Hardlines Stand To Benefit From Private Healthcare Exchanges: Citi

Hardlines Stand To Benefit From Private Healthcare Exchanges: Citi

Healthcare reform was mainly intended to benefit people who don’t have a health care plan under their employer, and who don’t qualify for other forms of assistance, so most analysis has focused on how the individual exchanges will affect premiums. But the rise of private exchanges, often run by large consulting firms like Aon and Towers, provides companies with high turnover rates an effective way of capping their healthcare costs.

Healthcare costs decelerating

“While premium rates are rising at the slowest rate in more than a decade, they are still growing much faster than overall inflation,” write Citi analysts Oliver Chen and Kate McShane. “Between 2012 and 2013, the total employee cost increased 6.5% ($560), with premiums rising over 8% and out of pocket costs rising less than 4%.”

Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information

Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More

Citi’s managed care industry analyst Carl McDonald estimates another $560 increase for 2014, but there is a lot of detail lost when looking at employer costs as a whole. First, smaller companies may opt to drop their health insurance plans and pay people a bit extra to compensate. Since companies pay premiums with pre-tax income and individuals pay with after-tax income, this would push rising costs increasingly on individuals. But for large companies that are subject to penalties, simply dropping coverage isn’t cost effective.

Private exchange for high turnover positions

But industries with a lot of turnover can turn to private exchanges that pay a portion of the employees’ premium, regardless of which plan they choose. If the amount of money is set to cover a silver plan, for example, then the employee could choose bronze and get some money back, or choose platinum by kicking in some extra themselves. “This should allow Hardlines retailers to cap expenses on health care vs. expiring mid-single digit y/y increases every year and make employees bear more of the brunt of increasing costs,” write Chen and McShane. “Already, retailers like Sears Holdings Corp (NASDAQ:SHLD), Walgreen Company (NYSE:WAG), and Darden Restaurants, Inc. (NYSE:DRI) have expressed enthusiasm over this option.”

Higher paid, low turnover jobs probably won’t be affected by this trend, since companies need to offer competitive benefits to keep talented employees, but the private exchanges may become the default method of providing healthcare to low wage workers.

Updated on

No posts to display