Four trends in the 2017 benefits delivery marketplace

If you’ve been following the headlines over the past few years, you’ve seen some big changes in the benefits administration world. For example, just last month Aon announced that it is selling its long-standing benefits and human resources (HR) administration business to Blackstone. In January, Xerox completed the spin-off of Conduent, which provides benefits consulting and administration services. Back in 2015, TransAmerica acquired Mercer’s U.S. defined contribution recordkeeping business.

Gartner Inc. research reveals that 80% of companies now outsource at least one HR activity. The trend toward benefits administration outsourcing continues to accelerate, with roughly three in four companies now outsourcing at least some benefits administration activities—up 12% from two-thirds in 2014. So how have these changes to the benefits delivery marketplace affected benefits strategies and buying decisions?

Here are four trends we’ve seen based on recent work with our clients.

1. Best-in-class purchasing
There’s a move toward best-in-class selection of outsourcing providers. In other words, employers are selecting providers by benefit “tower”—health and welfare, defined contribution, defined benefit—rather than consolidating delivery to one total benefits outsourcing (TBO) provider. Our observations are backed by a recent study, which revealed that 64% of employers surveyed use more than one benefits administration provider. Additionally, 35% of large employers, with 1,000 lives or more, indicated an increase in the number of providers they use to five.

There are a number of explanations to support this trend:
• Flux in the marketplace
• Inconsistent service quality across benefits towers
• Fewer providers who can deliver TBO

What this means to plan sponsors: Clients who bought a TBO/single-provider approach and like the integration have far fewer options to consider should they decide to go to market. They will need to expand their thinking to include the best-in-class approach and look for integration among providers—which can be accomplished with good leadership and vendor management from the client.

2. Provider disruption
The benefits administration marketplace has been, and continues to be, dynamic. In the 20+ years I have been in the market, there has scarcely been a year when some major provider change has not occurred. Providers have consolidated through acquisition and merger. Some have exited one or more towers of delivery. Others have spun off their administration units to stockholders as independent companies. The disruptive nature of the provider base has not led to market contraction. However, as affected client companies continue to outsource their administration it has led to movement by clients and opened the door for new providers.

What this means to plan sponsors: In this environment, a plan sponsor must be cognizant of its role as fiduciary to the plan. This means doing due diligence, soliciting proposals from alternative providers, and reviewing service levels with the current provider—especially as providers work their way through the changes.

3. Changes to bundled consulting and administration
Interestingly, providers are initiating very different strategies regarding the bundling of consulting and administration. Of the four largest administration providers in the large company market segment, two (Mercer and Willis Towers Watson) have tightened the link and two (Aon and Conduent) are breaking the link between consulting and administration. The exception is when a client chooses a private exchange model. In this case, the provider wants to keep consulting and administration tightly within its service offering.

Clients are split regarding the efficacy of bundling. Based on our work in this area and our observations of client choices, about as many believe that integration is important to effective plan management as believe in keeping them separate.

What this means to plan sponsors: Plan sponsors need to be aware of what products and services their consultants provide, such as benefits administration, private health exchanges, prescription collaboratives, etc. There may be corporate initiatives requiring consultants to present these products to you. That’s why it’s important to get independent insights into your decision-making process to ensure which strategy will work best for your organization.

4. Health and welfare outsourcing growth
The majority of retirement plans, both defined contribution and defined benefit plans, are outsourced today. Though health and welfare (H&W) benefits administration has lagged behind, over the past several years it has grown by 7% to 10% annually. Approximately 52% are outsourcing H&W administration, while 45% are administering in-house or using limited outsourcing services (flexible spending accounts, COBRA, Patient Protection and Affordable Care Act [ACA] reporting).

Rationale for administering in-house:

• Contact: Health plan administration involves many calls. Some plan sponsors believe that employees want to talk to company employees versus a call center.
• Cost: Some plan sponsors believe it is more costly to outsource than to manage the plans in-house or at least have a difficult time developing the cost/benefit analysis to move to outsourcing.
• Complexity: The plan design is very unique and/or complicated so the plan sponsor believes it needs to be administered in-house.

Reasons employers move to outsourcing:
• ACA compliance requirements
• Expanded benefit options for employees
• Lack of internal technology capability and expense of upgrades
• Overburdened staff or loss/reduction of staff
• Leverage of outsourced providers for administrative cost savings

What this means for plan sponsors: With the changing benefits marketplace, employers need to offer competitive benefits—with options for changing demographics. They also need to improve web-based employee access and still contain cost. The market is growing and changing quickly but your Milliman consultant can help you understand the current market, guide you through expected future changes and find a partner to serve you well over the coming years.

Consumer transparency issues in an evolving individual health insurance market

Consumers in the individual and small group health insurance markets want to understand the future of their health insurance. This paper by Milliman actuaries Esther Blount and Andrew Bourg highlights the steps the Patient Protection and Affordable Care Act (ACA) has in place to promote consumer knowledge in the individual market and the pros and cons of removing such initiatives.

Price transparency considerations

Increased price transparency from healthcare providers may help individuals become better consumers and reduce overall healthcare costs. However, some studies indicate that more price transparency may actually increases costs. In this article, Milliman’s Shyam Kolli explores the forces driving the need for price transparency. He also discusses potential ways to improve transparency.

Summary of individual market enrollment and Affordable Care Act subsidies

The Patient Protection and Affordable Care Act (ACA) introduced many changes to the individual health insurance market beginning in calendar year (CY) 2014, including new rating rules and the introduction of federal financial assistance to purchase health insurance through the insurance marketplaces. It is important for state policymakers to understand the health and stability of the individual health insurance market and how the ACA has affected its health insurance consumers.

Milliman actuaries Paul Houchens, Jason Clarkson, and Zachary Fohl have prepared a profile of the individual health insurance market for each state along with the District of Columbia (DC). The profile summarizes insurer financials, marketplace enrollment, and federal assistance provided to households purchasing insurance coverage through the insurance marketplaces, incorporating recently released data from the 2017 open enrollment period.

Long-term care first principles modeling: Advantages and enhancements in modeling

This article by Milliman actuaries is the fourth in a series on long-term care (LTC) first principles modeling. The first article in the series, released in March 2016, introduced the topic and set the stage for the series of case study discussions that would follow. The second and third articles in the series, released in June 2016 and November 2016, examined the development of mortality and lapse assumptions, respectively, for use in an LTC first principles model. The latest article builds on these discussions with a look into how a first principles model, using these assumptions, can enhance and simplify the modeling of LTC projections. Once the groundwork of developing the key assumptions is completed, first principles models provide an improved platform for modeling by automating many processes and making refinements both easier to implement and more varied.

The importance of evaluating RDS and EGWP trends to optimize plan value

Financial dynamics and an evolving regulatory environment in the group retiree pharmacy benefits market continue to influence the relative values of Employer Group Waiver Plans (EGWPs) and Retiree Drug Subsidy (RDS) plans. Plan sponsors should periodically monitor and evaluate emerging trends in these programs to optimize plan value in this still-changing market.

Last summer, for example, the Centers for Medicare and Medicaid Services (CMS) announced a large decrease in the monthly direct subsidy revenue to EGWPs. Additionally, the Medicare Payment Advisory Commission (MedPAC) recently proposed changes to the Medicare program with major implications for EGWP costs.

Figure 1 summarizes key recent and proposed market and regulatory dynamics that are already impacting the relative values of EGWPs and RDS plans—and which could potentially influence further shifts in these values.

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