Preparing for Private Health Insurance Exchanges

Private exchanges' rapid growth has slowed recently, but is still strong. Hospitals and health systems should monitor private exchange growth locally and have a plan for how to deal with the disruption they can bring.

This article first appeared in the October 2016 issue of HealthLeaders magazine.

Private health insurance exchange enrollment continues to grow, albeit at a slower rate in 2016. Yet as the growth continues, hospitals and health systems need to understand how private exchanges are different from traditional insurance plans in order to make informed decisions about whether and how to negotiate deals with them, and how to compete as their influence grows. The ultimate fate of these exchanges is uncertain, but will hinge on a couple of key points: Will hospitals and health systems be willing to accept rock-bottom rates in return for incremental volume? Will employees and their beneficiaries accept extremely narrow networks in return for lower premium costs? So far, the answer seems to be a qualified yes.

Their promise
Private exchanges were envisioned to mimic the Patient Protection and Affordable Care Act Health Insurance Marketplace exchanges in at least one key way—by injecting consumers into decision-making about healthcare expenditures, and making them choose a narrow network in which to consume services. By creating these networks, intermediaries, like AON Hewitt, Mercer, and Willis Towers Watson, among others negotiate big discounts in return for guaranteed volume. Like HMOs, private health insurance exchanges tend to heavily restrict where a beneficiary has coverage in a local market. The big difference is that instead of the employer forcing limited choice onto the employee, the employer makes a defined contribution to an employee's annual health costs, and asks the employee to choose from a few combinations of costs and benefits. This allows the employer to cap its healthcare costs, an extremely attractive feature for it. The employee, frequently, chooses the low-cost, narrow network option.

Private exchanges inject patients directly into value-seeking from healthcare providers—they have a limited pot of money to spend on benefits, and depending on the plan they choose, various levels of copay and coinsurance rates come out of pocket, a move that's meant to put downward pressure on rising healthcare costs through, in part, consumer value-seeking.

Private exchanges have been popular in pockets of the country, especially with small and midsize employers that have decided private exchanges are the only way they can continue to offer health insurance benefits, given the uncertain cost profile of traditional health plans.

Accenture estimated private health insurance exchange enrollment reached 8 million in the 2016 benefit year. While growth has slowed to 35% from 2015–16 compared with 100% between 2014 and 2015, enrollment was only 3 million in the 2014 benefits year, so growth over time has been significant. Accenture had predicted in 2015 that enrollment would approach 40 million by 2018, but that forecast is in doubt because the 8 million actual enrollees in 2016 fell short of Accenture's 12 million projection.

Despite the growth slowdown, "projections such as this should make any hospital or health system anxious, and it is important to develop plans accordingly should the market change quickly," says Keith Alexander, senior vice president and regional president for Memorial Hermann Health System.

Big discounts, but slow adoption
Texas has the second-highest enrollment in private exchanges (behind only Florida) and enrollment in the Houston area has reached approximately 350,000, says Alexander. Healthinsurance.org, a consumer-focused health insurance information resource, projects 1.3 million people enrolled in private exchanges in the state in 2016 (Florida had 1.6 million). So while 350,000 enrollees in Houston may sound like a lot, in a market of nearly 7 million, 350,000 is not huge.

In fact, Alexander says the buzz surrounding private exchanges has died down dramatically over the past couple of years, and while well-known purveyors of private exchanges are actively promoting them in the metro area, Alexander says the market is not responding as quickly as was anticipated.

That doesn't mean he's not preparing.

When preparing for private exchanges, "health systems will need to determine if they are willing to accept substantially discounted rates in return for projected incremental volumes," he says.

If they are, they need to be ready to ramp up direct marketing and education to individuals, he adds.

Memorial Hermann is going farther than that. In fact, health system leaders are investigating whether Memorial Hermann Health Solutions, the health system's provider-sponsored health plan, can become a viable private exchange option. Also, brand loyalty becomes ever more important as private exchange enrollment rises, Alexander says.

He adds that Memorial Hermann will focus on consistently demonstrating high-quality and cost-efficient care tied to high degrees of patient satisfaction, hopefully insulating against some of the business effects from a proliferation of private exchange-based health plans.

