Growing Interest in Defined Contribution Could Become a Game Changer for Insurers

Growing Interest in Defined Contribution Could Become a Game Changer for Insurers

AIS Health Business Daily, October 16, 2012

Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry.

Just 18 months after announcing that it would build a multicarrier insurance exchange, consulting firm Aon Hewitt on Sept. 27 said more than 100,000 U.S. employees will be selecting coverage through the new entity during the upcoming fall open-enrollment period. Several large carriers, including UnitedHealth Group, Cigna Corp. and Blues plan operator Health Care Service Corp., are selling coverage through the new exchange.

Two large employers — Sears Holding Corp. and restaurant-chain operator Darden Restaurants — are among the exchange’s high-profile early adopters that will offer employees a defined contribution with which to purchase coverage from a menu of options.

Health plans that don’t participate in a multicarrier exchange, or launch one of their own, could be left behind, warns Rob Panepinto, managing director of client practice and exchange solutions for Connextions, a technology and business services firm that has developed exchanges on behalf of carriers. “As exchanges become more critical and a larger part of the overall distribution of benefits in the group, individual and Medicare marketplaces, carriers who decide not to participate will clearly face the risk of losing membership.” Connextions is part of UnitedHealth Group’s Optum division.

For some health insurers, participating in a private insurance exchange — or launching their own single-carrier exchange — is as much an offensive strategy as a defensive one. And with state insurance exchanges slated to begin open enrollment next October, developing products for private exchanges might make sense for carriers.

Defined Contribution Accelerates

“The ACA is creating the environment for carriers to operate in an exchange.…They’ll have to do this to survive. So why not also consider the private exchange route?” asks Paul Fronstin, director of health research at the Employee Benefit Research Institute.

Mary Ann Tournoux, senior vice president and chief marketing officer at Michigan-based Health Alliance Plan (HAP), agrees and says defined contribution “is becoming the norm.” Carriers that choose not to participate in private exchanges, or develop a proactive strategy around them, may actually be ignoring an important sales channel, she tells HPW.

During a Sept. 25 webinar on private insurance exchanges sponsored by AIS, John Mills, senior director of consumer products at Pittsburgh-based UPMC Health Plan, said offering coverage through a private exchange could help carriers win market share.

“We think it’s going to become an important distribution channel for us over the next decade,” he said. “If you’re not looking at exchanges as being an offensive model to increase market share and service capabilities, then it probably doesn’t make sense for a health plan to do it.”

Fronstin notes that other significant benefit-design innovations — such as account-based consumer directed health plans, defined-contribution retirement plans and even managed care — all started off small with a handful of early adopters before gaining traction.

Employers Are Eyeing Private Exchanges

While Darden and Sears will be joined by other early adopters, “most employers we’re seeing right now are in more of a fact-finding place, where they’re trying to really understand the opportunity, the challenges and the logistics. There’s also a bit of ‘wait and see’ at play, based on how the marketplace shakes out,” says Panepinto.

During the webinar, Tournoux referenced a 2011 survey of employers conducted by Deft Research that found 36% of midsized employers and 41% of large employers are likely to move their health benefits to a private insurance exchange. Nationwide, that would translate to about 15 million employees.

According to Tournoux, private exchanges used in combination with a defined-contribution model gives employers a way to stabilize their costs while continuing to provide a benefit program for their workers, offer more choice to employees and maintain the tax advantage status that comes with a benefit program.

Many employers and health plans see private exchanges as a necessity to remain competitive, which has created some urgency, says Kevin Kickhaefer, who heads sales and market development at Bloom Health Corp., which a year ago became majority owned by WellPoint, Inc., Health Care Service Corp. and Blue Cross and Blue Shield of Michigan. “We also see that both employers and employees increasingly want to shift the balance of power to the work force when it comes to selecting benefits. It just doesn’t make sense that your employer should choose a one-size-fits-all benefit package for a diverse work force, and they get that.”

While word that two large employers would move to a defined-contribution strategy made the front page of The Wall Street Journal on Sept. 27, it’s far from a new idea. Large employers have been offering defined contributions to retirees for years. And most big firms already offer a wide variety of coverage options which, paired with a fixed employer contribution, is a type of defined contribution approach, explains John Hickman, an employee benefits attorney at the law firm Alston & Bird.

What is new is the “downstreaming of the availability of multiple coverage options to smaller employers,” he tells HPW. Insurers, he explains, “have been reluctant to offer a true private exchange approach due to adverse selection and administrative complexity concerns.”

Carriers Building, Joining Exchanges

HAP intends to join a multicarrier commercial insurance exchange. It already works with Extend Health, Inc., which boasts the nation’s largest private Medicare exchange. Extend Health was acquired by consulting firm Towers Watson in May and is expected to be used as a platform for a multicarrier commercial insurance exchange. UPMC Health Plan is developing its own single-carrier exchange. Mills says a request for information attracted responses from eight vendors.

Panepinto anticipates “significant growth” in defined contribution plans over the next five to seven years, as employers need to find ways to limit the rising cost of benefits. “There are still some global questions that need to be sorted out relative to implementation of health care reform, but clearly this is a growth segment,” he says.

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