Group health insurance brokerage is changing but the changes are not primarily due to Congress or the courts. Rather the changes are being driven by costs — the cost of healthcare coverage and the cost of serving employers who are looking for ways to manage healthcare costs.
Employers are asking that their brokers do a lot more than just quote and place a policy. They want help addressing the costs. Increasingly, this means shifting responsibilities and costs to individual employees, who also expect help.
Executives at the Kentucky-based insurance agency Neace Lukens say they hear the same concerns from employers about benefits, regardless of the size of their companies.
“Number one is the the out-of-control cost on the healthcare side,” says Scott Heiser, a senior vice president of Neace Lukens and president of its BeneSolv division.
Mike Sullivan, executive vice president and chief marketing officer of Digital Insurance in Atlanta, hears the same thing.
“They are trying to balance what it is to be a good employer versus the affordability of contributions to individuals and families,” says Sullivan of business owners, noting that the solution may vary by geography and industry.
Heiser says the market has changed from the traditional brokering of marketing products and comparing offerings from Anthem, Aetna and other carriers to where there is now more of the need to “consult with the employee to drive the employer strategy.”
While cost is employers’ top concern, they have others. The second concern is regulatory and compliance issues whether under the Patient Protection and Affordable Care Act, COBRA, HIPAA or other laws. The third concern has to do with the management and administration of benefit programs.
“Those are the three areas that employers grapple with every single day and try to figure out how to stay within their business goals and cost structure,” according to Heiser.
The cost concern has been on employers’ minds for years but is now driving the process in many ways, including forcing employers to seek out options to traditional group plans, according to these brokers.
Some brokers are seizing this time as an opportunity to truly become full advisors to their clients. This means providing additional benefits such as health savings accounts, critical illness, accident and Medigap policies and wellness programs. It also means offering services to help with legal compliance, transactions, education and benefits communication.
But it takes resources, infrastructure and personnel to do the benefits job right, brokers say, and this reality is making it difficult for smaller brokers including property/casualty agencies that wrote some benefits business more as an accommodation than as a serious undertaking.
“A lot of firms that have been dabbling in employee benefits and have put no money in the infrastructure, and have no real advisory expertise,” says Richard Lonneman, managing director for Neace Lukens in its Cincinnati office. “Amateur hour is about over now, and that’s why we’re seeing a mass exodus of a lot of P/C shops who were just that.”
Those agencies and other small benefits brokers are now selling their books to consolidators and others or seeking other options. This trend is being encouraged by health insurers that are offering enhanced packages of services to agencies that have larger blocks of business, according to Heiser.
Companies including Ascension and Digital Insurance have been acquiring smaller employee benefit operations to create national networks. Also, larger property/casualty agencies are increasing their involvement in employee benefits as a way to strengthen their relationships with their key commercial customers and diversify their businesses. Thus far in 2012 alone, key P/C agencies buying employee benefits firms have included Arthur J. Gallagher, Marsh, Hylant Group, Neace Lukens (Assured Partners), USI and Brown & Brown.
These large brokers are equipped to serve larger employer accounts. Some are outsourcing their small employers with fewer than 10 or 20 employees to firms like Digital Insurance, while others are trying to build up enough small group business and scaling their services to create economies of scale.
Neace Lukens and Digital Insurance are two agencies based in the Southeast that have made a commitment to the benefits marketplace. Insurance Journal spoke with them to see how they are navigating the new world of benefits brokerage.
Neace Lukens has clients in 40 states across the country, with a lot of its $750 million in business east of the Mississippi, although it also has offices in Phoenix and Tucson. The Louisville, Kentucky-based agency was founded 20 years ago as a property/casualty specialist. In 1993 it began also offering employee benefits and has been doing do ever since. The employee benefits division works closely with the property/casualty side for clients with as few as two and as many as 10,000 employees.
Heiser believes that “being a whole integrated shop” gives Neace Lukens advantages over standalone brokerages. The agency sees employee benefits (EB) and property/casualty (P/C) as complementary. One is insurance for the other. An agency that controls multiple lines of business for a client is less vulnerable and has better relationships with clients than an agency with only one or two lines. It’s good not only for the agency but also for the client.
“They don’t want multiple parties,” says Lonneman. “They want the responsibility in one firm. ”
The arrangement means more accountability. “If we screw up the P/C, we’re going to lose potentially the EB along with the P/C,” Lonneman says.
It works the other way, too. If the agency gets the benefits account, this can open the door to the P/C business. “We have to obviously have a very high bar and make sure we exceed expectations,” says Lonneman. The agency is getting more business but it’s also got more at risk if it doesn’t perform well.
