Could This Surprising Trend Blow Away Obamacare?

Private healthcare exchanges offered by companies including Aon Hewitt and Towers Watson could end up having a bigger long term impact on insurers like United Healthcare than Obamacare.

Jun 21, 2014 at 9:30AM

Obamacare's launch of health care exchanges is changing how Americans buy their health insurance, but it's not just the uninsured that are benefiting from increased price competition. Growing interest in exchanges' ability to curb runaway insurance premiums has gotten the attention of employers wrestling to contain health care costs, too.

As a result, the insurance industry is finding more employers are switching from providing insurance from one insurer to competitive exchanges being offered by companies like Aon Hewitt (NYSE:AON) and Towers Watson (NASDAQ:TW) that pit plans from insurers, including UnitedHealth (NYSE:UNH) and Cigna (NYSE:CI), against each other.

Obama

Source: White House Flickr

Reinventing health care insurance
According to Accenture, more than 3 million people signed up for health care insurance through private exchanges offered by their employer this past year. That tripled Accenture's previous forecast for 1 million people.

While private exchange signups trailed signups on Federal or state exchanges this year, the total number of Americans receiving health care through employers totals more than 150 million. That suggests the market for private exchanges could be much bigger than public exchanges, which hope to provide insurance to as many as 24 million people by 2017.

So far it's small and mid-sized companies that have been most eager to embrace the private exchanges, but large employers like Walgreen are getting in on the action, too.

Walgreen's decision to offer insurance to its 250,000 employees through Aon's private exchange could open the door for others to follow, particularly if exchanges follow through on their promise to lower employer's spending on health care.

Employers have traditionally picked a plan and paid a percentage of that plan's cost, but in private exchanges a company like Walgreen can pick an overall amount it wants to spend on insurance, and then let employees pick from a menu of plans with different service levels and costs.

So far employees have been selecting lower-cost plans, and while it's still early innings for private exchanges, those cheaper plans are saving employers money. According to private exchange company Mercer, employees are picking plans that are about $800 cheaper per employee per year.

G

Source: Aon Health Exchange

Growing exchanges
Aon and Towers Watson are two of the biggest beneficiaries of the surge in interest in private exchanges.

The two companies run private exchanges that offer insurance plans by companies like UnitedHealth and Cigna and then collect commissions on those plans when employees pick them.

At Aon, more than 1 million people signed up for insurance through its health care exchange for 2014 and more people are expected to sign up this year. That's because plan prices offered through Aon's exchange grew much more slowly than traditional employer plans. According to Aon, pricing for plans on its exchange grew by 5% this year, significantly less than the 6% to 8% growth rate for nonexchange employer plans. That price advantage should allow Aon to ink deals with more employers this year.  

Towers Watson bulked up its own offering last fall with the $200 million acquisition of private exchange operator Liazon. Liazon, which offers an exchange for active employees, will be combined with Tower's existing exchange for retirees to offer a more comprehensive offering this year.

In the first quarter, Towers' exchange solutions business generated $47 million in sales, up from $31 million a year ago. Towers' nine month results are equally impressive, growing from $60 million last year to $118 million this year.

Fool-worthy final thoughts
While 3 million members is nothing to sneeze at, it's still a drop in the bucket in terms of the overall insurance market. UnitedHealth, for example, serves more than 88 million people. As a result, these private exchanges aren't yet moving the needle for the big insurers like Cigna.

When asked about the impact of private exchanges during Cigna's first quarter conference call, CEO David Cordani replied, "The net of all of that through our experience has been de minimis -- meaning puts and takes, wins and losses, relatively small volumes and a relatively small net movement within the portfolio."

The impact appears bigger -- for now -- for exchange providers Aon and Towers Watson, but that could certainly change quickly, particularly if more large employers embrace private exchanges.

"[W]e view that the private exchange environment is still in the early phases
of adoption and clearly may create a very attractive sustainable marketplace for time to come," said Cordani.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Aon and UnitedHealth Group. The Motley Fool owns shares of Aon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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