Industry Succeeds Where Obamacare Fails

Walmart is about to get into the health insurance business.

The retail giant’s Sam’s Club division just announced that it would launch a private health insurance exchange for its small-business customers. Business owners shopping at the wholesaler will effectively be able to pick up health insurance for their employees along with their industrial-size tubs of mayonnaise.

Sam’s Club’s chief competitor, Costco, unveiled a similar private exchange for its members earlier this year.

For both consumers and employers, the emergence of private exchanges is great news. Already, these marketplaces are exhibiting tremendous potential to expand consumers’ insurance choices and reduce costs.

Earlier this year, Aon Hewitt, a human resources consulting firm, surveyed companies that provide a fixed benefit for employees to purchase coverage through a private exchange. These firms saw their insurance costs increase at rates 1 to 2 percent below those of their peers that offer traditional insurance benefits.

Over a period of years, slowing the growth rate of premiums by even a few percentage points can yield huge savings.

Another consulting firm, Accenture, recently revealed that three million people signed up for employer health coverage this year through private exchanges. That’s three times more than the consultants previously estimated.

Some of the largest corporate names in the country are now providing health benefits through private exchanges — including Walgreens, Sears, and Darden Restaurants.

From an employer’s perspective, it’s easy to see why these exchanges are an attractive option.

Typically, companies either purchase insurance directly from an insurer or self-insure, whereby they pay for the care their employees consume directly and contract with an outside firm to process claims. Self-insurers typically also purchase an umbrella policy to protect them from the risk of facing catastrophically expensive claims. About 160 million Americans have employer-sponsored health insurance today.

Private exchanges provide several advantages over these existing arrangements.

For starters, companies have long struggled to administer their health plans. And thanks to Obamacare, there are lots of new rules and regulations that make things even harder.

Private exchanges, by contrast, allow employees to get coverage directly from insurance companies — and thus drive down the administrative burden for employers. Further, private exchanges permit employers to offload all their health-cost risk onto insurers.

Employees also stand to benefit from getting coverage through private exchanges. Most employers offer only a few options for health insurance — or even just one.

In an exchange, workers can choose from tens or hundreds of different health plans. They can select a policy with a high deductible, for instance, if they’re reasonably healthy and would like to save on premiums. Or they can pick a policy that covers every office visit, if they have kids who need more frequent check-ups.

Private exchanges may also result in higher wages for workers.

For years, the rapid increase of health premiums has been eating into wage growth. Last year, health insurance costs jumped three times as much as wages.

Private exchanges empower consumers to choose among competing insurance plans. Those principles of choice and competition will lead to lower prices. If employers are spending less on health insurance, they’ll have more money left for other purposes — including wage hikes.

Further, because employers can provide a fixed benefit to go toward the purchase of health insurance in a private exchange, an enterprising employee could sign up for coverage that’s less costly than the value of that benefit — and negotiate to receive the difference in cash, which he or she could put into a tax-advantaged Health Savings Account.

And if lawmakers were to roll back many of the most expensive state and federal essential health benefits mandates on what policies must cover, premiums would fall further — freeing even more money up for pay increase or other investments.

Looking ahead, there’s plenty of evidence to suggest that even more employers will turn to private exchanges.

In September, a PricewaterhouseCoopers Health Research Institute survey of 1,200 businesses found that one-third of employers are considering providing coverage through private exchanges. Another survey, conducted last year by the Private Exchange Evaluation Collaborative, found that 45 percent of businesses were already using exchanges or were planning on using them.

Accenture is now predicting that one in five Americans will get insurance coverage through a private exchange by 2017. By 2018, enrollment in private exchanges will outstrip enrollment in Obamacare’s exchanges.

That would be quite a feat, especially because the government is literally paying people — in the form of income-based tax credits — to enroll in Obamacare’s government-run exchanges.

Eric Grossman, a Senior Partner at Mercer, a consultancy that operates a private exchange for 52 employers covering 200,000 employees, says that the momentum toward private exchanges will not abate anytime soon.

“The private exchange model is an innovation that has unleashed a wave of transformational change that touches virtually all employers, who must now fundamentally rethink how to provide benefits to their workforces,” he told Forbes.com’s The Apothecary earlier this year. “The bottom line is that employers of all sizes are looking for new solutions to deliver benefits and manage cost.”