Obamacare Is Killing Traditional Employer

English: Walgreens in Little Egg Harbor, New Jersey (Photo credit: Wikipedia)

Obamacare is going to kill traditional employer-provided insurance. And that's probably a good thing. IBM, Time Warner, and now Walgreens have made headlines over the past two weeks by announcing that they plan to move retirees (IBM, Time Warner) and current employees ( Walgreens) into private health insurance exchanges with defined contributions from employers.

Retiree health benefits-like lifetime pensions-have been shrinking in the private sector for decades (only about half of large employers still offer them, down from 80 percent 20 years ago), so it's no surprise that the relatively few companies like IBM that do offer generous post-retirement health benefits are trying to find ways to keep them affordable.

Private Medicare exchanges are relatively well established at this point, so what issurprising is how quickly private insurance exchanges for current employees are attracting interest from employers. A recent survey by Accenture suggests that while Obamacare's publicly funded exchanges will enroll more people at first, by 2018 more people will be enrolled in private exchanges (40 million) than the public exchanges (31 million). Accenture also reports that more than 1 in 4 employers are considering moving their employees to a private exchange format over the next 3 to 5 years.

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Moreover, data from existing surveys indicates that employers are quickly moving to high-deductible plans with health savings accounts, away from more expensive plans with high premiums, but low deductibles and co-pays. Notably, when employees are offered a 'defined contribution' - a fixed amount of money from their employers with which to shop - they also (although not always) opt for more high-deductible options.

Let's give credit where credit is due. Obamacare has undoubtedly accelerated interest in private exchanges by spurring investment and discussion of the public insurance exchanges mandated under the law. That's the carrot, so to speak, attracting companies towards private exchanges.

The 'stick' is Obamacare's 'Cadillac Tax', which will hammer companies with a 40 percent excise tax beginning in 2018 if their plans cost more than a fixed amount - an amount that is set to grow more slowly than medical inflation traditionally has. Combined, these forces are driving companies toward a 'defined contribution' strategy where they will offer employees a set amount with which to shop for insurance through an online marketplace - an exchange. (The other alternative would be to just move your employees en masse into high deductible plans, perhaps while kicking in some money for an HSA.)

The basic exchange concept is the same between public and privately run exchanges: an electronic marketplace where individuals can shop from a variety of insurance plan options.

But as the Obamacare exchanges get up and running, we'll increasingly see a bifurcation between private exchanges and public exchanges. Public exchanges - with attendant public subsidies and Medicaid coverage - will cater to relatively low-income uninsured, especially populations that flip back and forth between Medicaid and private coverage. But the exchanges will also be highly regulated, and are likely to offer plans - at least at the silver and bronze end - that offer coverage experiences somewhere between Medicaid and commercial coverage, in terms of access and rates paid to providers. Longer waiting times, smaller networks, and a 'gate-keeper'-like experience in terms of access to specialist care are more likely face consumers entering state exchanges (at least the cost-sensitive ones).

Let me be clear: I've got nothing against tiered networks or high-deductible health plans. But standardization on the public exchanges will come with some very real trade-offs, and people who were expecting to be able to buy employer-style coverage (low deductibles, large networks of physicians) are going to be in for a rude shock. And many uninsured people who don't qualify for subsidies on the exchanges may find more affordable plans outside the exchanges. Caveat emptor.

Private exchanges, if they are designed well, may have some critical advantages over their Obamacare-mandated counterparts. First, while the federal law sets the regulatory 'floor' for qualified health plans (QHPs) available for subsidies on state exchanges, states can set additional requirements and regulations for state-based exchanges - adding costs and limiting consumer choice.

For instance, in a recent Manhattan Institute study of insurance rates that have been released by state exchanges, we found that Vermont (which has a very restrictive exchange) will have only 2 carriers and will see significant rate increases in 2014 for even basic insurance coverage - 133 percent for 27 year olds, 104 percent for 40 year olds, and about 55 percent for 64 year olds. State rates will vary, but in the 13 states plus D.C. we've examined so far, premiums for individual insurance are increasing by an average of 24 percent.

Real experimentation and competition is more likely to thrive on private exchanges. This is because the more relaxed requirements of private exchanges (especially for companies who self-insure, and thus are exempt from state insurance mandates) will allow insurers and employers to offer a wider range of plans for employees. Private exchanges can also offer wellness and prevention options tailored to the needs of specific populations, and sophisticated 'decision support' tools that allow employees to decide how to best trade off premium costs and deductibles based on their current and (predicted) future health needs. Private exchanges, in other words, can offer more personalized options and customer service tools than standardized public exchanges are likely to do.

Also, while public exchanges can only offer health insurance, private exchanges can offer additional types of coverage - potentially offering one-stop shopping for health, life, dental or disability insurance - becoming an Amazon.com of insurance. Consumers could opt for high deductible health insurance plans, for instance, while also purchasing disability or other catastrophic coverage to offset health care costs if and when serious illness strikes. Consumers who are used to bundling services like internet, cable, and phone services (or comparison shopping on Amazon) will appreciate one-stop shopping for insurance in a familiar retail environment.