Comparison of Plans and Coverage Choices Before and After Implementing

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Investment Monitoring

Retirement Plan Consulting

Comparison of Plans and Coverage

Choices Before and After Implementing

a Private Exchange Strategy

Josh Rickard, ASA, MAAA

Consultant, Financial Analysis and Underwriting

Benefits & Human Resources Consulting

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Comparison of Plans and Coverage Choices Before and After

Implementing a Private Exchange Strategy

Executive Summary ...3

Introduction ...3

Approach...4

Summary of Findings ...5

Analysis of Gallagher Marketplace ...6

Comparison of Benefit Levels – Before and After Gallagher Marketplace ...6

Comparison of Plan Enrollment Distribution – Before and After Gallagher Marketplace ...8

Comparison of Plan Values – Before and After Gallagher Marketplace ...10

Conclusion ...11

Summary of Outcomes ...11

Appendix A – Definitions of Terms ...12

Appendix B – Model Designs for Plan Tiers ...12

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Executive Summary

Private exchange strategies continue to pick up momentum as a preferred solution for helping employers contain rising healthcare costs and attract, engage and retain top talent. Post-implementation, determining the impact of the exchange is important to assessing its value, and leveraging real data is essential to that process. The Gallagher Marketplace (Marketplace) private exchange platform, offered by Arthur J. Gallagher & Co. (Gallagher), is designed to meet the needs of both employers and employees. This market report addresses how Marketplace is meeting that objective, based on key insights into employer outcomes gained from past implementation experiences:

• Are employers able to better meet employees’ needs by offering expanded options through Gallagher Marketplace?

• When provided choice and a defined contribution buying environment, are employees exhibiting better consumerism?

To answer these questions, data was collected from approximately 1,700 employees representing seven Marketplace clients. The actuarial values of the medical plans were compared before and after Marketplace, as were employee enrollment choices. Results from this study indicate that employers and employees are realizing positive outcomes from Marketplace. For example:

• Employers are able to offer significantly more medical plan options to employees. • Employees have the tools to purchase appropriately from these options.

• On average, employers offered one to two plans prior to entering Marketplace as compared to seven plans after implementing Marketplace.

In addition to expanded choice for employees, most of the employers analyzed are seeing decreases in the level of benefits selected by employees when compared to the options selected prior to the exchange. The average change in the actuarial value of benefits chosen on Marketplace compared to those chosen before Marketplace is -4.3%. Some of the employers that were analyzed observed slight increases in the average level of benefits that employees selected. In a defined contribution environment, these employees must pay extra to participate in more costly plans. When they do buy up, it is their choice to pay more to get more if richer plans better meet their needs.

Therefore, employers are seeing more discerning consumer behavior on Marketplace. Employees are able to purchase benefits that are adequate for their needs rather than settle for benefits that offer too much or too little insurance coverage, and at the same time, control how much they spend.

Introduction

Since its inception, Gallagher Marketplace has been used by several employers to manage the cost of benefits while offering employees increased choice. These objectives have been combined with improved decision support to help employees select coverage that better matches their needs.

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Two key components of using an exchange platform are defined contributions and decision support. A defined contribution approach allows employers to set the amount they pay for medical benefits and shift the decision to pay more for richer benefits to employees. Decision support systems provide recommendations to employees that align medical plans with their specific needs and personal budgets. The combination of defined contribution and decision support allows predictable, manageable budgets for employers and increased consumerism from employees. Together, these components also allow employers to expand their coverage options using Marketplace as an information tool and defined contribution as a risk management strategy.

While defined contribution strategies are not the focus of this report, they are important to maximizing the value of an exchange solution. As an intelligent risk management strategy, defined contribution helps to mitigate unsustainable growth in benefit costs.

The purpose of this report is to summarize the choices that employers and employees have made related to medical insurance benefits as part of Marketplace, in comparison to traditional medical plan offerings. From this data, the potential for Marketplace to offer expanded medical plan options and encourage consumerism among employees can be assessed.

