Providing quality health insurance to your employees is a never-ending challenge. The Affordable Care Act (ACA) established a number of new regulations for large organizations while the cost of health insurance continues to go up every year. Under these tough circumstances, private exchanges for organizations have appeared as one possible solution.
What Are Private Exchanges?
Private exchanges for organizations are marketplaces where your employees can compare health insurance plans. You sign your organization up with a benefits firm that runs an exchange with plans from different health insurance firms. Then, you give each employee a set amount of money, like $400 a month per individual, and they use this money to buy a plan off the exchange.
Rather than paying for a health insurance plan on an employee's behalf, you give them money that they then use to buy a plan themselves off the exchange. Private exchanges have been described as a defined contribution model of health insurance, like a 401(k), whereas offering your own plan is a defined benefit, like a pension. Under a defined contribution style private exchange, you know exactly how much you'll spend on health insurance benefits ahead of time.
Drivers for Adoption
The number of organizations signing up for private exchanges is growing quickly. According to Accenture, roughly 40 million employees will be using private exchanges by 2018. Cost savings are a big reason why organizations are moving to private exchanges. Because health insurance costs go up every year, they can be unpredictable and difficult to budget for. If you have your own insurance plan, your organization will have to absorb these costs.
With a private exchange, you lock in your cost per year because you give each employee a fixed amount to buy coverage rather than guaranteeing coverage for a plan, regardless of cost. If an employee wants a more expensive plan, they pay the difference out of pocket.
Organizations also see private exchanges as a way to avoid compliance issues with the ACA. The organization running the private exchange is in charge of designing the plans and make sure they meet all ACA regulations.
One important issue a private exchange can help to circumvent is the Cadillac Tax, an extra tax on health insurance plans with benefits over a federal threshold, according the Washington Post. This tax is set to start in 2020, although this is one of the items under discussion with the new administration. If you run your own plan, you need to either design a plan that avoids the Cadillac Tax or pay it. With a private exchange, the insurance firms are responsible for handling this planning or they will have to pay the tax themselves.
The ability to save money is a key advantage of a private exchange. When you use a private exchange, you set up a predictable, fixed cost for health insurance benefits. Employees have a set amount per year to use on the exchanges so you know how much you'll spend each year.
At the same time, the competitive model of a private exchange has many insurance firms competing for the business of the employees on the exchange. They have more of an incentive to keep the premiums low compared to when your organization is committed to just one firm.
You also cut down on the administrative work of running your own health insurance plan. The private exchange handles administrating claims and designing the health insurance plans according to the new ACA regulations. This frees up time for your HR department to focus on other HCM needs.
Employees benefit because they have more options from multiple firms. Employees that want more coverage can choose more comprehensive coverage, while healthier employees can choose less expensive, high-deductible plans and put the unused money toward another benefit like dental. You can't offer as many options when you have your own plan.
If you decide to use a private exchange, you need to be careful not to upset employees, as health insurance is one of their most important benefits. You need to make sure that the amount you provide per employee each year is enough for them to buy effective coverage on the exchange or else they'll get frustrated, which can increase turnover.
Since private exchanges are also fairly new, you and your HR department will need to educate both your current workforce and new hires about how your plan works. Employees may be uneasy since it's not a traditional health insurance plan. Your explanation should highlight how the quality of your plan remains the same.
As the health insurance landscape continues to evolve, you need to find new ways to adapt. Private exchanges for organizations could be the answer.
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