Private health insurance exchanges are relatively new mechanisms for businesses to provide health insurance coverage to employees. Although designs vary, private exchanges typically involve multiple plan choices from one or more insurance carriers. Employers offering health insurance through private exchanges for active employees typically contribute a percentage of the lowest-cost health insurance premium, requiring the employee to pay for any differential cost for a more-expensive plan. In some cases, particularly in the retiree market, employers use a defined contribution mechanism (a flat dollar amount indexed to inflation) to contribute to premiums in the private exchange, an approach that makes the...

We used three methodologies to conduct this study: literature review, discussions with key experts, and microsimulation modeling. This section details the methods for the literature review and discussion components. Section 4 sets forth the modeling methodology.

We searched four online databases as part of the peer-reviewed literature search: JSTOR, PubMed, National Bureau of Economic Research, and EconLit. Search terms included “private exchanges*” and “health insurance” or “small group” or “large group” or “Cadillac tax”; “health insurance exchanges*” and “small group” or “small employer”; and “private insurance exchanges*” and “small employer” or “small group.”

Prominent topics in the literature include analyses...

One of the challenges that we identified both in our literature review and discussions is that there is no shared definition of exactly what the term “private exchange” means. One discussant said:

I think one issue is that the word exchange has been liberally used. There are insurers who offer exchanges with their own products, consulting groups who might run their own with multiple insurers, and then there are agent/broker firms that run exchanges with multiple definitions.

In general, private exchanges involve Web portals through which employees can shop for health insurance, usually with more options than are typically available...

Our literature review and discussions with experts revealed that reducing health care costs and possibly avoiding the Cadillac tax are primary motivations for employers to move or consider moving to private exchanges. However, discussants reported that most of the cost reductions in moving to private exchanges stem from employees switching to lower-cost plans. Moves to lower-cost plans may be incentivized through reference pricing or defined contribution approaches, in which the employer’s contribution is fixed as a dollar amount or as a percentage of a low-cost plan and does not increase if the employee chooses a more-expensive option.

While the ability...

Given both our literature review and our discussions with key experts, we found no consensus on the definition of private exchanges. Respondents agreed that increased plan choices, use of decision tools, benefit administration, and cost-containment strategies were core functions of private exchanges. However, respondents disagreed on other potential features of private exchange design. For example, some respondents believed that plan standardization within the exchanges was important, while other exchange operators preferred to work with employers to develop customized plan designs. Several respondents also argued that a core component of private exchanges is the ability to encourage competition among carriers, which...