Specifically, this report addresses the ability of employers to deliver expanded health plan options while increasing consumerism for their employees using Marketplace as a vehicle for choosing benefit plans. In doing so the following questions are answered:

• How do the plans offered before Marketplace compare to the plans offered on Marketplace?

• What types of plans are employees choosing through Marketplace and how do they compare to their choices before Marketplace?

• What are the levels of medical benefits (actuarial value) selected by employees on Marketplace and how do they currently compare to their choices before Marketplace?

Approach

This report is meant to be more informative than conclusive. It aims to illustrate Gallagher Marketplace-based outcomes that some clients have realized in the solution’s early stages.

Data for the study of seven clients, comprising a total sample of 1,735 employees, was collected before and after they implemented the Marketplace solution. Each of these employers implemented a defined contribution strategy and also offered decision support tools to employees.

The data collected included information on enrollment by plan as well as plan design (deductibles, coinsurance, etc.). Plan design information was then converted to an actuarial value and used as a measure of benefit costs. For an explanation of an actuarial value, see Appendix A. This data was summarized in different ways to help provide answers to the objectives presented in the beginning of this report.

Defined contribution

and decision support

allow employers to

set more predictable

budgets.

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Summary of Findings

The analysis of clients enrolled in Gallagher Marketplace illustrates that clients are realizing positive outcomes from the platform. These outcomes include increased choice for employees and better consumerism from employees. See below for a summary of findings from this study.

Intended Outcomes Findings

Increased options for employees • On average, the clients analyzed

were only offering one to two plans before implementing Gallagher Marketplace.

• After implementing Marketplace, the average number of plans offered increased to seven.

• Most clients offered medical plan options that are both richer and leaner than those offered prior to Marketplace. In addition, all clients offered an HSA-compatible medical plan through Marketplace.

Increased consumerism from employees

• Most clients saw a reduction in the level of benefits selected when employees were given expanded options, decision support and the choice to purchase benefits commensurate with their needs. • In most cases employees purchased

leaner benefits than before. In some cases employees purchased richer benefits.

• The outcomes are positive; employees are able to select medical plans that work for them, and employers are indifferent because they pre-set their budget using a defined contribution strategy.

With Gallagher

Marketplace, clients

are providing increased

choice and realizing

better consumerism

from employees.

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Analysis of Gallagher Marketplace

The remainder of this report explains the supporting evidence for the above outcomes using client data collected on Gallagher Marketplace. First, the report compares benefit levels of plans, before and after Marketplace, to explain how the plan options that employers offer are impacted by the Marketplace model. Next, enrollment information is analyzed by benefit level to understand employees’ benefits selection in an exchange environment. Lastly, the report compares the average benefit level before and after Marketplace to illustrate how the purchase of benefits through Marketplace affects consumer behavior.

Comparison of Benefit Levels – Before and After Gallagher Marketplace The first issue to be addressed is how the medical plan benefits offered by clients before Gallagher Marketplace compare to the medical plan benefits offered on this private exchange. A significant advantage of Marketplace is its ability to offer multiple plans, along with a decision support system that guides employees toward medical plans that make the most sense for their individual needs. Employers are able to offer many more plans through Marketplace than previously possible without overwhelming employees with a significant burden of choice.

To help illustrate the breadth of plan offerings through Marketplace, the actuarial values of plans before and after Marketplace were compiled. Figure 1 compares the range of benefits, measured using the actuarial value, before utilizing Marketplace and after. This graphic also uses levels of coverage from most rich to least rich – Platinum, Gold, Silver and Bronze – to help better compare the types of plans offered. For a description of the coverage levels, see Appendix A. For an illustration of what types of plans fall into each level, see Appendix B.

Figure 1. Actuarial Value of Plans Before and After Gallagher Marketplace

Actuarial Value

Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Before Gallagher Marketplace

After Gallagher Marketplace 100% 95% 90% 85% 80% 75% 70% 65% 60% Platinum Plan Gold Plan Silver Plan Bronze Plan Summary of Figure 1:

• Five of the seven clients offered expanded benefits after Marketplace, with medical plans both richer and leaner than the medical plans offered before Marketplace.

