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Analysis: Benefit firms create tremors for insurers in U.S. healthcare shakeup

Patient Eilleen Corrigin (L) stands next to a nurse while checking in for an appointment at an anti-coagulation clinic at the Staten Island
Patient Eilleen Corrigin (L) stands next to a nurse while checking in for an appointment at an anti-coagulation clinic at the Staten Island

By Caroline Humer and Lewis Krauskopf

NEW YORK (Reuters) - American companies are sending shockwaves through the healthcare industry by moving a rapidly growing number of employees onto privately run online exchanges for their medical coverage.

In a business already bracing for major change because of President Barack Obama's healthcare reforms, the decisions are threatening to shift more power in the market to the benefit consulting firms opening many of the exchanges.

Health insurance companies and pharmacy benefit managers who have traditionally had a more direct relationship with the employers could lose out to the nascent marketplaces.

"It's important to the insurance companies to sell through the private exchanges to maintain their biggest customers," said Mike Nugent, managing director of the healthcare practice at business consulting firm Navigant Consulting.

He said that if the pharmacy benefit managers and others "do not deliver the savings, they will not get paid and that will be the ripple effect."

The exchanges received their biggest boost yet when Aon Plc insurance broker said on Wednesday it signed up 18 companies to participate in its Aon Hewitt Corporate Health Exchange, including the country's largest drug store operator Walgreen Co, resulting in coverage for an estimated 600,000 people next year.

The announcement drove up the shares of Aon and other benefits consulting firms, such as Towers Watson and Marsh & McLennan, which owns Mercer, one of the largest consulting firms in the world.

All three have easily outpaced the broader market in the past year, with Towers Watson shares up 79 percent and Aon up 42 percent. Among the biggest stock losers were Catamaran Corp, which has had a pharmacy benefit deal with Walgreen.

Corporations are hoping the move to the private exchanges will keep healthcare spending in check and force employees to manage more of their own healthcare costs. Companies still directly pay a portion of the premium and deduct premium payments from employee wages for the difference between the employer contribution and the cost of a plan, but employees can choose a plan from a menu of low to high cost offerings.

For instance, Walgreen employees can choose from five plans for 2014 instead of two in 2013.

The consequences for insurers are unclear. Competition for customers will be fiercer and employees may buy lower-priced plans, so their carefully managed profit margins could suffer.

Some experts say moving to an exchange prevents companies from "over-buying" insurance. Alan Cohen, chief strategy officer of private exchange company Liazon, said that based on the 200,000 transactions processed at his companies, employees spent on average 25-30 percent less when they chose the plan compared with what the company would have spent.

On the other hand, the Aon exchange and others shift the risk associated with providing health insurance to the insurers from the large companies that have traditionally being bearing the risk, or self-insuring, which can be more profitable.

Self-insured members generate $4 of pre-tax profit monthly, compared to $18 in pre-tax profit for each fully insured member, according to Credit Suisse analyst Ralph Giacobbe.

OBAMACARE

The move comes as the Affordable Care Act, widely known as Obamacare, starts to fully kick in next month, with the introduction of state-based public exchanges for individuals. About 7 million people are expected to buy insurance on those exchanges for 2014.

Obamacare is not directly behind the creation of the private exchanges.

The idea for competitive marketplaces for insurance date to the 1990s. But some of the law's requirements for employers, such as providing certain preventative services for free and new taxes, have added new healthcare costs for companies.

The coming year is the first time in which a significant number of larger employers will use private exchanges for their workers' benefits. Companies, which start unveiling benefit plans this month, are sending at least 1 million employees to private exchanges in 2014 versus a few hundred thousand now.

More growth is expected in 2015 with nearly 1 in 3 large companies saying they were considering a move. By 2015, 6.5 million people could be on these exchanges for active employees, according to forecasts by analysts at William Blair.

The possible market is much larger. About 170 million people received employer-based health insurance in 2012, 156 million of whom were under 65. The total population of the United States is 311 million.

Aon, Towers Watson and Mercer already dominate the market for consulting for the top 1,000 U.S. companies about benefits, putting them in a position to promote their exchanges.

The expansion of private exchanges is expected to add significantly to revenues of the benefit companies. Rates from exchange contracts bring in more revenue per employee than current administrative ones, according to William Blair analysts. Also, once the exchanges are established with a fixed cost base, new corporate clients become highly profitable, according to William Blair.

The private exchanges have the potential to boost earnings at Aon, which is ahead of its two rivals in the business, from an annual growth rate of 10 to 12 percent, to 15 percent in five years, said William Blair analyst Adam Klauber.

Buck Consultants, a unit of Xerox, also is making inroads. It has signed up 11 new clients ranging in size from 3,000 to 75,000 employees for 2014, including Bob Evans Farms Inc restaurants and household products maker Church & Dwight Co.

FEAR OF LOSING MEMBERS AT INSURERS, PBMs

David Windley, an analyst with Jefferies & Co, said investors are anxious about the impact of both public and private exchanges on the business model of health insurers. One fear is that insurers will lose members should employers choose to put their workers into exchanges.

Insurers have been preparing for this possible shift to private exchanges. In some cases they are investors and in other cases, like Aetna Inc, they are building their own.

But plans offered by large, household name insurers such as UnitedHealth Group, Aetna and WellPoint Inc are likely to be among the most prominent choices for consumers selecting a plan on a private exchange, Windley said.

For pharmacy benefit managers such as Catamaran and Express Scripts Holding Co, any significant shift to private exchanges could mean a less direct relationship with employers, instead forcing the pharmacy companies to contract with health insurers, said Cowen & Co analyst Charles Rhyee.

Private exchanges are similar to markets for small business insurance and private Medicare plans that have been around for years. For instance, IBM and Time Warner Inc have said they would move their retirees over age 65 to a Medicare exchange ExtendHealth that was created in 2004.

Companies still make a contribution to the premiums for these employee plans, making the move different from foregoing healthcare and putting employees on state-based public exchanges where some could receive government subsidies instead. Home Depot Inc said on Thursday it was shifting its part-time medical coverage to the public exchanges, affecting about 20,000 workers.

(Corrects title of Alan Cohen and description of Liazon in paragraph 12)

(Additional reporting by Beth Pinsker; Editing by Martin Howell, Grant McCool and Eric Walsh)

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