NEW YORK (Reuters) - Healthcare companies including Aetna Inc, Mercer and Towers Watson Co have invested hundreds of millions of dollars to build exchanges that allow company employees to buy their own insurance, betting that Corporate America wants to get out of managing workers’ health benefits.
By last year, blue chip names like Sears Holding and Walgreen Co had signed on and industry experts predicted that more than 20 percent of the nation’s employees would soon buy their health insurance in this way, compared with less than 2 percent today. But Reuters interviews with nearly a dozen industry executives has found that no major U.S. company signed up their employees for the first time to a private health insurance exchange for 2015.
Many of those executives expect a similar situation in 2016, as blue chip employers wait for proof that the new exchanges will save them enough money to warrant the switch, raising doubts about this new business model.
“We have a lot of wait-and-see going on with large employers,” said Brian Marcotte, chief executive of the National Business Group on Health, a lobbying group for large corporations. “They are not quite sure yet how they will deliver on managing costs better.”
U.S. employers provide health benefits for more than 160 million people, mostly by contracting with large health insurers to administer the healthcare benefits that the company funds, with contributions from employee-paid premiums. But as healthcare costs rose steadily, and President Barack Obama’s healthcare law required coverage of more medical services, many sought ways to rein in those expenses.
Private exchanges such as Aon Hewitt, part of Aon PLC, aim to be the Amazon.coms of the insurance world, where employees choose and pay for their own plans and competition helps keep prices down.
Employers contribute a fixed dollar amount to help their workers buy coverage, but can save money by no longer managing the benefits within their companies. They are not directly related to the state-based Obamacare insurance exchanges that offer government-subsidized health plans.
Since 2012, employers covering as many as 3 million people have signed on to use the exchanges. A recent report from Mercer LLC, part of Marsh & McLennan, found that 3 percent of large employers were using private exchanges and that 28 percent of employers would make the shift within 5 years, taking a bite out of the business served by major insurers like UnitedHealth Group Inc and Anthem Inc, previously known as WellPoint.
Industry executives are now projecting more caution about when private exchanges will take off. Aon Hewitt said in October that it would lose money on its private exchange this year, after previously expecting the business to be mildly profitable. Aon didn’t say how much money it would lose. Insurer Cigna Corp will sell health plans on the Aon exchange in 2016.
“This is coming. It’s just the pace at which we believe the market is going to make the transition” that is slower than expected, said Patty Fontneau, who runs Cigna’s private exchange business.
Mercer and Towers Watson’s Liazon unit are still seeing growth from serving more mid-sized businesses, which are signing up for exchanges at a higher rate since they have less invested in managing health coverage for employees.
Other insurance experts question whether the forecasts will ever materialize.
“Private exchanges were over-hyped from the beginning,” said Dan Mendelson, chief executive of healthcare research firm Avalere Health. Large employers enjoy significant leverage in negotiating down the price of benefits for the many members of their workforce, an advantage that an exchange can’t match, he said.
Darden Restaurants Inc, owner of the Olive Garden chain, was one of the first large companies to move to Aon Hewitt’s private exchange. Medical costs were rising 8 to 10 percent per year and it had used the same insurer for 15 years. In 2012, it made a “leap of faith” that Aon Hewitt could do a better job, said Danielle Kirgan, Darden’s senior vice president for human resources.
It took four months to overhaul Darden’s benefits systems and explain the change to employees. The pay off has been lower year-over-year increases in healthcare spending. “We have over three years of seeing rates, and they have been dramatically and consistently less,” Kirgan said in an interview.
Starbucks Corp, however, took a close look at the private exchanges to understand them, but has never planned to move its 136,000 employees.
“What we tended to learn is that what we do is just easier and better for people,” Starbucks Chief Operating Officer Troy Alstead told Reuters.
Large companies who are open to joining the exchanges are now asking to see at least two or three years, and as many as five years, of data on insurance premiums and medical claims from plans sold on the exchanges to be sure that there will not be a sudden increase in premiums to contend with, benefits consultants said.
Some corporations also describe a sense of fatigue after several years of getting their coverage compliant with Obamacare and are loath to make additional changes in short order.
Many have introduced health plans with high deductibles to shift costs to employees and want to see whether that will be enough to save money. They are also uncertain about what may be required of them if the Affordable Care Act is changed by a new Congress with Republican opponents of the law in charge.
Aetna said last month it would spend $400 million to buy private exchange company Bswift and remain competitive against Aon and others. Kerry Sain, who runs Aetna’s private exchange business, acknowledged that large companies are just “dipping their toes” into the new model.
Aetna said it will still benefit from Bswift’s technology even if the private exchange market does not end up as large as forecast.
Leerink Partners analyst Ana Gupte said large companies need a catalyst to spur them to move onto the exchanges, namely the cut to U.S. corporate tax benefits that come from providing health coverage planned for 2018.
“If that doesn’t do it, I think we’re pretty much done on this thing,” she said.
Additional reporting by Lisa Baertlein in Seattle; Editing by Michele Gershberg and John Pickering