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May 26, 2015


Health Exchanges, Consumerism and Payers – Digital Transformation Underway

by Ravi Kalakota

DigitalHealthcareEvolutionEmployee Benefits and HR are going digital. New firms like Workday and Zenefits are transforming HR into the multi-tenant Cloud.  New firms like BenefitFocus, Liazon (acquired by TowersWatson), and others are moving employee benefits to the cloud.

Employee benefits and health insurance in the U.S. is at the cusp of a major transition from an employer-driven payer model to a employee driven digital model.

Private and public health insurance exchanges with a defined contribution approach represent a significant step in this journey. There are also clever risk shifting strategies emerging where employers are moving part-time workers onto public exchanges.

The spend on employee benefits in the U.S is staggering. In 2011, employers spent on $1.64 trillion on employee benefits alone.  Healthcare benefits are the 2nd costliest line item for companies in the U.S. So, companies are taking aggressive steps to reduce this spend.  Employers are digitizing HR and moving employees to private exchanges at faster than anticipated rate. Consider this:

  • IBM moved to a private health exchange…Extend Health private exchange will be handling plan options for 110,000 IBM retirees
  • Walgreens moved employees to a Corporate Health Exchange.  Of the 180,000 Walgreen employees eligible for healthcare insurance, 120,000 opted for coverage for themselves and 40,000 family members. Another 60,000 employees, many of them working part-time, were not eligible for health insurance.
  • Trader Joe’s  — decided to send some employees to the new public exchanges. Trader Joe’s has left coverage for three-quarters of its work force untouched but is giving part-time workers a contribution of $500 to buy policies. Because of the employees’ low incomes, the company says it believes many will be eligible for federal subsidies to help them afford coverage.
  • Time Warner will direct retirees to an exchange to get health coverage

The move to patient-centered, consumer-driven, and value-based models is real. The market size is enormous.  Healthcare spending is forecasted to be ~$3.1 trillion in 2014, with $620 Bln of this paid by U.S. employers.  In 2013, employers contributed 32% more in health care expenses than 2008.  More recent data about the changing insurance and delivery landscape.


Employers are structurally attacking this sizable and growing employee benefits problem via a variety of strategies:

  1. moving from defined benefits to defined contribution;
  2. migrating part-time employees to Public Health Exchanges;
  3. more efficient Private Exchanges that are more benefits administration but include wellness and preventative disease management.

Connected Health: Digitizing Employee Benefits

Benefits as a % of total employee compensation are 30% and rising.  Health benefits account for over 30% of all benefits received. New models of care shift costs to consumers.

The focus in 2013 was on and other Health Exchanges (public and private), basically getting them up and functioning. The focus in 2014 is enrollment, engagement and scale.  But cloud-based private Health Exchanges with Affordable Care Act (ACA) are slowly but surely reshaping the employee benefits landscape – core medical, dental and other voluntary benefits plans as well as wellness programs.

The market opportunity for exchanges (and related analytics, reporting etc.) is correlated to the size of the employee benefits segment:

  • There are over 18,000+ Employers with over 1,000 employees in the U.S. – almost all of them are moving from defined benefits to defined contribution model (consumerism)
  • A growing portion of employers’ costs is non-salary benefits, such as the health insurance that they provide to their employees.
  • Benefits as a % of total employee compensation are 30% and rising (an average of $9,248 per employee)
  • Healthcare reform creates a whole new set of processes (shop, enroll, manage and integrate), compliance and reporting needs for employers, insurance carriers and brokers.

It’s exciting as magnitude of transformational change taking place in the U.S. health care space is amazing and we are at the early stages of this.  The following figure from BenefitFocus illustrates the cloud-based transformation underway in Private Exchanges.


Digital Transformation of Employee Benefits

Emerging health reform themes are….Marketplaces, Consumerism, Wellness, Engagement Mobile, Globalization, Cloud based Benefit Administration, Affordable Care Act, Big Data and Analytics. The core digital transformation trends in benefit exchanges include:

1) Consumerism –   transform core processes….SHOP, ENROLL, MANAGE, and INTEGRATE.

  • SHOP for benefits that meet your needs (Decision Support);
  • ENROLL in health, life, voluntary and financial benefits;
  • MANAGE communications, enrollment and billing;
  • INTEGRATE data with insurance carriers and HR systems.

2) Drive convergence of health and wealth by integrating management of tax-advantaged vehicles (HRAs, HSAs, IRAs). This way employees can manage their healthcare savings, retirement portfolios in one place.

3) Reducing administrative costs (Leading the shift from manual to automated cloud and SaaS enrollment) and increasing flexibility while achieving health care quality goals and outcomes that result in cost savings.