The services and programs Neace Lukens offers today are testimony to how the benefits landscape demands more than just price quotes and placement. It offers a benefit administration system called BeneSolv, a health and productivity management program, and communication services that include web surveys and multimedia presentations.
Its financial and data analysis services include financial reviews of plans, renewal negotiations with carriers, benchmarking, plan modeling, contribution strategies, reserve analysis, fully insured equivalent rates, claims utilization and data mining.
In addition to traditional group plans, its employee benefit offerings include managed care plans, cafeteria plans, self-funding plans, health savings accounts, dental, vision, disability, long-term care and pre-paid legal and other options.
Neace Lukens will weigh a client’s objectives and current programs and come up with a customized plan. It can identify the types of claims a company is having, such as whether employees have a high number of diabetes or musculoskeletal issues. It will then devise plans to both manage the most common claims and guide the employees on how to stay healthier.
In terms of benefit program design, employers are more open these days to high deductible plans and in “moving towards the consumerism model, and defined contribution type programs” where the employees take more risk, says Heiser.
Employers also want brokers to offer products such as wellness benefits that help mitigate the risks that the employees assume and voluntary benefits that help individual employees supplement and fill some of the gaps in their benefit packages.
The job doesn’t end there.
Neace Lukens has small business units to service small accounts and then segments middle and large accounts based on the expertise and services they require
There is work to do to educate employees about their options and manage all of the transactions.
“We’ll provide benefit administration outsourcing and employee advocacy programs to help deliver and manage the strategic programs that we customize for them,” Heiser says.
As more employers offer health savings accounts and high deductible plans, they are also looking to help employees who have been accustomed to $500 deductibles fill the gaps that now exist under the new $2,500 deducible. These gap-filler products include health savings accounts, dental and vision plans, disability coverage, long-term care coverage and more.
“The voluntary products have just exploded in the last three years,” says Heiser.
At the same time that employers have been adopting consumer-driven plans with high deductibles, health insurers have been cutting back and not providing the consumer education, communication and administration that employers and employees need, according to Heiser. He said carriers have been driving all of the response and education on benefits to the Internet, which doesn’t work for everyone. Neace Lukens sees its role as filling that gap in client services.
To help them pay for the expanded services employers now expect, larger benefit brokers like Neace Lukens are depending less on the commissions paid by insurers that are tied to premium increases and more on fees for services from clients themselves.
Neace Lukens has been moving toward a more fee-based system for about 10 years for several reasons. For one, Neace Lukens did not want to “be beholden to carriers” if they changed commission levels in a way that could alter the agency’s financial picture. The other reason is the agency wanted to be “very transparent with its clients and develop a value proposition with them” in which the agency delivers certain services and the client, after negotiation, recognizes these services are worth “X” dollars.
According to Lonneman, the agency is no longer “overly concerned” with what the carriers are going to do. “Because we are no longer connected with them in an indirect manner to get paid, we are direct with our clients and we’ve established our value proposition,” he says.
He said the fee-based system also frees the agency to be objective when the cost of insurance goes up. “If unfortunately they get a big increase, we can say, ‘We’re not participating in that.’ We are here, if you want to cut your benefits, we’ll do what you need to do and advise you accordingly,” he said.
The Patient Protection and Affordable Care Act recently upheld by the Supreme Court has received lots of attention. The Neace Lukens brokers say that while the law’s full impact may be unknown, it has already had a major effect.
“It’s getting employers to look at things differently and, again, with the escalating costs, having them actually willing to adopt change because they know they need to do something,” he says.
Neace Lukens sees employers accelerating their adoption of consumer-driven healthcare features. Heiser thinks the market could become similar to a defined benefit environment where an employer will give each employee a set amount to spend on healthcare and it will be up to the employee to decide what to buy from the menu of benefit options. For instance, they might live with a $3,000 deductible or buy supplemental coverage to offset it.
Lonneman thinks consumer-drive plans are a key to controlling costs in the future. “You’ve got third party people paying for costs and just like in education, when other people are paying for it, it’s easier to raise the cost,” he says. But if consumers have an option between a $1,500 MRI and a $300 MRI of equal quality, “the market will change pretty quickly,” he says.
The agency focuses its full benefits services on employer groups of 100 or more employees. While several years ago it considered dropping or outsourcing the small (2 up to 49 employees) groups, it decided to keep them and actually grow this segment, adding more to stabilize this end of the business and build the critical mass needed to make money on its investment.
“We determined that we’d need to have to be in it in a large way, or get out of it. So we decided we would be in it in a large way,” says Lonneman.
In the near future, these smaller accounts may find exchanges are their best option. In that case, Lonneman says Neace Lukens should have enough volume to be able to provide a private exchange solution.
