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March 22, 2013

As Insurers Prepare for Healthcare Reform, Are Private Exchanges in Their Blind Spots?

Posted by Eric Paternoster (View Profile | View All Posts) at 10:36 AM

 The Patient Protection and Affordable Care Act Explained  [Source:http://www.youtube.com/watch?v=AM4sM297Jl8]

The Patient Protection and Affordable Care Act (PPACA) is going to have a profound effect on all aspects of life, particularly for the nearly 50 million Americans who will now be part of the healthcare system. 

The plan aims to make comprehensive healthcare more accessible and affordable to all Americans. The more that both individuals and companies know about how this transformation will effect them, the better they'll be able to position themselves to take advantage of all its intended benefits. Indeed, fully implementing such a sweeping policy change is going to be the biggest challenge.

A recent item that caught my eye was the decision by two large, U.S.-based companies - Sears and Darden Restaurants - to change the way their employees receive their health insurance. Both firms are giving their workers money to purchase a healthcare plan from a private, online exchange. 

What occurred to me was that this scenario is similar to the change in how companies arranged for their employees' retirement benefits. About a generation ago, in a large chunk of corporate America, defined-benefit pension plans gave way to defined-contribution 401(k) plans. 

The early movers during this financial services transition were innovative investors like John Bogle of Vanguard and Peter Lynch of Fidelity. Their mutual funds gave individuals a large array of investment options for their 401(k) plans. In the old days, pension fund managers elected what kinds of investments to make on behalf of all their company's employees.

That same kind of transformation is happening in the healthcare industry. My prediction is that health insurers that get out in front and form their own private exchanges - instead of allowing third party exchanges to set the pace for them - will have a tremendous advantage in this new world. That's why Aon, the company that offers a multi-carrier exchange to Sears and Darden Restaurants, is a fascinating example.

As with any other big transformations, health plans are going to have to assess just how they form their own exchanges. A big challenge is how to implement a private exchange all while preparing to participate in public exchanges in the states, given the promise of enrolling new consumer and small business members. It's a good bet that most plans will need solutions to keep pace with public and private exchanges as they come to fruition. Think about the enormity of added work involved in getting the right private exchange up and running simultaneously.

From one standpoint, health plans should be (at least in theory) the strongest and best-positioned players in the burgeoning private exchange realm. But I often wonder how many of them realize the pressing need to act quickly - and in parallel with the development of public exchanges. Like the mutual fund giants who led the development of the 401(k) era, the most successful firms that develop private exchanges will be doing more than simply throwing up flashy Web sites with lots of perceived options.

The uncertainties around healthcare reform itself are behind us. By now health plans should be thinking about first mover advantages - especially in a space that will evolve rapidly and be extremely competitive. To that end, have they considered whether it's better to build or to buy their way in?  And whichever route they choose, do they have scalable sourcing that will allow them to provide the optimal customer outreach and service?
Just as important is having the right kind of partners who know both public and private exchange issues, and understand that this is not just a technology challenge but involves deeply intertwined process and organizational change. Nothing in this new healthcare world will be black and white, so companies need to be nimble and respond to how healthcare reform develops during the coming years. 

Smart companies of all sizes will embrace this change and make the new world of health care work for them and their employees.  Are health plans ahead of the game and prepared to play offense to attract new members while simultaneously playing defense to protect their large employer base? Be prepared: Changes are already underway.

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