Why a Private Exchange Might Make Sense for your Company

Posted in: Employee Benefits

Over the past year there has been significant interest from progressive employers and many business writers in a new strategy in employer-sponsored group insurance. This strategy revolves around a transition from the way benefits are now offered to employees to a defined contribution model using a private exchange.

With healthcare reform on everyone’s minds, the term “exchange” has been circling around just about everywhere you turn. It is important to note that public and private exchanges are two very different things that strive to solve two very different problems.

Beginning 2014, a public exchange will be a federal or state run entity that will provide a marketplace of options for individuals and small employers. Public exchanges will administer the eligibility for federal credits and subsidies made available in the healthcare reform law designed to make coverage more affordable and accessible for those that would otherwise be unable to obtain or afford coverage.

private exchange is not trying to solve the access problem, but instead allow employers the ability to change the way they are offering benefits to their employees. With a private exchange, the employer is no longer burdened with the often thankless task of trying to choose the “right” healthcare plans for all of their employees. With a private exchange, the control shifts into the hands of the employees. Employers choose a defined dollar amount they want to allot per employee to their benefits plan, and the employees are empowered to choose the benefits they deem best for themselves and their families.

Traditional health insurance plans force employers to pigeon-hole their employees into choosing from a limited number of plans. Private exchanges greatly expand the number of health plan options, along with an expanded menu of other coverages such as several dental plans, multiple disability plans, life insurance and a variety of ancillary and voluntary plans around those options.

 So how exactly does a private exchange work for a company?

Too often, companies are faced with three undesirable choices at renewal: pay more for benefits, cut benefits or pass more costs onto employees. With a private exchange, employers give employees a set amount of money to spend on benefits (many choose to allot the same budget as last year’s “traditional” plan). Employees will then be able to go shopping for benefits in the exchange, which operates much like online shopping sites people use every day, and build benefit plans to meet their family’s needs.

As part of the exchange, employees will have the opportunity to answer a series of questions that help narrow down all of the many benefit options being offered. From these answers, the exchange can provide guidance and education for the benefits program that is best for the employee. The employee has the option to either follow the exchange’s recommendations or not.

The result is the employer has greater control over cost while employees are much happier about having expanded choices and the ability to tailor a package that better meets their individual needs.

Private exchanges are a new and empowering way for companies to view how they handle their benefits program. If you’re interested in learning more about private exchanges, please contact me at mmoran@psafinancial.com.

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