Mike Sarafolean, CEO of Orion Corp. of Minnesota, said he had a limited number of insurance choices to offer his 70 workers: “I had to buy a plan that would make sense and fit for most people. Now they make choices that fit for them.” For the past few years, his company faced “double-digit premium increases every renewal.” A little more than a year ago, Orion received a 40 percent renewal increase, prompting him to move to Minneapolis-based Bloom Health, which set up private exchanges in Michigan, Minneapolis and Indiana.

Defined Contribution Model

Now, his company makes a defined contributions ranging $125 a month for younger workers to $350 for older ones to special health reimbursement accounts (HRA), which workers then use to buy an insurance policy. By making the change to a flat contribution and a private exchange, the company is saving 10 percent over its previous year’s cost of insurance, he says. Many of his workers also spend less, he says.

This “defined contribution” model in health care compares the to one that gained speed in the early 1990s - employers abandoning pensions in favor of offering workers 401(k) plans for retirement savings. But just as 401(k) plans transferred the risk of market downturns to workers, the flat-payment model would shift risk to workers if rapidly rising health costs outpace increases in employer contributions.

Rejection For Preexisting Health Conditions

Unlike most of the private exchanges, the Bloom Health model, which serves about 25,000 people, sends workers to buy their own policies on the individual market, rather than through a group health policy. However, insurers selling individual policies in most states can reject applicants with medical problems, a practice that will end in 2014 under rules in the health care law.

Bloom CEO Abir Sen says his company offers its services only in states where rejected applicants can qualify for special state-run, high-risk insurance programs, which generally cost at least 25 percent more.

Gabrielle Smith, a 16-year employee of Orion who has an auto-immune disease, worried that under Bloom she would be unable to get insurance “or it would be so in excess of what I could afford.” Smith, 48, did get coverage - through Minnesota’s high-risk pool - and she now pays $45 a month for her premium on top of her employers contribution. “I haven’t heard anyone who is unhappy with the current insurance because it was all individualized,” says Smith. “Some of the younger employees with no medical conditions (found low-cost plans that) don’t require any money out of their paychecks.”

Other Private Exchange Models

Other private exchanges, including Buffalo-N.Y.-based Liazon, which serves about 25,000 employees in 23 states, and the new Aon Hewitt model send workers to group policies, which cannot reject applicants with health problems. The exchanges vary in other ways, too: While Bloom and Aon Hewitt offer a variety of insurers, for example, Liazon contracts primarily with one main health insurer in each region..

It’s unclear how the advent of state-based exchanges will affect programs such as Bloom, Liazon and Aon Hewitt, or whether there will still be a demand for their services by small businesses.