October 22, 2015
Healthcare Exchanges: Math Doesn’t Work
by Tom Emerick
We've seen this movie before: Healthcare exchanges won't reduce costs for employees and will increase them for employers.
Employers of all sizes are rushing into healthcare exchanges these days — often after heavy prompting by their consulting firm or broker. Part of the expectation is that employers can cap their future health plan costs while giving active employees more options. 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 healthcare exchanges was in the early ’90s 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. If plan costs increase 10%, and the company’s contribution stays flat, 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 ’90s 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% to 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 for employers.
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. If your consulting firm owns an exchange, really beware.
Alas, considering the rush into exchanges today, it looks like history is doomed to repeat itself.