Following the passage of the Patient Protection and Affordable Care Act (ACA) and leading up to the initial enrollment period in the public exchanges (for the 2014 plan year), many industry observers forecasted that the employer mandate provisions included in the ACA would drastically alter the healthcare benefits landscape to the point of driving large segments of employers out of providing health benefits altogether.
It was expected that new employer regulations, coverage mandates and additional administrative burdens would significantly alter employer willingness to provide health benefits, and this change would trickle down to impact health plans, brokers and other benefits technology vendors.
Though the outlook varied, many well-respected firms used survey data of human resource (HR) professionals and CFOs to predict significant changes to the group insurance marketplace as the public exchanges came online and as the new regulations and coverage mandates went into effect. The overhead would be so burdensome to employers that many would end up choosing to pay the penalty (up to $3,000 per employee) for not providing coverage and instead choose to send their employees to the public exchanges.
The potential disruption in the employer-sponsored insurance (ESI) market caused significant uncertainty in HR departments, at health plans and within the broker and benefits technology landscapes. Investors too were at a standstill due to market uncertainty. Big changes were surely coming to the group insurance marketplace that would have far-reaching implications.
So What Actually Happened?
So far, the doomsday scenarios have not come to pass. The group insurance market has been relatively stable across large group coverage, the mid-market, and even the small end of the market. As the ACA provisions have come into effect, employers have not wholesale looked to drastically change their benefit approaches. Looking forward, things are unlikely to change significantly. The benefit consultants and brokers, who previously predicted massive changes, have updated their views on the group insurance market as shown below. The most recent survey data shows a renewed view that health benefits are an important part of the overall compensation picture and employers’ interest in exiting employees to the public exchanges has fallen drastically.
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Another reason that employers continue to provide ESI is that a viable alternative has not emerged. Consumer satisfaction with the public exchanges (and products offered on the public exchanges) has been extremely low, characterized by a poor and confusing enrollment experience along with increasing premium rates and limited network coverage associated with products offered. Hundreds of millions of dollars have been invested to improve the public exchange experience with questionable outcomes to satisfaction and retention. Employers will continue to be reluctant for employees to fend for themselves in public exchanges in the current environment.
This is not to say that changes in group insurance have not occurred −the opposite is the case. Employers have been trying new strategies to manage continued cost escalation for employee coverage as insurance rates continue to climb. Adoption of High-Deductible and Consumer-Directed Health Plans (CDHP) continues to grow; acceptance of narrow provider networks appears to be gaining in the group segment (and is certainly apparent in public exchange product selection); and other cost-shifting approaches like fully defined-contribution health benefits facilitated through a private exchange are emerging as viable and socially acceptable benefit approaches that help employers better manage cost control for ESI. Focusing in on CDHP, for which data is more readily available, it appears that employer experiences with these products have been positive (i.e., increased adoption, cost savings).
Concurrent with increased employer adoption of CDHP products, we also view private exchange growth as another disruptive force going forward. Accenture projects private exchange growth to almost quadruple through 2017 (from 6 million in 2015 to 22 million in 2017) as employers seek to cap their cost exposure as it relates to health benefits. For employers, the rationale behind defined-contribution arrangements (which are primarily led through a private exchange) is similar to CDHP: it provides risk mitigation (from continued cost escalation) while still providing employees with a benefits alternative as well as the flexibility to select coverage options that best meet their needs. While we are unsure whether the shift to private exchanges will come as quickly as Accenture predicts, our own research and discussions continue to reflect a strong market interest. In order to prepare for this, health plans, brokers and other benefits technology vendors are adjusting their infrastructure to accommodate private exchange functionality.
Firms Capitalizing on the Continued Sustainability in the Group Market
It seems for the time being that ESI enrollment will remain stable. Many politicians and interest groups were counting on the opposite and may be disappointed, but those that were steadfast in the sustainability of ESI have benefited.
Insurance Companies: Payers have been among the chief beneficiaries of stability in the group market. A market shift away from group insurance would have had significant profitability implications to those insurance companies with large group books. Group insurance products deliver a significantly higher margin than individual public exchange market products. While revenue may have shifted between products, overall margins for these insurers would have certainly eroded in the case of diminished ESI.
Brokers: Brokers have newfound significance as a result of ACA in supporting their employer clients with benefits decisions. The insurance broker has not gone the way of the travel agent, which could have been the case with the erosion of ESI. Successful brokers have evolved by building scale and efficiencies to offset commission cuts by expanding the range of services provided and therefore creating potential revenue opportunities with their employer customers. Digital Insurance, a broker historically focused on the smaller end of the group market but quickly moving up market, has been among the chief beneficiaries that we have observed. The Company has evolved its solution offering and value proposition to retain its employer book and has leveraged technology innovation to improve efficiency of its brokerage business. Similarly, Hodges-Mace, an employee benefits communication and enrollment company, has acquired and invested in technology to provide value-added benefits administration and other software tools to expand its value proposition.
Benefits Technology Vendors: Just as other industries are evolving to digital technologies, so too is group insurance. An abundance of benefits-focused technologies have emerged with the focus on automating the traditionally inefficient process of enrolling employees and administering their benefit plans. The overall segment is growing quickly as employers are seeking to drive more efficiency via automation into their HR departments; TripleTree believes we are still in the early stages of a sustainable trend. We are not alone in this view. Considerable transaction activity has followed with several leading firms raising sizeable capital amounts (PlanSource, Empyrean, Businessolver, Jiff, and Zenefits) or being acquired over the past 18 months (Acclaris, Evolution1, bSwift).
Consumer Advocacy and Decision Support: As employers shift increasing benefit costs to employees through high deductible plans or defined-contribution arrangements, these consumers are demanding and employers want to provide greater transparency and information to support their benefit and care decisions. Companies like Health Advocate, ConsumerMedical and Accolade have been identified as leaders in supporting employee navigation and decisions. Change Healthcare has also gained considerable traction by offering cost transparency to support consumer purchasing decisions in healthcare.
Wellness: Consumers are also becoming increasingly responsible for their own health and lifestyle decisions. To address this reality, employers have shown increased willingness to incorporate wellness-related offerings to support employee efforts to manage their own health status. While the market is highly competitive, we have taken note in particular of WellTok, Novu, Keas, RedBrick Health, Healthper, Audax Health and ShapeUp in our market coverage efforts.
There are many other segments around the benefits landscape that this blog does not cover, but overall we expect to see continued innovation, investment and consolidation as the industry reaffirms its belief in the sustainability of ESI and capitalizes on the opportunity to drive improvements across group health benefits.
As always, we welcome your input and perspectives on this topic. Let us know what you think
Disclaimer: TripleTree advised Digital Insurance in their 2012 recapitalization with Fidelity National Financial (FNF). TripleTree advised Health Advocate in their 2014 sale to West Corporation. TripleTree advised Change Healthcare in their 2014 sale to Emdeon.