4) Medical plan variety, Better coordinated care, chronic disease management, and improve the quality of care employees get. Access to own medical records is empowering for employees.

healthandfitness5) Wellness management with emerging quantified self products like Fitbit, Jawbone UP, Nike Fuelband etc.  I expect full health and fitness services platform will be widespread in the next 3-5 years.  The data that is generated from wearable computing devices will be very valuable for customized Health Insurance purposes. This is similar in concept to Auto Insurance firms providing incentives to drivers for safe driving.  Disease prevention via fitness improvement is the name of the game.  

At its core, a private exchange is a portal – typically operated by brokers or insurers – that sells insurance products to health care consumers through an on-line product.  What makes private exchanges unique is their ability to enable the health care consumer to shop from among a wide-variety of major medical health plans and supplemental insurance products (e.g., hospitalization, disease, disability, or dental coverage) through the use of technology.  Private exchanges also offer “decision support” or they employ “recommendation” guided/facilitated services that may not be offered in a traditional setting.

Employer focused, Employee Driven Private Exchange Strategy

Moving from manual to digital processes is at the center of the private exchange strategy.  An exchange is an online portal where employees can purchase and manage benefits. Core trends in employer focused, employee driven private exchange market include:

  • Integrate health, payroll, and employee time and labor data in one portal.  The goal is to encourage healthy behavior via various incentives such as tiered employer contribution account
  • Shifting from defined benefit to defined contribution for both health and wealth. This means improved access to tax-advantaged vehicles (HRAs, HSAs, IRAs) that only big companies provided
  • Cloud based private exchanges (“Cloud-First” strategies) for entire benefits administration value chain and voluntary benefits
  • Driving better employee engagement and develop more voluntary benefits

According to the U.S. Bureau of Labor Statistics, the single largest benefit provided to employees in the United States is healthcare insurance, often encompassing more than 90% of all insurance benefits spending by employers.

According to SNL Financial data, the U.S. private healthcare insurance market consists of approximately 313 carriers covering approximately 176 million individual consumers. Carriers provide benefits primarily through over 5.7 million U.S. employers.

Employer focused, employee driven is the new defined contribution model (similar to the 401K). One of the biggest hurdles to controlling healthcare costs for employers is the complexity and obfuscation in the market. It’s hard to be a smart shopper when you can’t compare the quality of different providers or even know how much they cost or plan modeling… how much different benefits will up costing employees.

Figure below is from Liazon’s Bright Choices show the digital enrollment and shopping side.


Connected Health: Data Driven Employee Interfaces

For patients to behave like cost-conscious consumers, you have to make it easy to compare the cost of care in their communities. Employers, providers and insurance firms want to stop using, “your insurance will cover it” as an excuse not to share price information. So several new companies like Castlight shown below collect vast amounts of data and display relevant bits in a more clear and simple way to help consumers make smarter choices.

Health care Value is an emerging opportunity for community conversation. Social Communities are helping consumers evaluate products and services. There are more and more social communities that enable patients to share their journeys with their communities allow others to support them.


Modernizing Architecture of Health Insurance Carriers

Employer enrollment platforms need to be connected seamless with the insurance carriers for the end-to-end digitization to work. Patients expect “consumer grade” experiences in their interactions with every carrier.

Insurance carrier IT systems typically consist of software platforms that handles customized benefit plans,  claims management, claims re-pricing, insurance premium billing, network management, and case management. Despite widespread carrier consolidation, numerous disparate systems remain in place, with many large carriers operating on multiple IT systems.

Real-time response for different steps – enrollment, eligibility, billing — is now an expectation. The effective delivery and management of healthcare benefits depends on the timely, continuous exchange of data among carriers, their employer customers, and individual members.  Legacy benefits management systems often lack important functionality such as web and mobile self-service capabilities and real-time data exchange.

Critical carrier processes, including member enrollment, billing, communications, and retail marketing have often been under-optimized or neglected by legacy systems, and carriers have devoted significant internal resources to cover technology gaps.

The growth in customized benefit plans  (see below – adapted from BenefitFocus investor presentation) also creates new complexity for the Insurance Carriers (such as BlueCross, Cigna, Aetna, United Healthcare, Wellpoint and others).

Engagement at scale requires the carrier platforms to be highly available and scalable to meet the demands of an expanding user base. As the demands increase, infrastructure and computing power must be provisioned dynamically across a variety of servers. Sitting on top of the infrastructure are  real-time monitoring systems that provides visibility into the health of core systems.


Digitizing Healthcare Benefits – Employer Perspective

Healthcare is an enormous industry.  Employers are forecasted to spend ~$620 Bln on health care in 2014, according to CMS. According to the Bureau of Labor Statistics, health care benefit costs account for ~8% of total employee costs in the U.S and represent the largest category of voluntary benefits provided by private employers. These costs are also growing rapidly.