Further, Alexander says it will be critical to understand individual needs and decision-making triggers as well as maintaining strong physician relationships. Financially, he says the health system needs to critically assess the viability of alternate revenue streams and individual demands versus any type of broad pricing-reduction requests to participate in private exchange plans. Without a benefit design that would increase steerage into a health system's facilities and physician network, such a deal would be problematic from a variety of angles.

Be ready for bad debt
Enrollment in a private exchange plan can be a different experience than enrolling in an employer-sponsored commercial insurance plan. Among the variables enrollees and beneficiaries will encounter that they likely have not seen before are the complexity of plan designs, provider options, coverage, and out-of-pocket costs. And rather than the employer making a decision on behalf of dozens, hundreds, or thousands of employees and their dependents, with exchanges the enrollment process is one individual at a time, Alexander points out.

One concern for healthcare entities—and not just hospitals—is that private exchange members can move their network allegiance year to year, emphasizing the requirement that hospital and health systems must build brand loyalty with this population if private exchanges have gained a foothold in the market. Consumers increasingly are receptive to switching from services or goods that fail to meet their expectations, and healthcare, especially under private exchanges, will be no different. After all, consumers are bearing more of the financial burden associated with their care. In the past, they had been insulated from the cost of the services they consumed, but that is becoming more and more rare. As they experience more of the financial burden for their care through copays, deductibles, and coinsurance, they will expect to have consumer experiences that mirror the best of retail and other cash-based goods and services they consume.

The dark side of more patient responsibility for healthcare bills for providers is obvious: direct patient liability for bigger portions of the healthcare dollars expended on their behalf. Hospitals and health systems have to worry about that going forward, says Bruce Elegant, president and CEO at 176-staffed-bed Rush Oak Park (Illinois) Hospital, even if private exchanges are still a small part of the overall market in their region.

"The growth of private exchanges will result in a significant spike in patient liability for healthcare bills," he says. "Private exchanges pose challenges in verification of benefits and up-front collections."

These consumers will expect health systems to meet them on their own terms, through additional capability for telemedicine, for example, or expanded primary care office hours. If those elements are not provided, they could quickly gravitate toward organizations that do provide such features. Some are doing this already because of other competitive pressures that don't necessarily have anything to do with private exchanges, but private exchanges will exacerbate the trend.

"Hospitals of necessity will have to up their access for patients in terms of office hours and telemedicine capabilities," Elegant says. "Investments in care coordinators to assist patients in navigating a complex healthcare landscape are the single-biggest change that will provide dividends going forward."

Many little payers
Perhaps it helps to imagine each healthcare consumer who is covered under a private exchange as a payer––the catch-all term hospitals use for Medicare, Medicaid, and commercial insurers. Consumers in exchanges are each little payers, and that's becoming more true as more first-dollar coverage liability is shifted from employer to individual. Hospitals and health systems should recognize that consumers demand greater transparency, improved patient experience, accessibility, and convenience.

"It was only a few decades ago that the employer or the broker or the commercial health plan was calling all of the shots," says Memorial Hermann's Alexander. "Armed with the Internet and smartphone applications, consumers are now better able to make informed decisions on the quality of providers or health facilities."

Moreover, especially for health systems that plan to compete with their own health plan offerings, whether they be through the Patient Protection and Affordable Care Act Health Insurance Marketplace exchanges or any other mechanism, Alexander says it may be helpful to focus on the provider-sponsored health plan's "price position" in the local market. In other words, how competitively priced is your commercial insurance or exchange product relative to the competition?

"Armed with the Internet and smartphone applications, consumers are now better able to make informed decisions on the quality of providers or health facilities."

Alexander says if a health system has a health plan division, the published per member per month premium can substitute strategically as an expression of the efficiency of the delivery system as a whole. As a health system gains efficiency, its provider-sponsored health plan can lower its per member, per month costs, making it more competitive.

Consumers, meanwhile, will begin to compare total out-of-pocket costs as a fundamental and influential variable in choosing their health plan, including deductibles, copays, and coinsurance. And that's a big potential bright spot for health systems and hospitals as value-based healthcare matures, says Alexander. "Systems with contemporary plan design, an efficient provider network, strong chronic disease management programs, and robust data analytics will be able to price certain insurance products at 10%–15% less than their competitors."