• Two of the seven clients offered benefits at or below the richness of their medical plans before Marketplace.

• The average spread in actuarial value between plans offered on Marketplace, calculated by client, is about 3%. This would likely result in larger premium spreads when considering the impact of utilization, network differences or other aspects impacting costs between plans.

Employers can offer

more plans through

Gallagher Marketplace

without burdening

employees with too

much choice.

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To further illustrate the expansion of options made available to employees using Marketplace, Table 1 summarizes the number of benefit plans offered before and after Marketplace for each client analyzed.

Plan Tiers Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7

Before Marketplace # of Platinum Plans # of Gold Plans 1 1 1 1 # of Silver Plans 1 2 2 2 # of Bronze Plans 1 Total Plans 1 1 2 2 3 1 2 After Marketplace # of Platinum Plans 1 1 1 1 # of Gold Plans 4 5 4 4 2 1 # of Silver Plans 5 3 5 5 2 3 5 # of Bronze Plans 2 2 2 2 2 3 Total Plans 10 11 12 12 6 6 8 Summary of Table 1: Before Marketplace

• Three of the seven clients offered one medical plan. • Three offered two medical

plans.

• One offered three medical plans.

After Marketplace

• Two of the seven clients offered six medical plans. • One offered eight medical

plans.

• Four offered 10 or more medical plans.

Table 1. Number of Plan Offerings Before and After Gallagher Marketplace

As shown in Table 1, clients on Marketplace offered noticeably expanded medical benefit options, which included at least three of the tier options in nearly all cases. Before Marketplace, no client offered plans in three different levels.

Marketplace also allowed clients to offer HSA tax-incentivized plans in more cases. Prior to Marketplace, only three of the seven clients offered an HSA-compatible medical plan. After Marketplace, all seven clients offered at least one HSA-compatible medical plan to employees. This illustrates that Marketplace permits expanded choices in medical plan benefits beyond the choice of deductibles and coinsurance levels.

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Comparison of Plan Enrollment Distribution – Before and After Gallagher Marketplace

With the understanding that clients are able to offer an expanded range of medical plans on Gallagher Marketplace, it is important to note the choices that employees made in this new environment. As part of the analysis, the distribution of enrollment before and after Marketplace was evaluated to help determine if expanded options, combined with a defined contribution structure, induces consumerism.

Plan enrollment information is presented by client in Table 2. The cells highlighted in red represent the enrollment rates for plans that are richer than the richest plan that was offered before Marketplace. The white cells represent the enrollment for plans equal to the richest plan that was offered before Marketplace. The green cells represent enrollment rates for plans that are leaner than the richest plan that was offered before Marketplace.

Actuarial Value Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7

Before Marketplace 90% - 100%_{85% - 89%} _100% _100% 80% - 84% 80% 100% 75% - 79% 20% 72% 36% 100% 70% - 74% 28% 43% 65% - 69% 21% 60% - 64% After Marketplace 90% - 100% 3% 13% 2% 2% 85% - 89% 3% 13% 8% 12% 80% - 84% 30% 28% 11% 15% 23% 13% 75% - 79% 64% 26% 62% 67% 31% 42% 22% 70% - 74% 2% 41% 65% - 69% 19% 9% 13% 18% 42% 36% 60% - 64% 8% 2% 15% 4% Summary of Table 2:

• For clients offering only one plan prior to Marketplace (Clients 1, 2, 6 and 7), the average percentage of employees who chose a plan with lower benefits on Marketplace was

83%.

• For clients offering two or more plans prior to Marketplace (Clients 3, 4 and 5), the average percentage of enrollment in plans lower in value than the richest plan offered was 37% before Marketplace. For these same clients, the average percentage of enrollment in plans on Marketplace with benefits lower than the richest plan offered prior to Marketplace was

43%.

Table 2. Enrollment Distribution by Actuarial Value Before and After Gallagher Marketplace

Clients who only offered a single plan prior to the exchange had a significant number of employees choose less expensive plans when enrolling through Marketplace. On average, clients who offered multiple plans prior to Marketplace realized only a modest increase in employees who bought down, compared to those who bought the richest plans. This would indicate that Marketplace can be effective at encouraging consumerism. It also indicates that employees are willing to pay more to get more medical coverage when the option is available.

