When Starbucks announced that it was shifting its health benefits strategy from a single carrier to multiple carriers via a private exchange, insurers – and the rest of the benefits management world – took notice. Beginning with 2017 open enrollment, eligible U.S. employees will have the ability to shop for and buy health insurance through a private health exchange. Although Starbucks did not reveal how many of its 160,000 U.S. employees receive benefits through the company, the number is sure to boost the tally of employees enrolled via a private exchange. And it adds further evidence to the argument that private exchanges are no fad. Here, Oliver Wyman’s Howard Lapsley and Chris Bernene explain why private exchanges are here to stay, and why insurers should now double down on their private exchange strategy:
When private healthcare exchanges for employees first burst on the scene in 2012, they seemed poised to permanently alter the employer market. However, the delay of the Cadillac tax and lower than anticipated cost-trend increases, along with still-limited functionality and decision support led to slower-than-anticipated growth. After an initial flurry of interest, many employers settled into wait-and-see mode.
But today, consumers’ increasing cost share, desire for customized benefits solutions, and worry over financial exposure, combined with employers’ concerns over accelerating cost trends and payers’ need to diversify product offerings has created renewed energy in private exchanges. In fact, we predict there will continue to be significant adoption over the next two to four years.
Private exchanges are no fad, and they are emerging as a critical component of a payer’s omni-channel strategy. (Omni-channel defined as ability for customers, no matter the segment, to access and buy benefits from their preferred channel source – be it an agent or an avatar.)
How can we say private exchanges are here to stay?
Numbers don’t lie. According to the Employee Benefits Advisor PBE Index (data from eight leading private exchanges), the number of employers using exchanges has increased 142 percent since June 2015, and lives covered jumped 121 percent. Mercer predicts over 1.5 million lives on its exchange in 2016, a 42 percent increase over 2015. And though estimates vary greatly, we believe private exchanges will have 10 million active enrollees (not including retirees, whom account for about another 2 million enrollees) by the end of 2016.
There is already meaningful traction in the small and mid-size markets; and with over 150 exchanges in the market, there will be continued marketing and sales efforts to drive growth. Anticipated consolidation will only strengthen exchange platforms’ technology advances (decision-support algorithms etc.), product shelves, and appeal to customers large and small.
Private exchanges are delivering on simplicity. Private exchanges are starting to deliver on the underlying customer need for simplicity and administrative ease (i.e. administrative and outsourcing relief) – a particularly attractive selling point for smaller employers, which have a need for turn-key solutions. The attention and popularity of Zenefits, in spite of its CEO woes, and Hixme, a California entity that allows employers to set benefit contributions and then facilitates employee access to the retail health marketplace are examples of the market responding to customer needs.
Private exchanges facilitate defined-contribution models. New research predicts that U.S. health spending will grow 5.8 percent a year through 2025. While this is lower than pre-recession growth rates, it will still outpace inflation. Add in soaring specialty pharma costs, and it is not surprising that more employers are turning to defined-contribution models to limit or predict costs. As employees shoulder more of their health expenses via defined-contribution plans, demand for consumer-friendly and tailored benefits packages will rise.
Reasons to double down
Private exchanges are a certain part of the future distribution landscape. Toe-dipping time is over; payers need to recognize the future market is an omni-channel one and approach private exchanges with a purposeful intent in how to play.
Here are five reasons why payers should double down on their private exchange strategy:
1. Offers pathway to product diversification
Private exchanges are a way for payers to test new and innovative products and adjust real-time offerings (following the model of most successful web start-ups). For example, private exchanges provide a great vehicle for expansion in to new ancillary products, new wellness, nutrition, or financial-security offerings. Exchanges also offer an easy way for an innovation to gain traction and scale in the market quickly.
2. Facilitates lifestyle product-bundles
Technology advances (in the form of tools and decision-support algorithms) are making it easier for consumers to choose the products most appropriate for their life stage. Private exchanges allow payers to offer “bundles” of core and ancillary benefits customized to each consumer’s life-stage needs. The consumer-friendly guidance available via private exchanges can help customers navigate benefits decisions and create “total risk-protection” lifestyle bundles.
3. Can protect turf and deliver unique experience
Other industries have seen product manufacturers successfully move into distribution by creating “marketplaces.” This works in P&C and in mutual funds. Health insurers should think about private exchanges in the same way. A proprietary exchange can work if it allows consumers access to special products only available there and also provides a superior shopping/buying experience. As part of an onmi-channel strategy, single-carrier exchanges are particularly effective in protecting share in a high-penetration market and/or targeting a specific population or segment with targeted offerings,(e.g. retail or software sector).
4. Consumer-friendly complement to “feet-on-the-street” sales
In the omni-channel market, relying on the traditional broker approach to meet customer needs isn’t going to be good enough. Private exchange platforms provide the ability to offer products and services in a consumer-friendly way that traditional broker “feet-on-the-street” approaches cannot. That is why so many brokers have embraced electronic exchanges in one form or another to help them sell more products more easily. The question is to what extent (and how quickly) will these platforms help drive a lessening of the broker influence going forward, particularly in the smaller end of the market?
5. Supports consumer-centric makeover
Private exchanges should be thought of not only as a new distribution model, but as a central part of a consumer strategy. That’s because the technology powering exchanges will continue to advance, and exchanges will emerge as a primary gateway for customers to purchase insurance products and access healthcare services. Already, several best-in-class platforms are able to deliver an outstanding consumer experience that includes shopping, comparing options, and decision-support. And, in a pattern playing out across other industries, it will be essential for health plans to prepare for the coming tsunami of Millennial customers who will look to digital marketplaces—not necessarily human intermediaries—to manage their health and benefits.
But simply being placed on multiple electronic exchanges won’t suffice. Payers need to survey the exchange landscape and purposefully work with the future exchange “winners” (i.e. those that have enough scale to invest in needed technology and partner with carriers to deliver innovative product innovation packages) in a targeted manner to reach those high value groups in a value-added, cost allowable manner. This may also be complemented with a single-carrier option. To do that, insurers must understand what their customers value today and in the future at the segment level; and then they must partner with all distribution “doors” to optimize offerings and leverage the latest in technology and consumer-centric engagement techniques and product design.