How health insurers can thrive in the private exchange market [Q&A]

Amid a flurry of headlines about public exchanges put in place by the Affordable Care Act, it can be easy to forget that private exchanges are also playing a major role in how the health insurance industry operates.

Private exchanges continue to be a growth industry. Their enrollment numbers reached 6 million in 2015 and could reach 40 million by 2018. A survey conducted by Deloitte last fall found that many employers are optimistic about private exchanges' ability to simplify their role in benefit administration, lower costs and provide employees with higher-quality coverage.

To find out more about how the rise of private exchanges have changed the industry and what insurers can expect in the future, FierceHealthPayer spoke to Ashok Subramanian (pictured right), co-founder and CEO of private exchange company Liazon. 

FierceHealthPayer: How do private exchanges drive member retention and build consumer loyalty to health plans? 

Ashok Subramanian: We've seen a lot of progress. Our research at Liazon has found that in a multicarrier exchange environment there's a pretty substantial effect of price. We see on the public exchanges and elsewhere that consumers are relatively price sensitive, and so that obviously keeps carriers on their toes in terms of being efficient. But we've also seen a high degree of consumer loyalty.

People don't like changing year over year. There's about a 50 percent incumbent effect, meaning they're a lot more likely to stay with the carriers they have and they know.

At the end of the day, private exchanges have created a laboratory-like environment for health insurers to test some ideas they've been thinking about for a while in terms of how to do a better job of tracking and retaining membership. We're starting to see, now that we're a few years into this, the benefits of those new ideas. And I expect insurers to come out with new ideas as they learn more.

FHP: What, if anything, do public and private exchanges have in common?

AS: I like to joke that the only thing in common with the private exchanges and public exchanges is the word exchange. And perhaps that was a mislabeling. The primary important commonality is both are about individuals owning the benefit dollars. On the public exchange, it's member dollars, and on a private exchange it's employer dollars, but with much more transparency and ownership over the value of those dollars than in a traditional benefits program.

When people see the full price tag of products and have full control over the dollars, they're making the kinds of economic tradeoffs that they make in just about any other industry, but haven't necessarily had to make in healthcare because of the way it was delivered.

The second commonality is the aspect of choice. On both types of exchanges, you have people that have choices of carriers, choices of plan design, choices of different kinds of benefits. And so you start to see, again, a much more consumer-like market.

FHP: Where do private exchanges stand now--is uptake increasing, or has it leveled off?

AS: Uptake is absolutely increasing. If you were to draw a graph of the evolution of 401(k)s in the early 1980s and the adoption rate of those plans in the retirement space and then you draw a similar chart with private exchanges, you would find a relatively similar pace of growth. As with Health Savings Accounts, the pace of growth was rapid, but not perhaps quite as rapid as the market buzz would have hoped. And I think the reason for that is very simple, because things related to people's healthcare and people's financial security are emotional decisions; they're ones made with great care. Anybody in the private exchange space is remarkably pleased by the overall pace of growth.

There's much more traction in the small-to-middle market than in the large market. And I think that's also to be expected, given that large companies have different levers through which they manage their overall rate of healthcare inflation, and the rate of healthcare inflation has been relatively low for the last few years. So you don't have quite the burning platform in the large market as you do in the small-to-middle market to make the kinds of changes at the company through the introduction of a private exchange.

FHPWhat are the business benefits for health insurers who enter more private exchanges?

AS: I think every insurance carrier of reasonable scale--whether a regional plan or a national plan--participates on a private exchange in one form or another, whether it's participating on a third-party exchange or creating a private label online storefront with their own products. Different folks have taken different approaches, but everybody is in the business.

There's enough companies doing it, and there's enough fundamentals in the market that suggest more and more will do it. We find that carriers spend a lot of time talking to us and others thinking about how to change their business system to work in a private exchange model, which is different from a traditional model.

How do you interact with your brokers differently, how do you develop products differently? How do you think about plan design, how do you think about underwriting? So you literally have to take the end-to-end business process of how you work and think about how that has to be modified in a private exchange model, which is similar to carriers having to think about modifications in the individual market.

Now in the private exchange you have a bit of that hybrid. You have to cater to people because they're buying your products, but you also have to cater to employers, because employers are involved in the servicing and retain a lot of the responsibility with sponsorship.

FHPHow do insurers modify their businesses to fit a private exchange model?

AS: You have to look at your business with a fresh set of eyes, imagining that your customers are beyond just the insurance broker distribution and the employer, but people who are walking down the street. And that really does require an end-to-end review. The nitty-gritty involves thinking about things like plan design.

Here's an example. There's a lot of talk about narrow network plans and value-based payments to drive more efficiency in the healthcare system. What we find is when employers are making those choices, there is a relatively limited uptake in narrow network type plan design, because the employers are concerned in aggregate about changing the dynamics of their employees' providers.

So 2 percent to 3 percent adoption is what I typically see--very low. Whereas in the private exchange model, when you offer a narrow network plan to people, you start to see what we're starting to see in the public exchanges, which is that people are willing to trade off the dollars that they have to spend on insurance for some of those differences in provider access.

So we find in those situations upwards of 20 percent to 30 percent of people are opting for a narrow network option.

A carrier that is going to go into private exchanges has to think through that and have products that are ready--or they're going to lose market share really quickly.

Editor's note: This interview has been edited for length and clarity.

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