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Employers Turn to Private Health Exchanges to Cut Costs

One-third of U.S. employers plan to move their workers’ health-care coverage to a private exchange in the next few years, a survey found, following the lead of companies like Walgreen Co. (WAG) seeking to reduce costs.

While 95 percent of employers said they would continue to offer health care in the next three to five years, 33 percent may use a private exchange to provide the benefit up from 5 percent currently, according to a survey released today by a unit of Aon Plc (AON), a London-based insurance broker.

Traditionally, most large employers are self-insured, meaning they take on the financial risk of their employees’ health costs. Under a private exchange, workers are given a subsidy to pick from a limited number of health plans and the insurer takes on the risk.

“Employers are telling us they are losing confidence in their traditional approaches, like vendor changes or employee cost-sharing,” which only deliver “incremental” improvement, Jim Winkler, Aon’s chief innovation officer for health benefits, said in a telephone interview. “Employers are saying, ‘I need to do something different.’”

Health Care Exchanges

Health spending in the U.S. is expected to increase more than 6 percent this year and 6.2 percent annually from 2015-2022 as the Patient Protection and Affordable Care Act takes full effect and millions of Americans gain insurance, according to the Centers for Medicare and Medicaid Services.

Walgreen, Sears

Walgreen announced a shift last September to a private exchange run by Aon that serves 18 companies, including Sears Holding Corp. and Darden Restaurants Inc., and 600,000 employees. More than 20 insurers are participating in Aon’s exchange this year, Maurissa Kanter, a spokeswoman, said in an e-mail. Most employers have access to five carriers, which each have five plans, giving their workers 25 options to pick from.

“We expect it to grow pretty significantly” in the next few years, Winkler said. “We have a lot of interest in it.”

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Employers may also be responding to workers who want more choice, said Paul Fronstin, director of health research at the Employee Benefit Research Institute.

Workers looking at the new public insurance marketplaces created under the health overhaul known as Obamacare “may be asking their employers, ‘Why can’t we have more choice?’” Fronstin said by telephone. “Previously, employers never really had that market place where employees could pick.”

Ending Coverage

Aon surveyed more than 1,230 U.S. employers with more than 10 million workers. They found that 5 percent of the companies surveyed may drop employee health-care coverage in the next three to five years, an increase from 1 percent now.

Under Obamacare, companies that don’t offer coverage for their employees will be fined $2,000 per employee. Employers spend $6,000 per employee on average, so dropping coverage may seem like a good deal, but ultimately this is not a realistic option because of potential backlash from employees, said Fronstin.

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“Historically, employers have offered health benefits voluntarily to be competitive in the labor market,” he said. “With unemployment being much lower than it was four years ago, employers are more hesitant to put exiting on the table.”

Still, some companies are ending coverage for part-time employees. The law doesn’t require employers to provide health plans to part-time workers. About 38 percent of the companies surveyed by Aon said they would offer no benefits to part-time workers within the next three to five years.

Retiree benefits are also being reworked. International Business Machines Corp. (IBM) said last year that it would send 110,000 retirees to Towers Watson’s Extend Health, the largest private Medicare exchange.

The Aon survey found that two-thirds of employers who wanted to make changes in retiree benefits were looking to follow IBM’s lead.

Only 25 percent of large employers offer subsidized retiree health benefits, Aon said, down from about 50 percent in 2004.

To contact the reporter on this story: Caroline Chen in New York at cchen509@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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