no country can be strong whose people are sick and poor.” Such beliefs gave rise to much of the activism and political mayhem over health care and health insurance we see today.
One recent action that has riled public opinion on both sides of the health care debate is the Patient Protection and Affordable Care Act (PPACA), typically called the Affordable Care Act (ACA) or my least favorite term, “Obamacare,” which President Obama signed into law in 2010. By 2014, the first coverage year for which it was implemented, the ACA succeeded in its mission of getting millions of previously uninsured Americans enrolled in some form of health coverage, such as private insurance or Medicaid (see Figure 1.1).
Figure 1.1 Percentage of Uninsured U.S. Adults, 2010–2016.
Other than the burden of increased reporting requirements and headaches about which employees need to be covered by an employer’s health insurance, the hoopla surrounding the ACA and its attempted repeal has very little to do with employer-sponsored group insurance. Still, the steam rising from President Obama’s pen since the signing of the ACA has served to increase consumer awareness and engagement in the overall benefits landscape and has brought the term marketplace into the mainstream when it comes to purchasing individual health insurance.
In contrast to the individual market, private benefits marketplaces, also known as private exchanges, enable people who receive insurance from their employers to tailor-make their coverage portfolios, just as they would select their 401(k) portfolio, as well as access advice and tools that can help them feel more confident about these types of transactions. Giving the American people the freedom to shop online for the coverage they want and need has opened opportunities for innovation and market growth for insurers, human capital experts, consultants, and employers themselves. Indeed, we are actualizing the potential of private exchanges forecast by experts such as Dr. Paul Fronstin of the nonpartisan Employee Benefit Research Institute (EBRI), who said in 2012:
Through these exchanges, in tandem with a defined contribution funding approach, employers can accelerate the drive toward a more mass, consumer-driven insurance market and gain more control over their health care contribution costs, capping their own contributions, and shifting to workers the authority to control the terms (and to some extent, the costs) of their own health insurance.1
Using the sound principles of variety, quality, and transparency that have guided effective marketplaces throughout time, private exchanges are poised to empower more people to make personalized, informed choices about their health and well-being in an environment in which the health care conversation is front and center—and this is where it gets really exciting.
The success of our company Liazon, one of the first private exchange operators, and some of its competitors, demonstrates that private exchanges are becoming a sustainable fit for employers and their employees. A recent press release from Frost and Sullivan, titled “Private Health Insurance Exchanges Solutions Primed for Robust Growth Among U.S. Employers as Vendors Differentiate to Meet Evolving Consumer Expectations,” notes “employers’ growing need to reduce the costs, complexities, and back–office administrative burdens” and consumer “expectations derived from shopping experiences with online retailers.”2 With Liazon-powered exchanges, companies can adopt prestocked, “ready to go” online stores for buying benefits, or they can design their own custom stores that provide their employees with meaningful choices in medical, dental, and vision insurance, along with protection benefits like life and disability insurance, identity theft protection, and much more (see Figure 1.2).
Figure 1.2 Different Benefits Portfolios for Different Folks.
Until recently, most people had limited health insurance choices. Employers typically contracted with an insurer to offer one or two plans that people either signed up for or waived in lieu of paying out-of-pocket for their own care. As discussed in this book’s Introduction, the average number of medical plans offered actually decreased from 4.1 plans in 2015 to 3.6 plans in 2016.3 In contrast, the average number of medical plans offered on Liazon private exchanges in 2016 was 7.2, in line with the previous year.4 With private exchanges, also known as benefits marketplaces, people have more choices and can select the specific plans to create a unique portfolio that satisfies their personal and family needs.
The following sections dig a little deeper into some essential principles from economics and other disciplines and show how they are at play in a benefits marketplace.
