The term “private exchange” is broadly used and may have different meaning to each of us. Let’s take a look at some of the basic attributes.

  1. Private exchanges are not part of the Affordable Care Act. They are created by private sector companies – for example, by a health insurance company, a brokerage/consulting firm, association, or a chamber of commerce. A few private exchanges exist today, but they are coming online at an exceedingly fast pace.

  2. There are several reasons for employers to consider a private exchange. One key reason is to help manage the cost of offering health benefits. Private exchanges offer an interesting solution called “defined contribution” whereby employers can give their employees a set amount of money and then direct them to a private exchange.

  3. 47%  of employers surveyed already implemented or in process of moving to a defined contribution benefits modelPrudential's Eighth Annual Study of Employee Benefits Today & Beyond

  4. Private exchanges generally represent more than just health insurance products. In fact, in addition to the defined contribution strategy mentioned above, one of the main reasons an employer may consider a private exchange is to provide customized coverage based upon the specific needs of each employee. Employers no longer have to serve as the keeper of the benefits.

  5. Private exchanges are likely to appeal employers because of the contribution flexibility, and simplified administration; employees will find private exchanges appealing because of the ability to customize benefits based on budget and need. Everyone will appreciate the ease of use that they bring.

The way of the future. Private exchanges are going to change the way millions of employees will engage with their employee benefits. Several recent independent studies reveal that by 2018 upwards of 50% of all employers will utilize a private exchange to facilitate their employee benefit offerings.