Talking About Financial Matters That Affect You and Your Organization
The Industry Must Change
Aug 19th, 2015
The employee benefits market is broken. It is broken because there is no reality check between what a provider takes in terms of risk and what the policyholder is prepared to pay. At any point in time, a policyholder could test the market and find half a dozen quotes with savings ranging from 8% to 40%. 40% you say? Absolutely, in all my years working in employee benefits I have never seen the scale of savings that I see today.
What’s driving this? A combination of the recent economic re-boot, which drove jobs down (especially those well paying jobs with benefits), and a single minded focus on price (spreadsheeting). Providers cannot survive on the organic growth of their client base and must acquire new clients at an increasing pace. What is in the toolbox for driving customers? Price, features and service. What is the easiest attribute to benchmark? Price.
Why is this change bad? While policyholders may gain financially from the overly aggressive pricing, the vicious cycle of buy low and sell high is well in motion when the low-ball pricing is chased. This game can continue for a number of years since there seems to be renewed interest in insurers quoting 1st year renewals. The game ends at some renewal down the line when the alternative providers vanish leaving the policyholder no choice or when the real cost of the strategy appears with gaps in protection or member dissatisfaction.
Who loses? Everyone. If you look at any industry that has shifted itself into commoditization, outcomes are bleak. Customers lose all perspective on the real value of the product or service, providers must constantly reduce the quality of the product or service to meet pricing demands, and retailers become marginalized as product simplification limits the need for advice. Most importantly, plan members lose. They lose because the policyholders and providers dumb down the product or service, they fail to educate the plan member, they fail to innovate in an attempt to leverage the investment being made. Benefits become about cost instead of an investment.
What are the easy fixes?
There are a number of providers and third party administrators who are selling the virtues of self-insurance (ASO – Administrative Services Only). This argument is growing cloudier as insurers are offering similar pricing models on ASO. More importantly, these revised pricing models strike at the heart of traditional insured plans. How can a provider charge 25% administration to insure and 14% to self-insure? Is the difference really reflective of the risk since the policyholder uses the same administration and adjudication system in either case? A CLHIA study conducted by Michael Law points to this fundamental issue about provider margins. Even so, is changing the funding method really a solution? I think not. What stops a policyholder from moving from ASO to insured to generate a lower price? Nothing, and it is happening at an appreciable rate.
Another approach has been to drive pricing down through forcing behavioural change of plan members (mandatory generic and prior authorization). This is no quick fix, it has a demonstrable impact on the plan membership, and it only addresses one horse in a multiple horse race. A CHPI study conducted by Brett J. Skinner PhD points to this clear myopic focus on prescription drugs.
The disconnection between behavior and outcome is growing and there does not seem to be any resolution in sight. Why does this matter you may ask? It is incumbent upon all the stakeholders to make this system work. The current environment is not positive for the providers, plan sponsors, plan members, and advisors.
We all need to get back to focusing on the purpose of employee benefits.
- What are we trying to achieve?
- What information do we need?
- How do we make decisions?
- Want what are the best tools available to achieving them?
- What are the milestones to help us ensure we are on the right path?
- What levers do we have to make modifications if necessary?
Answers exist, the key is asking the right questions.