Transforming the benefits industry will take time and a lot of effort.


Source: Mary Meeker 2015 Internet Trends

1) Rising Costs Is a Continuous Issue for Employers

In 2013, employers contributed 32% more in health care expenses than five years ago, according to NBGH and Towers Watson. In addition, certain provisions in the ACA, such as the requirement to offer insurance to all full-time employees, will result in additional costs to most employers. As part of their strategy to manage their costs, large employers have been increasingly self-insuring, which more directly exposes these employers to volatility in health care expenses, and places the burden of designing health care benefits for self-insured enterprises on the employer.

According to an August 2013 Kaiser Family Foundation survey, in 2013, ~61% of employees who rely on health care funded by an employer are covered by health plans by U.S. employers that have elected to self-insure (including 94% of the covered employees of U.S. employers with more than 5,000 employees).

Better managing employee benefit expenses will have a direct impact on financial performance, making employers eager for solutions that can help them manage this growing problem.

EmployeeBenefits ComponentsofHealthPlan

2) Employers Have Been Largely Unsuccessful in Controlling Costs and Ensuring High Quality Care

Despite intensive efforts to reduce health care expenses and improve value over many years, employers continue to face escalating costs and highly variable quality.

Efforts to manage costs through benefit design have been largely unsuccessful. For example, during the 1990s, employers increased their use of health maintenance organization, or HMO, plans, which were designed to incentivize health care providers to reduce the spend for the care of an employee population, but restricted employee choice and created considerable employee dissatisfaction with their health benefits. Many employers responded by shifting to preferred provider organization, or PPO, plans, which offer greater choice and access for employees and their families, but reaccelerated increases in health care costs.

More recently, employers have attempted to reduce health care costs through use of employee cost-sharing plans, such as consumer-directed health care plans. These plans shift health care expenses to employees, and thereby incentivize them to make better health care spending decisions. This shift has been profound. For example, in 2013, 43% of employers with at least 1,000 workers offered high deductible health plans with savings option to their employees, up from only 8% in 2005 (source: Kaiser Family Foundation). Although these employee cost-sharing plans have had some success in decreasing the rate of growth of employers’ costs, employee dissatisfaction with these plans is high because they lack the tools to shop for care and understand their benefits.

Progressive employers have implemented benefit design strategies to improve quality of care and thereby lower costs by reducing complications and eliminating wasteful treatments. Employers can reduce their health care costs by directing employees and their families to higher quality service providers that can improve outcomes, reduce medical complications and eliminate wasteful treatments. While higher cost-sharing plans and other specific benefit design strategies have the potential to reduce costs, they are difficult to implement effectively without transparent and actionable information that enables employers and employees to identify options that provide more value for their health care dollar.

3) Public Health Exchanges and PPACA

The Patient Protection and Affordable Care Act (PPACA) introduces a huge number of new fiscal and compliance responsibilities to Employers, Healthcare Payors and Plans.  One big shift for hospitals and providers is: Fee-for-Service to Value-based Payment

Solving the PPACA compliance conundrum in ways that also provide valuable insights into data for strategic decision making purposes has become a key goal of Health Payor and Plan executives.

One aspect of PPACA is covering the uncovered. To encourage enrollment, PPACA introduces a new distribution model in the form of healthcare exchanges—online marketplaces that allow insurance carriers to compete directly for new members.

  • Public Exchanges — PPACA authorized the creation of publicly funded state exchanges in which individuals and small businesses can purchase health insurance directly from carriers. In addition to these federally mandated public exchanges, a number of private entities, including benefit outsourcers, carriers, and brokers are establishing their own private exchanges.

In simple terms, a Public Health Exchange is a resource where individuals, families, and small businesses can: learn about their health coverage options; compare health insurance plans based on costs, benefits, and other important features; choose a plan; and enroll in coverage. The Marketplace also provides information on programs that help people with low to moderate income and resources pay for coverage. This includes ways to save on the monthly premiums and out-of-pocket costs of coverage available through the Marketplace, and information about other programs, including Medicaid and the Children’s Health Insurance Program (CHIP).

Private Public Exchange


Summary – Patient-centered, consumer-driven, and value-based

In the U.S., health reform legislation is bringing extraordinary changes and uncertainty to the healthcare industry—both from a business and a technology perspective.  

Four key issues increasing impact health payors and plans

  • Consumerism – how to effectively move from defined benefits to defined contribution model
  • Health Insurance exchanges, in terms of tracking the cost of sales and profitability of this new segment
  • Medical loss ratio analyses, which affect planning, budgeting and operational reporting
  • Reinsurance, risk corridors and risk adjustment, the transition risk sharing model creating plan profitability uncertainty due to adverse selection.