Principle #1: Give Them Money and Let Them Shop
By offering employees control over and accountability for their money, the defined contribution model is one cornerstone of an efficient market. With a defined contribution model, an employer allocates a certain amount of money to each employee, who then decides what combination of benefits they’d like to purchase. Each employee can choose from a variety of plan designs for health insurance, for example, and decide how much he or she is comfortable paying for monthly premiums now versus how much may have to be paid later—in the form of deductibles, coinsurance, and so on. The employee can also allocate dollars from his or her paycheck toward additional benefits to help round out any gaps that may be missing from their medical coverage.
The defined contribution model became commonplace in retirement benefits planning decades ago. Employers and employees embraced the concept of people managing their own IRAs and 401(k)s, combining personal savings with designated annual employer contributions, with caps and floors based on an employee’s salary. From the employer’s perspective, 401(k)s saved money, compared to a pension plan. These vehicles contributed to a vast portion of individuals’ savings for a number of reasons: the psychological appeal of controlling one’s own retirement dollars, defaults on private pension plans (which scared employees and employers alike), fairly robust public confidence in rising stock and bond markets, and the role of many federal policies (including adjusting interest rates) in influencing returns. Viewed in this context, the concept of defined contribution is fairly simple to understand and often used as an analogy for how it works for employer-sponsored benefits.
By offering workers a defined, or fixed, contribution as part of their compensation to purchase health insurance and other benefits, employers cut through the murkiness that has long been associated with the cash value of employer-sponsored benefits. Employees would never accept not knowing how much salary a prospective employer is offering, and the same should be true for the compensation that comes in the form of benefits—which on average account for nearly one-third of the total employer costs of employee compensation.5 Giving employees cash to spend in a store instead of a predetermined insurance policy makes it clear how much the benefit contribution adds to a person’s total pay (a far bigger chunk than they may realize). When people understand that they’re spending their own money, they can make smarter, more personalized, decisions than their employers did on their behalf in the past. Liazon’s data show that with private exchanges, the value equation works better all around: Employees are more satisfied and engaged with benefits, and employers save money or control costs.6
Writing in the 2014 New England Journal of Medicine with Barak Richman and Kevin Shulman, Harvard Business School professor and consumer-driven health care trailblazer Regina Herzlinger summarized the defined contribution difference:
In rigid sectors of the economy, defined-contribution strategies could burden employees disproportionately with the weight of medical nflation. Yet the appeal of defined-contribution plans—whether as part of Medicare reform or in the form of changing benefits for retirees and workers—remains potent. Defined-contribution strategies reveal to employees and health insurance customers any cost increases that exceed the growth of wages, and individuals purchasing insurance on exchanges have shown a growing preference for lower–priced plans that increase cost sharing for health expenditures.7
With control of these dollars turned over to them, consumers are using private exchanges to foster the market–based competition many analysts have sought for years. They’re deciding how much to allocate to certain benefits, based on the perceived value of those benefits to their lives.
Professor Mark Hall, director of the Health Law and Policy Program at Wake Forest University, put it this way:
In the past with traditional plans, the employer picked up the whole or most of the cost. People had to decide whether they wanted single or spousal coverage and the differences between the various options they had were quite small. The key to defined contribution and employee control is how we make cost decisions at the margin.
Under defined contribution, we see the cost of what we’re adding to our basic package. This means paying a great deal of attention to what the added value will be of more generous coverage that comes at a higher cost. That kind of focus on the marginal cost is critical and helps drive value-based competition. It makes the consumer think hard: is it really worth it for me to opt into a plan that has a broader network or that frees me from certain restrictions? We’re asking ourselves not only about whether a benefit fits our needs—but is that extra cost worth it? That is the critical piece that the exchange concept brings.8
There are many advantages resulting from people spending their money more thoughtfully in private exchanges. Consumers are more aware of overall plan costs, as well as their share of them, because of true price transparency. They, in effect, demand their own cost controls through benefits selection, with guidance in the form of decision support. Thanks in part to the private exchange paradigm, more people (particularly single and younger workers) are choosing high-deductible health plans, narrower provider networks are becoming more popular, and nonmedical products from critical illness insurance to telemedicine are finally getting their due.