Obamacare is sort of like a medicine. It left a bad taste in the mouths of many -- at least at the initial launch. Advocates say that it will make plenty of people feel better over time. And then there are the side effects.
One of those side effects made news this past week with the announcement of results from Aon's (NYSE:AON) Health Care Survey of more than 1,230 employers. According to findings from the company's human resources solutions group, Aon Hewitt, fully one-third of employers plan to move their workers to private health exchanges within the next three years. Two-thirds of employers considering changes to their retirement health benefits are thinking about moving retirees to private exchanges.
What it could mean for you
What is the impact on employees? There is both good and bad news.
Walgreen's decision last September to offer health insurance to employees through Aon Hewitt's Corporate Health Exchange highlighted some of the positives. The pharmacy chain played up the flexibility to workers and their families of personal coverage options to best meet their needs.
That's not all spin, either. Aon Hewitt's 2013 survey of more than 100,000 employees of companies using its private exchange found that nearly 80% thought the health plan they selected offered the greatest value for their needs, and 93% liked being able to choose from multiple health insurers.
There is another angle, though. Walgreen and other companies moving to private health exchanges aren't just doing it to make employees happy. They're adapting to control their costs. The reality is that a key way of accomplishing this goal is to get employees to pay more. Aon Hewitt's Ken Sperling acknowledged several months ago that the amount that workers "will be asked to contribute is expected to grow much faster than the rate of salary increases."
This impending shift to private exchanges could be as dramatic as the move over the past few decades from employer pension plans to individual 401(k) retirement plans. Just as with that big change, the important factor at play is a transition from a defined benefits model to a defined contribution model.
Some would argue that the move to private exchanges preceded enactment of the Affordable Care Act and therefore shouldn't be viewed as a side effect of Obamacare. Walgreen spokesman Michael Polzin seemed to confirm this view last September, with his denial that the company's move to Aon Hewitt's exchange was driven by Obamacare.
On the other hand, multiple organizations have directly attributed higher health insurance costs to Obamacare. The desire to control higher costs is a prime motivation for employers' moves to private exchanges. As Towers Watson (NYSE: TW) senior consultant Sandy Ageloff observed, health reform implementation "is definitely escalating the pace of change" for companies trying new approaches for providing coverage to employees.
In an interview with Bloomberg, Paul Fronstin, director of health research at the Employee Benefit Research Institute, speculated that some workers could be pushing their employers for more choices after seeing the Obamacare marketplaces for individual insurance. If he is right, movement to private exchanges could certainly be seen as a side effect of the legislation. Even if his take isn't completely on target, Fronstin made a good point.
PricewaterhouseCoopers' Health Research Institute, or HRI, found that most individuals shopping for health insurance on the Obamacare public exchanges had a wider variety of selections than the offerings for many employers. The firm also reported that prices for the individual Obamacare plans compared favorably to -- and in some cases were significantly lower than -- employer health insurance coverage. It's important to note, however, that a key trade-off cited by HRI was restricted provider choice resulting from limited networks on many Obamacare plans.
Prescription for profits
What is perhaps the best news to be found with this side effect of Obamacare? You could make money from it.
With large employers like Walgreen already moving to private exchanges and many more saying they will follow suit, this relatively new model could present a way for smart investors to benefit. Three big players in the growing field of private exchanges include Aon, Towers Watson, and Marsh & McLennan's (NYSE:MMC) Mercer unit.
I expect the private exchange business for all three companies to grow tremendously in the coming years. You couldn't have gone wrong with any of these stocks over the past year. Marsh & McLennan gained 33%. Aon rose nearly 45%. Towers Watson performed best, with a big jump of around 65%. My view is that investors probably wouldn't fare poorly buying any of the three stocks and holding for the long run.
A sea change is happening in the world of health insurance. Obamacare is contributing to and likely accelerating that change. Whether you think the health reform legislation is a tonic for the U.S. health care system or poison for the nation's economy, riding the wave of private exchanges could be a prescription for profits.