The big trend is Private exchanges — Employer focused, Employee Driven. These aim to be less rigid, promoting both health and non-health benefits, with substantially fewer rules around the types of benefits offered. With private exchanges, employers can successfully implement defined contribution; Offer employees an array of choices; and Encourage employees to “buy down” to lower-cost medical coverage and use remaining dollars for other purchases

The Employer advantages include (1) Cost control, (2) Choice for employees, and (3) Streamlined management and administration.  The Employee advantages include (1) Personalized portfolios, (2) Cost-efficient, convenient buying, and (3) Comprehensive coverage.

As health insurance carriers continue to bolster their retail distribution capabilities, new technology solutions are emerging to attract additional members through private exchanges.  New data and analytics are emerging  to address cost and selection issues. These however require the complex integration of the end-end healthcare transaction data, general ledger, internal cost accounting data and claims data.

From a health plan or payer senior management standpoint, the goal is do more with less – reduce enterprise cost by consolidating, simplifying and standardizing IT architecture, and optimize cash flow through working capital improvements. The best decisions come from having greater visibility into data – a key aim to reduce earnings volatility and enhance flexibility to adapt to market changes.

Notes and References

  2. Healthcare Analytics Use Cases
  3. Quantifed Self – Wellness Tracking and Management
  4. Making Healthcare Costs More Transparent.
  5. The health care industry in the United States is the largest in the world, according to the World Bank. According to a 2012 study by CMS, U.S. national health expenditure is forecasted to reach $3.1 trillion, or approximately 18% of the U.S. Gross Domestic Product, or GDP, in 2014, and is expected to grow to approximately 20% of GDP by the year 2022. Despite this tremendous spending, U.S. health care outcomes remain inferior relative to those of many other countries.
  6. According to a 2013 Bloomberg report, the United States ranked 46th in overall health care efficiency based on a weighted-average of life expectancy, relative cost per capita and absolute cost per capita of health care. Additionally, a 2013 Institute of Medicine report estimates that approximately 30% of U.S. health care spending in 2009 was wasted due to factors such as inflated prices, the provision of unnecessary services and inefficient delivery of care.
  7. In addition to these inefficiencies, industry dynamics have led to high variations in the cost and quality of health care services. For example, according to a 2013 report by the Massachusetts Attorney General, found that prices paid by certain health plans in 2011 varied by up to 3.5 times between the lowest and highest providers. Further, the study also found that price differences were not explained by differences in quality or complexity of care delivered. Moreover, according to a 2013 study in the New England Journal of Medicine, the quality of health care services can vary dramatically. According to the study, risk-adjusted 30-day readmission rates for six surgical conditions at high-volume hospitals ranged between 7.5% and 25.5% in 2009 and 2010
  8. Approximately 149 million people in the United States rely upon health care that is funded by an employer, according to Kaiser Family Foundation.
  9. On average, employees paid approximately 23% of the total cost of their health care and employers paid approximately 77% in 2012, according to a joint survey by NBGH and Towers Watson.
  10. Spectacular Failure of a Health Insurance Exchange – Oregon 
  • Oregon, where $248 million was spent, never enrolled a single person through its website and has already announced that it plans to join the other 36 states on the federal site.
  • Nevada spent $51 million and has not yet decided if it will join those other states or attempt to repair its own site.
  • Maryland spent $118 million in federal money last year for a failed program
  • cost ~700M before they got it functional.  

Examples of private health exchanges include:

  • Extend Health (    (Subsidary of Towers Watson)
  • Aon Hewitt Corporate Exchange (
  • Mercer Marketplace Exchange (powered by BenefitFocus)
  • Liazon Corp.  —  the Bright Choices Exchange
  • Blue KC Exchange (
  • American Westbrook (
  • Array Health (
  • Bloom Health (
  • Blue KC Exchange (
  • Choice Administrators (
  • Connected Health (
  • eHealth (
  • Ensurex (
  • (
  • hCentive (
  • HealthPass (
  • RightOpt  (Buck Consultants)

Players in the U.S Healthcare Ecosystem

  • Hospital, Multi-Hospital System, Integrated Delivery System
  • Critical Access Hospital
  • Academic Medical Center
  • Ancillary Clinical Service Provider
  • Home Healthcare Org
  • IDS/hospital-owned Ambulatory Clinic
  • Independent Ambulatory Clinic
  • Community Health Center Clinic
  • Long Term Care Facility
  • Federal, State or Local Government (MediCare + MediCaid)
  • Payer, Insurance Company, Managed Care
  • Life Sciences (Biotech and Pharmaceutical firms)
  • Pharmacies

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