Gallagher Marketplace

allowed clients to offer

HSA tax-incentivized

plans in more cases.

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To further illustrate the shift in enrollment occurring through Marketplace, a summary of enrollment by coverage level aggregated across all clients was considered. A summary of the distribution is shown in Figure 2.

Platinum Gold Silver Bronze

Before 0% 22.9% 66.5% 10.6% After 1.3% 24% 46.1% 28.6% 70% 60% 50% 40% 30% 20% 10% 0% % Enrollment Summary of Figure 2:

• Enrollment for Platinum and Gold plans increased about 1% in each level. • Silver plan enrollment rates dropped by

about 20%.

• Bronze plan enrollment rates increased by about 18%.

Platinum plans were not present before Marketplace for any of the seven clients, and so the increase in Platinum plans is purely due to a few employees placing value on very rich benefits when given the option to buy up. There was a significant reduction in Silver plan enrollment rates corresponding with a significant increase in enrollment rates in Bronze plans.

Table 2 and Figure 2 support the concept that when employees are given expanded options, useful plan purchasing information and greater control over their benefits cost, they choose less expensive plans more often. Hence, consumerism is increased and employees are choosing plans that create less economical waste caused by excessive insurance coverage.

Figure 2. Distribution by Plan Tier Before and After Gallagher Marketplace

Gallagher Marketplace

permits expanded choice

in medical plan benefits

beyond deductibles and

coinsurance levels.

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Comparison of Plan Values – Before and After Gallagher Marketplace As mentioned earlier, one of the key potential outcomes of utilizing Gallagher Marketplace is employees who better understand the true costs of medical benefits and exhibit more informed consumer behavior. For the clients analyzed, the weighted average of the plan benefit values was measured for the plans before Marketplace and after Marketplace. The results are illustrated in Figure 3. Prior to Marketplace, the two clients who realized an increase in average benefit

Figure 3. Average Actuarial Value Before and After Gallagher Marketplace

Summary of Figure 3:

• The average change in the weighted actuarial value from before Marketplace to after Marketplace was a 4.3% decrease. • For the five clients realizing a decrease in

their average actuarial value, the average decrease was 6.6%.

• One client realized a virtually flat change in average benefit value of about 0.4%. • One client realized an increase in average

benefit value of approximately 2.5%.

Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7

Avg AV Before 87.9% 86.5% 81.8% 76.5% 73.6% 81% 78.1% Avg AV After 79.5% 80.7% 77.5% 76.9% 76.1% 72.6% 71.9% Change -8.4% -5.8% -4.4% .4% 2.5% -8.4% -6.1% 90% 88% 86% 84% 82% 80% 78% 76% 74% 72% 70% Average Actuarial V alue

value did not provide access to plans with benefit values above a Silver level. After Marketplace, one offered at least one plan in each of the tiers. The other client offered at least one plan in the Gold, Silver and Bronze tiers. Of the seven clients analyzed, these were the only two clients who did not offer a Gold plan prior to Marketplace and offered medical insurance plan options with greater benefits on Marketplace.

These findings would indicate that some employees do place value on richer benefits and are willing to buy up in a defined contribution environment when given the option. It is important to note that the two clients who realized an increase in average benefit value implemented a defined contribution funding structure. Therefore, they are not impacted when employees choose to buy up because the employees pay more to participate in the higher cost plans.

The change in benefits selected depends on what plans are offered before as well as after Marketplace implementation. The data in Figure 3 supports the concept of increased consumerism from employees when they purchase benefits through an exchange. It also illustrates that some employees’ needs aren’t satisfied in a traditional plan offering environment unless benefit plans of higher value are offered alongside lower level plans.

Gallagher Marketplace

can be effective at

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Conclusion

Gallagher Marketplace is a solution meant for employers who are struggling to offer medical plans that meet the needs of employees, battling high levels of benefit expenses, or both. In meeting these objectives, Marketplace delivers value to both employees and employers.

