Private Health Exchanges : Turning Care for the Sick into Profit

First Retirement, Next Stop Healthcare!

Brought to You by the Firms and Banks that Brought Us The Great Recession!

By Stephen Holmes

One of the biggest changes in worker benefits over the last 30 years has been the shift from defined benefit retirement plans (i.e. pensions) to defined contribution retirement plans (IRAs). This shift was sold to workers as a way to give them more control over their finances. Funds that had previously been allocated to company retirement plans would be given directly to employees who could invest the money themselves -  instead of entrusting them to a pension fund manager.

This was supposed to give workers the same amount of money for retirement, although it is not clear that this has happened. Neither is it clear whether money invested and managed by individuals via personal retirement accounts has earned the same return as funds invested by professionals. Today, defined benefit plans primarily exist for public employees, while the majority of private sector workers either make defined contributions or have no retirement at all. Whatever the merits of these changes, the risk and cost of providing for one's retirement has clearly shifted from employers to employees.

The reduction in company pension plans has combined with an overall decline in Americans' real wages during the same period creating a particularly toxic brew for workers. At the same time, the largest beneficiaries of this shift are the investment firms and advisers who manage this money.

With such economic dynamics in place, a similar effort is now underway to do something similar with employer provided health care.

First a little history is in order. After World War II, most of the world's industrialized countries went to a government-run single-payer system of health insurance. The United States was different. In a so-called “Grand Bargain” between Labor and Management, it was agreed that employers would provide health insurance and retirement plans to employees as part of their overall pay. But as the strength of organized labor has declined, the “Grand Bargain” has broken down.

On the retirement side, there have been some spectacular flame outs in the public sector, such as Orange County in California and Jefferson County in Alabama, risking not only the pensions of retired public employees but the very services of those municipalities themselves. For workers, an even bigger problem has been the “lost decade for small individual investors. This has resulted in flat gains for those who use the “buy and hold” strategy - the major one used by personal retirement plans. Most Americans do not in fact wish to gamble and "play the market," but anxiously seek a safe course that provides some financial safety for the years when they are no longer able to work. For working Americans, The Grand Bargain of the 20th Century has morphed into the Big Question of the 21st : how much will the cost and risk of providing health insurance for their families now shift to them?

With President Barack Obama re-elected to a second term, it is clear that one of his signature achievements, the Affordable Care Act, will go forward with little or few changes. One of the major legislative components of the Act is the establishment of state public exchanges, designed to help smaller companies provide affordable health insurance to employees by pooling risks and “increasing choice.” Two of the the biggest problems faced by competitive health insurance plans are 1) when there are not enough healthy people to cover the costs of sick people or 2) when people only seek coverage when they are sick. The exchanges are supposed to minimize these problems. Individual states may set up and manage the exchanges, or they can opt to have them run by the federal government. The fact that several governors have so far refused to set them up -  as a political statement against the government mandate - only serves to complicate and delay matters.

At the same time, investment firms, consultants, and insurance companies are in the process of setting up private health exchanges that work similarly to the public ones. The major difference is that these exchanges target large corporations with an emphasis on reducing their operating costs and improving their corporate bottom-line. Sears and Darden (the parent company of Red Lobster and Olive Garden, among others) are among the first to take advantage of this, using an exchange set up by Aon Hewitt. (On a side note, Aon settled late last year with the SEC and the Department of Justice in the amounts of $14.5 million and $1.76 million respectively for violations of the Foreign Corrupt Practices Act). While un-related to the health exchange program, the federal fines show a company inclined to play fast and loose with the rules.

The Aon Hewitt exchange is likely the first of many. Earlier this year, consulting firm Booz & Company published a report laying out the pros and cons (mostly pros) of private health exchanges. At least two other human resource consultancies, Mercer (whose parent company Marsh and McLennan paid a combined $400 million to settle with New Jersey Ohio in 2009 for “false and misleading statements” in public filings and other communications) and Extend Health Inc., are in the process of setting them up, according to . Not to be left out, some Blue Cross companies have bought into Bloom Health - another company offering private exchanges. Whether offered by for-profit or non-profit companies, it is clear private health exchanges will soon be a major part of the healthcare landscape.

Given these latest developments, it's fair for working Americans to ask some pointed questions : To what extent will the burden and risk of providing health insurance now be transferred from employer to employee? Is this the beginning of the end of traditional defined benefit health insurance? Who specifically stands to profit from these changes and what influence will they exert on the legislative process?

UWS Digital News will continue report on this, but if the switch to defined contributions in health care is anything like what happened to retirement plans, the answers will be costly for workers and their families.

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