Had Neace Lukens decided to get out of the benefits business completely or outsource its small accounts, Digital Insurance might have been one option.
“Our view relative to benefits is you’re either all in or you need to figure out how to partner or get out,” says Mike Sullivan, executive vice president and chief marketing officer of Digital Insurance in Atlanta, one of the nation’s fastest-growing employee benefits agencies.
Sullivan says agencies used to be able to leverage relationships and be in the benefits business marginally and make a very good dime doing it. But those days are ending. “The easy money is leaving and the requirements that employers are looking for, even in the small end of the marketplace, are far outstripping what a P/C firm with a handful of people doing benefits is going to be able to deliver,” he says.
Digital started in 2000 as an online seller of benefits to small businesses but soon dropped that strategy. “Probably if there’s anything we did well at first it was to decide early enough that that wasn’t going to work. Rather than trying to build a storefront online and sell insurance online, we decided to go to where the business lived each day in the traditional distribution channel and ask, ‘Is there a way we can help?'”
The result was a new strategy of partnering with agencies already in the business. Digital went to bigger agencies that weren’t really delivering anything extensive to the smaller end of the marketplace and offered to handle this segment for them. “Outsource to us or partner with us and let us try to deliver more to the smaller end of the marketplace more efficiently. We began to build a company around that,” Sullivan says.
This strategy has put it in position to handle the small and medium-sized accounts for some the world’s largest brokers— including Aon and Mercer.
Under its “co-opetition” strategy, Digital is also buying up and consolidating local agencies and serving these clients directly as a retailer. “A large portion of the folks that we actually partner with we could potentially compete with in the marketplace. We’re basically saying we have two divisions, we think we can support both very effectively,” he says.
The company has revenues in excess of $50 million and works with about 225 brokers, many of them good-sized P/C agencies that do benefits. It manages about 22,000 customers and has about 300 employees.
Sullivan says that for larger firms, the economics of a segmentation strategy with a firm like his are “compelling” because Digital has built the infrastructure that allows the business to run more efficiently.
For the smaller agency, an affiliation might also make sense if the agency has decided to “play offense and grow with everything that healthcare reform represents.” These agencies will also need infrastructure and they will need products to compete more efficiently.
“If you’re totally OK with playing defense and milking it, that’s fine, but I think there’s a lot of fundamental changes that are happening in the marketplace that are reshaping this business,” says Sullivan.
These agencies are also going to face pressure from insurers to get in big, or get out. “The benefits business is starting to reshape itself much more like the P/C business, which means carriers no longer live in Switzerland. They’re going to delineate between the haves and have-nots,” Sullivan says. “If you’re not big enough and you’re not growing, it is going to be increasingly difficult to marginally stay in the benefits business.”
Sullivan agrees that cost is the main driver of the marketplace today. He says employers are trying to “balance what it is to be a good employer versus the affordability of contributions to individuals and families.”
Ultimately, he says, this pressure will drive the decision-making through the employer down to the individual family. “Engagement at the consumer level is the destination for everybody. So providers are trying to get there, pharmacies are trying to get there, carriers are trying to get there,” he says.
Benefits brokers who do not have an ability to serve these individuals and families within the groups may find that that’s a real competitive disadvantage.
Digital is building what it sees as its next big advantage– a system that is geared toward assisting not just the employer but also the individuals who are assuming more of the decision-making and cost of their healthcare. Digital is betting that letting employees assume more control rather than having employers make the decisions and assume the bulk of the risk will help rein in healthcare costs.
“The only way you ultimately spend the trend relative to medical cost inflation is to have an engaged, informed, educated, empowered, lifestyle oriented person” who understands the need to get and stay healthier, according to Sullivan.
Digital sees itself bundling core benefits with voluntary benefits and retirement options for small and mid sized businesses. In addition, it will be educating about health and wealth literacy.
This new world is far from the one traditional benefits brokers have been living in.
“When you start talking about these concepts and then correlate that to what does the traditional agency today do? God bless,” Sullivan says.
Sullivan agrees that while the Affordable Care Act has not really addressed costs, it has gotten people to pay attention. “What it has done is gotten everyone to the table to say, ‘I’ve got to be part of the solution and the solution is getting people to behave differently in the future.'”
Digital is reaching down to the individual consumer, where the education needs to occur and behavior needs to change. “If we can go to employers and say, ‘Tell us your budget, and then we’ll take care of the rest, and we’ll help deliver a productive employee that understands and is literate about health and wealth issues.’ I guarantee you employers will pay for that.”
He agrees with Neace Lukens executives that the days of depending on commissions paid by insurers are over. He’s happy they are. “Let us go talk to employers about how much value we can deliver, and what we think we should get paid for it, as opposed to a carrier,” he says.
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