In 2020, Workers Will Decide Health Benefits

Feb. 09--By the end of the decade, the majority of American workers will be selecting their health benefits from an online menu of plans and paying for those benefits with a stipend from their employer, according to experts in the field.

If and when that day comes, it would mark a major shift for the nation's health care apparatus and a reversal of the method by which health insurance has been furnished to American workers for decades -- through a defined-benefits plan selected by an employer.

In 2020, private health "exchanges" will be the predominant way that health care benefits are delivered in this country, said Eric Grossman, a senior partner at Mercer and the exchange business leader in his company's benefits division. Mercer, based in New York with an office in Pittsburgh, is a global human resources, benefits and financial services consultant.

Mr. Grossman, like many other experts in the field, likens the transition in health insurance to the ongoing transition in retirement planning -- where once the "defined-benefit" pension was commonplace, now many companies offer "defined contributions" which employees can steer to a 401(k) or an investment mix of their choice.

That transition took two decades, but now, for anyone under the age of 35, employer-subsidized retirement -- where it still exists, that is -- generally means a defined contribution.

"Our prediction in health care is that a similar transition will happen, [but] it will happen more quickly," Mr. Grossman said.

Private health insurance exchanges -- some of which already exist -- work like this: Instead of an employer negotiating a standard benefits plan or two for its employees, companies instead make a defined cash contribution to employee accounts. Employees then use the cash to select from a menu of a half-dozen or so health plans, with varying price levels of coverage.

Exchanges are set up and managed by health insurers (such as Highmark), benefits consultants (such as Mercer), traditional benefits brokers and online brokers. Plans included in exchanges can be a mix of plans from regional and national insurers, depending on who is the sponsor. A Highmark exchange would offer only its own plans, for example, while a Mercer exchange would offer plans from several companies.

Businesses have dozens of plans to choose from within the exchange "universe" -- health as well as dental, vision and others -- but that list is whittled down to a handful before the plans are finally offered to employee groups.

These are called private, or closed, exchanges because the policies are available only to company employees -- not to the population at large, as is the case with the national and state-based marketplaces that came online Oct. 1 as part of the Affordable Care Act.

Right now, said Bill Brown, Highmark's manager of digital distribution, national marketplace penetration for private exchanges is about 3 percent and adoption rate among Highmark's client base is about the same. Large companies with more than 250 employees have been particularly cautious.

Highmark began offering large employers access to its "MyBenefits" exchanges Jan. 1.

"There's a lot of interest," Mr. Brown said. "But they're not ready to jump."

That's partly because, despite the 401(k) analogy, there's not much immediate cost savings in a health exchange, particularly for large groups. When big employers moved away from pensions and toward defined contributions, the point was to reduce immediate retirement costs and unload a major financial liability going forward. Today, less than 30 percent of Fortune 100 companies offer a defined-benefit retirement plan to new salaried employees.

But with health exchanges, big, self-insured employers that now pay all of their own medical claims will continue to do so. The impetus to move to an exchange, at least among larger employers, won't come from claims savings but rather the opportunity to offer a wider array of health plans to employees and to offload some of the benefits administration now handled by human resources departments.

The real savings will come for fully-insured small-and-mid-sized groups, Mr. Brown said.

They'll be able to offer far more variety to employees, and the entire process will happen online. "It really streamlines administration," he said.

If they "move onto [the] exchange, they get five medical options, four dental, four vision" plans, he said. Employees can choose the plan that is best for them and their family.

While the pension analogy is the one most commonly used to describe the shift, Mr. Brown said a comparison to the world of retail shopping might be more appropriate. Where once customers went to a store and were able to select from whatever the store had in stock, now they can go to Amazon.com and buy anything.

A decade or so ago, people might have been skeptical of the online shopping process, but not anymore -- at least, not in retail.

Mr. Brown believes that will be proven true in health insurance: 14 years ago, Highmark test-launched an online ("paperless," the press release described it) defined-contribution platform called BlueChoice. "It kind of fizzled out. Nobody was ready at that time."

But they soon will be. Part of it is just the ubiquity of the Internet. Part of it is getting used to health care as a retail market. And part of it, said Mr. Grossman of Mercer, is getting people to separate work from health insurance. If people don't buy auto or mortgage insurance through their employers, why do they get health insurance that way?

"The mindset for decades was, for most people, 'My employer provides it,' " Mr. Grossman said, and employers have done so, and continue to do so, for competitive reasons. Employer-sponsored health insurance became the norm in the U.S. following World War II, driven by recruiting needs and labor unions.

That era is ending, and Mercer is of the opinion that the "employee is in the best position to decide the best plan," Mr. Grossman said.

Mr. Brown predicted that in the next 18 months, up to 40 percent of small employers will be offering benefits through some kind of exchange and up to a quarter of midsized companies will do the same.

"The one thing I'm waiting for is someone really big to make a move [to exchanges] -- Walmart, McDonald's," Mr. Brown said. "That's the tipping point. And the entire market is going to start to switch."

Bill Toland: [email protected] or 412-263-2625.

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