A number of employers of all sizes are rushing into exchanges these days – often after heavy prompting by their consulting firm or broker. Part of the expectation is that they can cap their future health plan costs, and give active employees more options through participating in exchanges. Sounds great, doesn’t it?
The problem is the math doesn’t work. In addition, this approach has been tried before and flopped miserably.
The previous iteration of this was in the early 90’s and was called “cafeteria” plans. The same claims were made: “No longer will your costs be at the mercy of healthcare inflationary trends. You can control how much you want to increase your subsidy each year – that is, if you want to increase it at all.” This failed because the math worked against the strategy then too.
Let’s take a steely-eyed look at the numbers. If a company puts employees into an exchange because it wants to cap its costs going forward, that creates a reverse leveraging effect on employee payroll deductions. Here’s an example. Assume premiums (or self-insured budget dollars) are $10,000 per employee per year and the company contributes 75%. The company pays $7,500 per employee per year (PEPY) and the employee pays $2,500 per year. If plan costs increase 10% over two or three years, and the company’s contribution stays flat at $7,500 PEPY, the employee cost will increase by $1,000 per year ($10,000 x 10%). That means the employee payroll deductions will go from $2,500 to $3,500, or an increase of 40%!!
If costs go up another 10% in the next year or two, and the company contribution remains flat, the employee payroll deduction will increase another $1,100, for a total of $4,600, or a total increase of nearly 85% over a few years.
What employers quickly realized in the 90’s was that if they didn’t keep increasing their subsidy level at a market rate, the cost to employees became intolerable.This reality led to the demise of so-called cafeteria plans.
If that is not enough, consider this. Some benefit managers hope exchanges will lead employees to choose less costly plans, ones with even higher deductibles. However, in an era in which 80% of plan dollars are being spent by 6-8% of plan members (called outliers), that notion is flawed. Why? The 92% who aren’t spending much may choose plans with higher deductibles and copays, but the outliers won’t. Period. The result is having about the same claim dollars as before but collecting less in employee contributions, an unsustainable proposition.
Further, some outlier spending is deferrable. An outlier-to-be in a high deductible plan can switch to a low deductible plan in the following year, have an expensive surgery, and then switch back. That, of course, is the definition of adverse selection.
A private exchange may look like a good fit for your situation, but beware. Also if your consulting firm owns an exchange, beware.
Alas, considering the rush into exchanges today, it looks like history is doomed to repeat itself.
Tom’s latest book, “An Illustrated Guide to Personal Health”, is now available on Amazon.