Analysis of several clients illustrates positive outcomes when Marketplace is used to offer medical benefits to employees.

Summary of Outcomes

• Employees are offered significantly more medical plan options through Gallagher Marketplace. On average employers offer about five more medical plans on the exchange than were offered before.

• Some employees are buying up but most are buying down. This illustrates that more employees’ needs are met on Marketplace compared to a traditional approach when it comes to medical insurance. Platinum and Gold plan enrollment percentages were virtually unchanged on Marketplace, however, Silver plans decreased by about 20% while Bronze plans enrollment increased by about 18%.

• When given a set amount of funds to purchase medical benefits and expanded options, employees are exhibiting increased levels of consumerism and are choosing benefits on Marketplace that are leaner when compared to their selection prior to Marketplace. On average, the clients analyzed realized a 4.3% decrease in the average actuarial value on Marketplace compared to their experience before Marketplace.

The results of this study show improvements in employers’ ability to meet employees’ needs as well as increased transparency of the total cost of medical insurance provided to employees. As more clients implement exchange solutions, the importance of monitoring trends in employee selection and satisfaction will also increase.

When given expanded

options, useful plan

purchasing information

and greater control

over their benefit costs,

employees choose less

expensive plans more

often.

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Appendix A – Definitions of Terms

Actuarial Value – The expected portion of benefit costs paid by a medical insurance plan. In formulaic form it is equivalent to:

(Expected Benefits Paid by Plan After Plan Design) ÷ (Total Expected Benefits Paid) Plan Tiers:

• Platinum Plan – Plan with actuarial value of 90% or more • Gold Plan – Plan with actuarial value between 80% and 89% • Silver Plan – Plan with actuarial value between 70% and 79% • Bronze Plan – Plan with actuarial value between 60% and 69%

Appendix B – Model Designs for Plan Tiers

This appendix provides an example of what a plan design would look like for each coverage level. These are not the only plan designs that fall into each category. Rather, they are meant to provide a baseline to understand the type of benefits covered by each level.

Plan Name Platinum Gold Silver Bronze

Network Deductible $100/$200 $250/$500 $2,000/$4,000 $5,000/$10,000

Network Coinsurance 100% 80% 80% 80%

Network Coinsurance Max (Not Including

Deductible) $0/$0 $2,500/$5,000 $3,500/$7,000 $1,350/$2,700

Copays (OV, SP, ER) $15/$30/$200 $25/$50/$200 $25/$50/$200 Deductible +

Coinsurance Retail RX (Generic, Brand Formulary,

Brand Non-Formulary) $10/$30/$60 $10/$30/$60 $10/$30/$60 Deductible + Coinsurance

Mail Order RX (Generic, Brand Formulary, Brand Non-Formulary)

$20/$60/$120 $20/$60/$120 $20/$60/$120 Deductible +

Coinsurance

The weighted average

actuarial value of

benefits decreased

by 4.3% after

Gallagher Marketplace

was implemented,

compared to before

implementation.

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About the Author

Mr. Josh Rickard is a consultant for the Benefits & Human Resources Consulting division of Arthur J. Gallagher & Co. Located in Chicago, Illinois, he works on the North Central Region Financial Analysis and Underwriting team to provide financial support to help clients manage financial costs and risks associated with group health and welfare plans. He also assists clients with plan design, funding and defined contribution structures on Gallagher Marketplace.

Josh delivers solutions for clients in a variety of industries ranging from

manufacturing to healthcare and has a strong background in analyzing healthcare financial information. In addition to his experience in financial analysis, Josh is an Associate of the Society of Actuaries.

Josh Rickard, ASA, MAAA

Consultant, Financial Analysis and Underwriting Benefits & Human Resources Consulting Arthur J. Gallagher & Co.

[email protected] | 630.285.4431 www.ajg.com

Josh Rickard

Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.

Comparison of Plans and Coverage Choices Before and After Implementing

Investment Monitoring

Retirement Plan Consulting