Private exchange makers show more numbers

Two of the most open players in the private health insurance exchange market are still considerably smaller than some of the more open public exchange programs, but managers say they see opportunities for growth.

Executives from Benefitfocus (Nasdaq:BNFT) and Connecture (Nasdaq:CNXR) shed light on the private exchange market earlier this month when they talked to securities analysts about their performance during the first quarter.

Both companies get revenue from serving insurers, employers and other types of customers in addition to providing private exchange services.

Benefitfocus is reporting a $13 million net loss for the quarter on $55 million in revenue, compared with a net loss of $15 million on $43 million in revenue for the first quarter of 2015.

Connecture is reporting a $7.3 million net loss for the latest quarter on $18 million in revenue. That compares with a net loss of $5 million on $21 million in revenue for the year-earlier quarter.

In some ways, the two private-sector startups might be somewhat comparable in size and financial performance to some of the Patient Protection and Affordable Care Act (PPACA) public exchange programs that post clear financial data on the Web.

Covered California, for example, expects to report a loss margin of about 41 percent for its 2015-2016 fiscal year and generates an average of about $53 million in revenue per quarter.

Connect for Health Colorado reported a loss margin of 15 percent on $26 million in revenue for the latest quarter.

For a look at details on the private exchange operations at Benefitfocus and Connecture, read on.

1. Benefitfocus

Benefitfocus said in a quarterly report filed with securities regulators that it has a total of 28 private exchange programs in place.

Mercer, which has a private exchange program that serves employers with 1.4 million covered lives, has taken an ownership stake in Benefitfocus and accounted for about 10 percent of the company's first-quarter revenue.

A major software company, SAP, has put Benefitfocus exchange services on its U.S. price list.

Benefitfocus is reporting $274,000 in revenue for the first quarter for private exchange services with what it classifies as exchange implementation services with a stand-alone value.

The company says it charges a base rate of $3.85 per employee per month for employer private exchange services.

Shawn Jenkins, the chief executive officer, told securities analysts during a conference call streamed on the Web that the company also sells add-on exchange services that can boost revenue to $7.50 per employee per month.

One major new addition is a content management system aimed at benefits administrators.

"Increasingly, the benefits administrator needs to think like a marketer and communicate a complex message to many different audiences," Jenkins said.

The administrators need good tools to send out all of the notices, Jenkins said.

"We are often times replacing legacy systems, on-premises systems or outdated systems provided by other parties," Jenkins said. "We give the customer a big leap forward in functionality."

2. Connecture

Connecture earned $277,000 from private exchange services for the first quarter on $1.9 million in revenue, compared with $414,000 in private exchange services on $1.4 million in revenue for the year-earlier quarter, according to that company's quarterly financial report.

Connecture said it gets private exchange revenue from charging insurance brokers a monthly fee for access, collecting per-enrollee commissions, and charging ongoing fees for software services contracts.

The company reported that setting an ordinary insurance distribution system for a large customer typically takes about six to 15 months.

Setting up a private exchange distribution system takes about one month to three months, the company said.

In a conference call with securities analysts, Jeff Surges, the CEO, said the nature of the enterprise system industry, which involves setting up a relatively small number of big systems each year, can lead to ups and downs in revenue based solely on when revenue gets recorded.

"Timing is timing," Surges said.

Surges said Connecture hopes to maximize growth by working hard to use private exchange systems to work with brokers.

"Unlike others in the industry who felt the brokers were losing their pivotal position in the distribution of health insurance, we believe that the value that the agent provides is more important than ever, given the myriads of decisions and financial responsibilities falling on consumers and employers," Surges said.

Some small private exchange companies are leaving the market, and that could help companies like Connecture that have bigger private exchange operations, he said.

Surges said Connecture see more than 20 good sales prospects in another market, the "payvider" market, or market for health care systems that are setting up their own health insurance units.

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