Most Americans had never heard of health insurance exchanges just a few years ago. Now, though, the concept is familiar to many after the highly-publicized rise (and temporary fall) of the Obamacare exchanges. But the real story to watch when it comes to health insurance exchanges isn't about Obamacare. More and more employers are turning to private exchanges to offer health insurance to their workers.
Enrollment in private exchanges is projected to reach around 40 million by 2018. That's a 1500% increase from 2014 levels. This trend holds the potential to dramatically shake up the employer-sponsored health insurance market, which currently covers 149 million Americans.
Where there's disruption, there are usually also opportunities to profit. This appears to be the case with private exchanges. Here are the three of the best stocks to invest in to ride the growing wave that's changing the landscape of employer-provided health insurance.
Aon plc (NYSE:AON)
It's no surprise that Aon would be one of the first to jump into private exchanges. The company focuses on human resource solutions for companies across the world and claims over 20,000 clients. Aon's Active Health Exchange was the first national multi-carrier, fully-insured private health exchange in the U.S.
Results so far for companies on Aon's exchange have been impressive. Average annual healthcare cost increases for organizations that have participated in the exchange for two years were 2.6% -- well below the industry average of 6.5%-8% increases for large companies with comparable benefit plans. That kind of performance enables Aon to boast that every customer in its exchange in 2014 opted to stay in 2015.
The company's private exchange represents a growing part of its business. In the first quarter of 2015, HR outsourcing, which includes the private exchange, reported the strongest growth of any area within Aon.
Marsh & McLennan Companies (NYSE:MMC)
Marsh & McLennan's Mercer business unit stands out as another leader in the private exchange market. The company's Mercer Marketplace offers health insurance for its clients' employees -- plus non-health options including auto, home, and pet insurance.
Mercer differentiates itself from Aon by targeting organizations with as few as 100 employees, whereas Aon focuses on large employers. However, Mercer clearly has its fair share of large organizations, with 247 customers with over 500,000 employees combined. A study conducted by the company last year showed that employers can save up to 15% on medical plan costs.
Marsh & McLennan shares are up more than 19% over the last year despite facing currency headwinds. Mercer contributes around one-third of total revenue. While the company does not release detailed information on sales for its private exchanges, Mercer CEO Julio Portalatin has publicly stated that its private exchange business is a "key part" of the company's future.
Towers Watson & Co. (UNKNOWN:TW.DL)
Like its other large human resources solutions rivals, Towers Watson has made a significant push into the private exchange market. The company's OneExchange is the oldest private exchange in the U.S., with operation starting a decade ago.
As of the end of 2014, over 800,000 individuals, including employees and their family members, used OneExchange. Towers Watson expects a 50% increase this year. The company points to healthcare spending growth from its customers of only 1.8% between 2014 and 2015, a statistic likely to catch the eyes of prospects looking to control their own healthcare costs.
Towers Watson performed better than both Aon and Marsh & McLennan over the last year, with shares rising 22%. Its private exchange business has grown most rapidly of all of its business units, with revenue jumping nearly 38% in the nine months ending March 31, 2015.
One fly in the ointment
Aon, Marsh & McLennan, and Towers Watson are all benefiting from impressive growth with their private exchanges. All three stand to reap rewards as employers continue to shift their workers and retirees to private exchange solutions. But there is one catch for investors.
Despite the success of their private exchanges, all three of these big companies make much more revenue from other areas. Aon generates two-thirds of its total sales from its risk advisory and brokerage business. March & McLennan's other segments bring in twice as much revenue as Mercer. Towers Watson received less than 11% of revenue last quarter from its private exchange.
None of these companies are pure-play investments in private exchanges. However, for now at least, they look to be the best investment alternatives for this fast-growing, disruptive approach to health insurance.