Could Emerging "Private Exchanges" Foretell The End Of The Line For Brokers?

Entrepreneurship will almost always trump government regulation in this great country of ours. Somebody smart will almost always find a way to make a buck anticipating changes in government policy and practice. And if they're especially creative, they'll use the government's own policies as a jumping-off point.

While most insurers and agents are still sweating PPACA's mandate to create public health insurance exchanges in every state, a few private organizations are launching private efforts to create entities which THEY call "exchanges," but which may or may not embody the fundamentals of the exchange strategy laid out in PPACA.

A Minneapolis-based company, Bloom Health, scored major headlines in late September. Bloom has launched an "exchange"-type platform and process to administer defined-contribution benefits arrangements for employer groups. According to Bloom's propaganda,the company's pilot involved working with about 50 companies, with collective enrollment of about 25,000 employees. Employees were offered a variety of plan options, based on a fixed employer contribution, and given the chance to select one which made most financial sense to them. he Bloom system handled the enrollment and administration (not clear what happened at renewal time).

The process must have worked pretty well, since the company announced in late September that some 80% of its equity was being purchased by Wellpoint/Anthem, Blue Cross & Blue Shield of Michigan, and the holding company which owns the Texas Blues.

The acquiring companies will be tweaking the Bloom Health model, of course. They have no interest in a neutral marketplace. They intend to use the model to sell their own products in their own markets. So, as I understand it, in Michigan, the Bloom Health platform will be BCBSM's private fishing hole. Groups will be able to offer a variety of plan designs, but they'll all be offered by BCBSM.

In Western New York, Liazon has made a big splash with its Bright Choices benefits portal, through which companies with "1-2,500 employees (Liazon's propaganda)" can use a defined contribution strategy to "find a way out" of the problem of escalating employer health costs. Back in April, the company raised $12.5 million in capital to expand its marketing presence. Liazon has used Chambers of Commerce in New York and Maryland as vehicles to expand its reach. It would appear that the company's primary insurer is UnitedHealthcare, but they claim to offer coverage through a variety of other carriers as well. It's hard to find out how many companies have actually signed up, but the company's YouTube tutorials have experienced a couple hundred hits. My guess is that if enrollment was through the roof, we'd know about it.

And the consulting and brokerage giant Aon/Hewitt has made a big splash with its plans to launch a defined contribution "exchange" for giant employers which have agreed to use their proprietary platform to make a variety of Medicare Advantage plans available to retirees. Again, employers will provide retirees with a fixed monthly contribution, and retirees will be expected to select a Medicare Advantage plan from among those offered, and pay the difference between the employer contribution and the plans' costs themselves.

Here are some thoughts on these so-called "exchanges," just for the purpose of creative discussion:

1) One of the oft-expressed concerns of a lot of health care experts was that the development of exchanges under PPACA would lead to a mass exodus of small employers from the small group market. That may yet happen...but not for the reasons one might expect. These early pilots, driven by entrepreneurs who are interested in making a buck, suggest that smart people in the market are chasing self-insured employers, which are a) large, b) closer to their actual health care expenditures, since they pay them directly, and c) technologically sophisticated enough to roll out a defined contribution model quickly and efficiently.

2) The defined contribution model will certainly have the effect of enabling employers to control their health coverage expenditures...but will that's about the extent of their cost-containment ambitions. Just as was the case with the shift in pensions from defined benefit to defined contribution plans, these early experiments will demonstrate their efficiency at shifting downside financial risk from employers to individuals. There is some rhetoric which suggests that such a shift will create a new generation of "empowered" consumers, who will shop aggressively for cost-effective service providers. The rhetoric is mostly that. It is just as likely that large employers, having contained their own downside risk, will go about their businesses and leave their employees and retirees with hyper-inflating, undefined contributions in the face of hyper-inflating health care costs. I'm anxious to see evidence to the contrary...good luck finding any.

3) If there's any interesting benefit to be seen from these pilots, it will be in the havoc they wreak on the traditional distribution channels. Bloom and Liazon clearly have the potential to displace brokers from the health care coverage sales and service transaction, replacing them with technology and call center personnel. These companies are plainly seeking to disintermediate agents and brokers, and the costs they represent. Bloom claims that the company generates revenue from fees charged directly to employers. Liazon's revenue stream is a little less clear to outsiders, but even if the company generates revenues from sales commissions, I suspect the company can do quite well at a rate of compensation which is half, or less, of what insurers must pay their welter of retailers and wholesalers.

4) It's not clear how any of these pilots actually sell coverage. If I look at their processes, it seems they are based on the assumption that someone else has actually sold the product; their emphasis seems to be assisting employers in setting up their defined contribution plans, "educating" employees, and administering the allocation and collection of contributions on the back end.

5) This is what gives me pause about the implications of these pilots for small businesses. A potential downside of state exchanges for small employers and individuals (at least as they're conceived via PPACA) is that they will be,at best, passive tools available to those who seek them out. It seems to me that a private small group health exchange would have an advantage in its ability to market actively to small employers and self-employed individuals. Yet the focus of these pilots seems to be largely on administering post-sale transactions: enrollment, renewal, billing, collection and allocation of premiums from employers and employees.
Given that most insurers already have robust and powerful back-end applications to support large employers, the early focus of these experiments seems to be on how better to serve their largest and most profitable clients.

I stated in an earlier entry here (http://polkiananalysis.blogspot.com/2011/08/so-much-angstover-market-no-one-really.html) that, despite all the wailing and gnashing of teeth regarding emerging health exchanges, nobody seems to care too much about how the small group market is served. It seems to me that private small group exchanges will need to combine a mix of multiple carriers offering standardized plans on a common platform, aggressive marketing, good customer service, and a back end well-suited to bring the administration of both defined contribution and defined benefit plans down to groups of 50 or fewer employees. But with insurers, brokers, and consulting firms scrambling to find ways to serve their largest clients better, there's a strong possibility that the small group market will continue to be an afterthought, and that state exchanges will evolve quickly into a dumping ground for small groups and individuals.

If there are experimental models out there which can give me hope, I'd sure like to see them. If not, somebody's going to have to build one, or half the employees in our country will soon be even more dependent on the voluntary brilliance and largesse of insurance companies ever more reluctant to do business with them at all...which is, after all, how we got to this problem in the first place.