Private Health Exchanges: Why They’re Coming; What They Mean


We believe commercial health insurance markets will shift toward an exchange-based format for employees of all income ranges and employers of all sizes, and that this transition will occur for most employees within three to five years

Rather than choosing from one or two relatively generous plans from a single (often national) issuer, the typical employee will have the choice of both less generous and more generous levels of coverage from multiple issuers, many of whom are likely to be local

This implies smaller average contract values (we believe employees will choose plans with average AVs of 65, a 21 pct decline from the current average of 82), share gains by local insurers at the expense of large national underwriters, and rising MLRs as each beneficiary is now both ‘in range’ of more underwriters, and more willing to switch plans each year based on price

The larger commercial HMOs (e.g. CI, AET, UNH, WLP) are most negatively affected; falling average contract values and rising average MLRs being compounded by a loss of share to local insurers. Because of these risks we now favor the smaller Medicaid-predominant HMOs (e.g. CNC, MGLN, MOH, WCG)

Where they exist, integrated health networks (IHNs) may have better reputations and generally do have cost advantages relative to other local issuers, and are likely to see large share gains. Being newly empowered to choose among multiple issuers, beneficiaries will demand revolutionary improvements in customer service from all health insurers

Pharmacy benefit managers (PBMs) are likely to see a shrinking market for pharmacy benefit carve-outs sold to large national accounts. Issuers of comprehensive exchange-based health plans are likely to outsource administration of pharmacy benefits to PBMs, but at ‘third party administrator’ margins below those in PBMs’ direct-to-employer relationships. Being less reliant on large employer-based national accounts, we believe CTRX is far less negatively affected than ESRX

Hospitals are negatively affected by the decline in average actuarial values, particularly as this affects collections. A beneficiary receiving care under an 82AV plan (the current ESI average) pays (out-of-pocket) $0.18 per dollar of care received, and hospitals’ collection rate on the beneficiary’s portion of the obligation is +/- 40pct over 90 days. The same beneficiary receiving care under a 65AV plan is responsible out-of-pocket for $0.35 per dollar of care received, and collection rates on this larger beneficiary obligation are likely to fall from the current level

Non-Rx Consumables companies (e.g. CFN and OMI in particular because of US focus, and also BDX, BCR, COV) offer exposure to rising per-capita utilization as coverage expands, without direct or even significant exposure to Hospitals’ pricing and collection pressures; accordingly we favor these names over Hospitals

For our full research notes, please visit our published research site.

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