Private Health Insurance Exchanges

Credit: tedeytan, via Flickr

This week Walgreens, the country’s largest chain pharmacy, announced that next year it will be dropping its traditional employer-sponsored health insurance plans and moving its 160,000 workers onto a private health insurance exchange in 2014 to find coverage. The company chose the private exchange run by the global management company Aon Hewitt officially known as the Aon Hewitt Corporate Health Exchange.

Walgreen’s decision is not an abnormal one. In recent months many other major retailers and businesses like Sears and IBM have made a similar decision. The end goal in all of these circumstances, Walgreens included, was to try to save money and cut costs.

Seeing all this in the headlines today got me thinking, what the heck is a private health insurance exchange anyway, and how is it different from the state-run health insurance exchanges (i.e., The New York State of Health) being set up by the Affordable Care Act?

The traditional system

To really understand the how and why of these private exchanges you need some background on how employer-sponsored health insurance traditionally works.

Usually, the company contracts with a health insurer to offer a plan for its employees. As workers sign up for coverage, the company and the employee, most times although not necessarily, share the cost of health insurance premiums every month.

However, this way of offering health insurance is slowly becoming more and more unaffordable for companies that contribute to their workers’ health plans. The main reason for this is that the cost of health care in the United States keeps rising. So year after year things are getting more expensive.

Defined Benefit

This traditional way of doing employer-sponsored health insurance is described as being a “defined benefit” model. Meaning that benefits are set, but contributions both from the worker and employer are not.

Let’s stop for a second and look at an average corporation’s health insurance plan. It’s usually a big plan covering lots of different things, which not everyone will use. Inevitably that makes these plans quite expensive.

Defined Contribution and contracting with private health insurance exchanges

So what are private health insurance exchanges? In a nutshell, they are places where workers at companies that have contracted with one can shop for health insurance. They’re similar to the state health insurance exchanges in concept, but instead of the government subsidizing the plans, it’s the company.

Here’s a more in-depth demonstration: The company contracts with a private health insurance exchange, which has already contracted with one or several health insurance companies to be able to sell their health insurance plans at the private exchange.

Companies switching their workers into private exchange plans will pay their workers a bonus of sorts to subsidize them purchasing health insurance at the private exchange. The contribution is usually just about equivalent to what the company would spend in a year on contributing to the worker’s health insurance plan. This is called a “defined contribution” model.

Potentially this could be a great situation for some employees. With access to a private exchange like the one run by Aon Hewitt, employees could choose from a host of health insurance plans being offered from a wide variety of different insurers instead of just one. They could also mix and match the different insurances they’d need and even buy other types of insurance like life, or dental.

The downside to all this though is the uncertainty. Sure we know how much the company is planning to contribute the first year they move over to a private exchange. But how will that change over time? Will it keep up with the rising cost of health care? As with some many things involving healthcare and healthcare reform, we’ll just have to wait and see.