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NEW YORK, Oct 15 (Reuters) - Petco Animal Supplies Inc and restaurant operator DineEquity Inc, the parent of Applebee's and IHOP, are among 33 companies moving medical coverage for their employees to a private exchange starting in 2014, a new sign of corporate America's shift away from directly providing benefits.
Mercer, a division of Marsh & McLennan Companies Inc , will become the benefits administrator for 75,000 employees and 90,000 dependents, the company said on Tuesday. It will also operate a separate private exchange for 35,000 Medicare-eligible retirees at 19 companies, including Kinder Morgan Inc and St. Louis Metro Transport.
For such private exchanges, 2014 is proving to be a watershed year, with over one million active employees due to participate, up from about 100,000 in 2013, as companies seek new ways to reduce their exposure to rising healthcare costs. Akshay Kapur, a principal at Booz & Co, predicts that could surge to between 10 million and 20 million employees by 2017.
The move is coinciding with the launch of new subsidized insurance exchanges in 50 states under President Barack Obama's healthcare reform, an option that is expected to attract some Americans who have health insurance through their employers in the hopes of getting a better deal.
"I think we reach critical mass in 2014," said Eric Grossman, a senior partner at Mercer, referring to the private exchanges. "If you look at the top health and benefit surveys about employer interest, private exchanges are at the top of that list and frequently number one."
A private exchange run by benefit consultant Aon Hewitt will cover about 600,000 people in 2014 at large companies like Sears Holdings Corp, Walgreen Co and Darden Restaurants Inc. Buck Consultants, a unit of Xerox Corp, will cover about 400,000 people at mid-range companies like Bob Evans Farms Inc and household products maker Church & Dwight Co Inc.
Using an exchange allows companies greater control over how much they spend for health coverage than directly providing benefits through an insurance company. They can cap their contribution to employee medical coverage as a fixed dollar amount each year or as a percentage of total costs.
For employees, the impact of the switch depends on how their company structures its contribution. One positive is that they often have more choices of plans on exchanges.
The Mercer exchange will offer five plan levels, which are named according to the carrier and the deductibles, but roughly correlate to the tiers of "bronze", "silver," "gold" or "platinum," defined by Obama's Affordable Care Act.
When given a set amount to shop with, research shows that workers tend to pick "leaner" health plans than their employer would for them, saving money for both sides, said Kapur.
That is the case at Addison Group, a Chicago-based staffing firm of 2,100 employees that is joining Mercer's exchange. Last year, the company offered two gold-level plans to its employees. But it found that the workforce, which is largely under 30 and single, wanted more choices and greater ability to save.
For 2014, the company will contribute 6 percent more to the premium costs per employee, but will end up saving about 15 to 18 percent overall by tapping into Mercer's negotiating leverage with insurance carriers and using its scale as an administrator, said Pat Jones, Addison Group's chief financial officer.
But for many employees, the shift will mean higher costs, especially at companies switching to a defined dollar contribution to shop with.
Among the 33 employers joining Mercer's exchange, there is a mix of those who are contributing defined dollar amounts and those contributing a percentage of the full cost.
"Some companies are paying equal or very slightly more than they paid last year. We have others that are increasing their defined contribution compared to what they spent last year, with and eye to controlling costs in the future," said Grossman.
Some companies are also offering larger contributions for non-smokers and for those who complete biometrics screenings.
Kapur said employers are also aware of the risks of shifting too much cost to valued workers who might seek better benefits elsewhere.
"They will raise their contribution to a level that allows them to be competitive in the marketplace," he said.
When Addison Group tells its employees about its new plan, Jones thinks the biggest negative reaction will be the association with the federal Obamacare exchange that has been crippled by technology problems since its launch on Oct. 1.
"It's going to be important to message that this is something completely different," Jones said.