Restaurants turn to private exchanges for health care coverageRestaurants turn to private exchanges for health care coverage

Since the inception of the Affordable Care Act, there has been no shortage of confusion surrounding its details — especially as it relates to the insurance marketplaces known as exchanges. Between the clumsy kickoff last year of the website hosting federal insurance options and the patchwork of state-led networks, a growing number of restaurant companies are turning to private exchanges as they prepare to comply with the upcoming employer mandate.

Private exchanges operate independent of the federal system and are viewed by some as a way to limit risk, increase predictability and lower costs when offering employees coverage. The employer mandate requires companies with 50 or more full-time-equivalent employees to offer affordable healthcare coverage or pay a penalty beginning Jan. 1, 2015. Private exchange enrollment is expected to reach 30 million people by 2017, according to new data from global consulting firm Accenture.

“It is really the cost of healthcare coverage that is driving employers to find new ways to offer coverage because they want that predictability,” said Michelle Neblett, director of labor and workforce policy for the National Restaurant Association.

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In 2013, Darden Restaurants Inc., parent to, among others, the Red Lobster, Olive Garden and Longhorn Steakhouse brands, moved to a private exchange administered by benefits consultant Aon Hewitt. The exchange, which also includes retailers such as Walgreens and Sears Holdings, expects in 2014 to service 18 companies with 330,000 employees, and has major insurance companies such as Aetna and UnitedHealthCare on board.

Darden’s decision to move its employees into the private model came from feedback from the employees themselves, according to Rich Jeffers, the company’s director of communications.

“Full-time employees said they were interested in having multiple healthcare options so they could select a plan that meets their personal situation,” he said.

Jeffers added that moving to the exchange expanded the options for both Darden’s full and part-time employees.

Under the Aon Hewitt exchange in 2013, salaried and full-time employees as defined by ACA — those working more than 30 hours a week on average — could choose from five different medical plans, four dental plans and three vision plans. Meanwhile, part-time employees — those working fewer than 30 hours a week on average — could choose from two limited-benefit plans and the same dental and vision plans. In 2014, the same options will continue for Darden’s full-time and salaried employees, while the company’s approximately 150,000 part-time employees will be able to obtain coverage from state exchanges because the ACA does not allow Darden to offer the limited-benefit plans it has historically offered those types of workers, Jeffers said.

Other restaurant companies turning to the private model are DineEquity Inc., parent to the Applebee’s and IHOP chains, and Bob Evans Farms Inc. In 2014 DineEquity will join an exchange that also includes Petco Animal Supplies Inc., administered by Mercer, a division of Marsh & McLennan Companies Inc., while Buck Consultants, a unit of Zerox Corp, will cover Bob Evans.

Potential pros

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The growing interest in the private model among restaurant companies is driven by two key factors, according to Eric Grossman, senior partner at Mercer.

“Companies are looking to facilitate cost control, especially in an environment where costs are probably going up because of the ACA, and to handle a lot of the administrative responsibilities,” he said.

Grossman also noted that early feedback from those in the restaurant industry who have joined the exchange was generally positive.

The benefits of private exchanges from an employer perspective were echoed by Mike Kahley, senior vice president of Lockton Dunning Benefits, an independent insurance brokerage firm focusing on risk management, insurance and employee benefits.

“One of the major reasons people will go there is because employers can cap their costs because they know how much they are going to spend per employee,” said Kahley, who spends 95 percent of his time speaking about health reform in the restaurant space.

In addition, Kahley said that private exchange designs are uniformly laid out to limit confusion in terms of what options are available to employees, which helps with the communication process between employer and employee.

“We opposed the law because it does harm to the industry in terms of costs and the burdens on the employers,” Neblett said referring to the Affordable Care Act.

But while private exchanges may help employers contain costs, not all employees are convinced of the benefits to them.

Potential cons

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According to Accenture, 50 percent of employees surveyed in 2013 agreed that a private exchange would, “give me greater choice and flexibility to choose my benefits,” while only slightly less, 45.9 percent, said that a private exchange would, “merely be my employer trying to cut costs.”

This uncertainty amongst employees is not without its merit, Kahley said.

“One of the downsides of providing coverage in a private exchange, particularly in the restaurant space, where incomes are relatively low, is that people by virtue of being offered a qualifying and affordable plan, are going to be excluded from subsidy eligibility on the federal public exchange, where they would probably be able to get better coverage for lower cost,” he said. “It’s an advantage to the employer and a disadvantage to the employee.”

Meanwhile, for employers, private exchanges are only a good method of mitigating costs if premiums do not continue to go up each year, Kaley said. Otherwise, the employer still needs to increase their cost of subsidy in order to give the employee access to the same out-of-pocket expense, he added.

“One of the problems with the private exchange is that the coverage tends to deteriorate over time,” he said. “You typically also end up with a lot more product offerings than are necessary, which could confuse people that are new to insurance.”

Kahley, Neblett and Mercer’s Grossman do agree on the fact that private exchanges provide a broader choice of coverage for employees and have the potential to cut costs for employers, but the overall benefits and impact of the model depend on a multitude of factors, and the truth is that nobody really knows yet.

“In concept, it [a private exchange] should cut costs, but it depends on the group and what preceded the exchange; it depends on a lot of different things,” Neblett said. “It is a newer thing that people are experimenting with on a larger scale, so we will have to see how it goes.”

Contact Charlie Duerr at [email protected].