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How does a Private Exchange save employers money?

line graph of private exchange saving money

Comparing the old group health plan approach to a Private Exchange 

As many employers are gearing up to make big healthcare decisions this fall and investigating the available strategies, countless are questioning how a Private Exchange will save employers on the cost of healthcare. 

As a quick review, a Private Exchange is when an employer offers five or more health plans to its employees. Five options aren't as many as the hundreds that one would find on the public exchange, but it's enough to allow meaningful choice for employees.

Private Exchanges are new to the healthcare market, but not as new as some might assumeAccenture predicts that by 2018 enrollment on Private Exchanges will outpace enrollment on public exchanges. Therefore, this strategy is critical for employers to consider.  

Today, we will look at how Private Exchanges save employers on the cost of healthcare. 

Private Exchange savings 

A Private Exchange saves employers healthcare dollars because it allows employers to move to a Defined Contribution strategy. Defined Contribution enables employers to fix their healthcare costs by giving employees a monthly amount to spend on benefits. 

Let's take an example.

An employer wants to move to a Private Exchange and give employees a 5% higher Defined Contribution every year. On the old approach with 2-3 health plans, the cost of benefits for this employer went up 30% every year. For this example, we'll look at just one health plan that costs $200 per employee, per month this year. We will follow the cost of this $200 plan for five years on both the old approach with 2-3 plan options and on a Private Exchange.   

Here's a little visual before we get started:

Private Exchange
Old approach

In this example, an employer's costs go up 30% every year. Over five years, the cost per employee, per month is $1,808. The yearly cost over five years for one employee is $21,703. 

Take a look at the graph that shows both the monthly and yearly costs per employee over a five-year period. 

Private Exchange

Now, let's look at the same health plan that costs $200 per month this year and follow this plan on a Private Exchange. 

Private Exchange with Defined Contribution 

This year the employer give employees $200 a month to pick a plan on the Private Exchange. Next year? The employer gives employees 5% more or $210 per month to pick a plan on the Private Exchange. The following year? Another 5%, meaning employees now receive about $221 a month for benefits. 

The total monthly cost over a five-year period for one employee is $1,105. The yearly cost is over a five-year period for one employee is $13,260. 

The graph below shows the Private Exchange monthly and yearly costs for one employee. 

Private exchange cost resized 600

Now that we have these numbers, let's look at comparing the old approach to a Private Exchange for different organization sizes. 

Comparing the old approach to a Private Exchange

Now, it's one thing to look at the cost savings of the Private Exchange for one employee over five years. However to really grasp the savings available, it's critical to look at the savings for 10, 50, 100, and 200 employees over a five-year period. To calculate the numbers you see in the chart below, we simply multiplied the yearly cost per employee on the old approach by the number of employees and the yearly cost per employee on a Private Exchange by the number of employees. Then, we subtracted the cost on Private Exchange from the cost on the old approach to get the Private Exchange savings over a 5-year period. 

Take a look at the chart below that shows the Private Exchange savings. 

Private Exchange savings 

As you can see, there are huge savings available when an employer moves to a Private Exchange with Defined Contribution. Even if an employer is used to a smaller increase at renewal, if this increase is greater than the additional amount you determine to contribute on a Defined Contribution strategy, then a Private Exchange still offers savings. Private Exchange with Defined Contribution offers a way to fix your healthcare costs so you aren't a slave to waiting for the shoe to drop on the next renewal. 

Now, some employers may be concerned about how employees will respond to this change. If the benefits are so substantial for employers, does that mean employees aren't getting good benefits? Absolutely not. Private Exchanges include huge benefits for employees, namely more control over healthcare spending and more options. 

What's not to love about a Private Exchange? 

If you liked this post, you may also like Private Exchanges: the benefits for employees

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