Private Exchanges Make Defined Contribution Benefits Easier

When we’re not reading headlines about the Presidential election, we’re seeing more coverage on private exchanges. Just last week, the Wall Street Journal had two articles on large employers using a private exchange as the mechanism for providing health benefits to their employees.

I’ve heard and read many responses and comments on private exchanges subsequent to this; one common misperception is that private exchanges are synonymous with defined contribution or that employers cannot offer defined contribution health plans without private exchanges.

Not true on either count. Private exchanges are shopping platforms, where people can shop for health insurance and select one from a range of plans offered. Defined contribution is a benefit strategy of growing interest among employers because it enables greater predictability in health benefit dollars since the amount of money contributed to an employee’s health benefit is fixed, or defined.

The nexus of private exchanges and defined contribution is that the exchange offers an easy way for employees to shop, moving away from a “one size fits all” health plan to finding the plan that best fits their needs. Technology (the exchange) makes the shopping experience easier and allows for greater transparency on what plans cost and what amount the employer contributes. An employer can adopt a defined contribution strategy without a private exchange. However they’ll miss the benefits of reduced administrative costs. And an employer can offer a private exchange without moving to a defined contribution strategy.

But chances are, we’ll the see more of the two going hand in hand.