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Subject: qotd: Benefits consulting firms move in for their cut of the
Date: Tue, 24 Sep 2013 12:46:21 -0700
From: Don McCanne <email@example.com>
To: Quote-of-the-Day <firstname.lastname@example.org>
September 20, 2013
Analysis: Benefit firms create tremors for insurers in U.S. healthcare
By Caroline Humer and Lewis Krauskopf
American companies are sending shockwaves through the healthcare
industry by moving a rapidly growing number of employees onto privately
run online exchanges for their medical coverage.
In a business already bracing for major change because of President
Barack Obama's healthcare reforms, the decisions are threatening to
shift more power in the market to the benefit consulting firms opening
many of the exchanges.
"It's important to the insurance companies to sell through the private
exchanges to maintain their biggest customers," said Mike Nugent,
managing director of the healthcare practice at business consulting firm
The exchanges received their biggest boost yet when Aon Plc insurance
broker said on Wednesday it signed up 18 companies to participate in its
Aon Hewitt Corporate Health Exchange, including the country's largest
drug store operator Walgreen Co, resulting in coverage for an estimated
600,000 people next year.
The announcement drove up the shares of Aon and other benefits
consulting firms, such as Towers Watson and Marsh & McLennan, which owns
Mercer, one of the largest consulting firms in the world.
All three have easily outpaced the broader market in the past year, with
Towers Watson shares up 79 percent and Aon up 42 percent.
Corporations are hoping the move to the private exchanges will keep
healthcare spending in check and force employees to manage more of their
own healthcare costs. Companies still directly pay a portion of the
premium and deduct premium payments from employee wages for the
difference between the employer contribution and the cost of a plan, but
employees can choose a plan from a menu of low to high cost offerings.
Insurers have been preparing for this possible shift to private
exchanges. In some cases they are investors and in other cases, like
Aetna Inc, they are building their own.
But plans offered by large, household name insurers such as UnitedHealth
Group, Aetna and WellPoint Inc are likely to be among the most prominent
choices for consumers selecting a plan on a private exchange, Windley said.
Some experts say moving to an exchange prevents companies from
"over-buying" insurance. Alan Cohen, chief strategy officer of private
exchange company Liazon, said that based on the 200,000 transactions
processed at his companies, employees spent on average 25-30 percent
less when they chose the plan compared with what the company would have
On the other hand, the Aon exchange and others shift the risk associated
with providing health insurance to the insurers from the large companies
that have traditionally being bearing the risk, or self-insuring, which
can be more profitable.
Self-insured members generate $4 of pre-tax profit monthly, compared to
$18 in pre-tax profit for each fully insured member, according to Credit
Suisse analyst Ralph Giacobbe.
The coming year is the first time in which a significant number of
larger employers will use private exchanges for their workers' benefits.
Companies, which start unveiling benefit plans this month, are sending
at least 1 million employees to private exchanges in 2014 versus a few
hundred thousand now.
More growth is expected in 2015 with nearly 1 in 3 large companies
saying they were considering a move. By 2015, 6.5 million people could
be on these exchanges for active employees, according to forecasts by
analysts at William Blair.
The possible market is much larger. About 170 million people received
employer-based health insurance in 2012, 156 million of whom were under 65.
Aon, Towers Watson and Mercer already dominate the market for consulting
for the top 1,000 U.S. companies about benefits, putting them in a
position to promote their exchanges.
The expansion of private exchanges is expected to add significantly to
revenues of the benefit companies. Rates from exchange contracts bring
in more revenue per employee than current administrative ones, according
to William Blair analysts. Also, once the exchanges are established with
a fixed cost base, new corporate clients become highly profitable,
according to William Blair.
Comment: Although these private insurance exchanges which resemble
Obamacare's state insurance exchanges are just getting off the ground,
they seem to be providing an out for employers who are tired of managing
their employee health benefit programs and who want relief from the
seemingly uncontrollable increases in health care costs. What an
opportunity this provides for the benefits consulting firms.
These consulting firms are not replacing the insurers, but they are
inserting themselves as another layer of administration in our system
already greatly overburdened with administrative waste. Their
administrative costs are not counted in the 15 to 20 percent allowed for
the insurers under Obamacare. No, these costs are in addition to the
administrative waste of the insurers and the waste of the administrative
burden that insurers place on physicians, hospitals and other health
care providers. It is part of our uniquely American health care system
that is designed to finance administrative services while seeming to pay
for health care services only as an aside - an exaggeration but it does
emphasize the priorities of these administrative corporations.
Since health care policies should be designed to take care of patients,
in this case employees who are moved from employer benefit plans to
these private exchanges, we should look at the impact that this will
have on the employees.
* Since employee health benefits and the costs to administer them are
paid by employees in the form of forgone wage increases, this additional
layer of administrative costs will be borne by employees with no
commensurate increase in health care services.
* This shift from defined benefit health plans to defined contributions
is one more example of our current trend of shifting risk and costs onto
the backs of employees.
* When employees select their own plans, they will buy the plans with
the lowest premiums since most of them and their families are healthy.
That means plans with high deductibles and spartan health benefits. For
those who develop serious medical problems, financial hardship will be
an inevitability because of excessive out-of-pocket costs, and impaired
access is very likely because of the shift to narrow networks of providers.
* The private exchanges will not be eligible for the subsidies provided
for plans in the state-run Obamacare exchanges, so low and moderate
income individuals will not be receiving the same help that those who
enroll through the state exchanges will have. Those employers now
selecting the private exchange option will be contributing to the
employees' premiums, though, unlike the state exchanges, that
contribution will not be equitable since it is not based on income.
* For employers who currently self insure and thus have lower
administrative costs, the administrative costs will be much greater in
the private exchanges, but those extra costs will be borne by the
employees, either directly of indirectly.
* The benefit consulting firms are entering these ventures with visions
of great profits. This is one more sad saga of the American approach of
scooping up profits from patient care dollars while designing health
coverage to maximize business goals and minimize health care services.
* These business intermediaries seek even more profits by catering to
Wall Street investors, pushing up the price of their shares while
appeasing Wall Street by demonstrating that they will limit as much as
possible the diversion of revenues to patient care.
Not only do we need to remove private insurers from their nefarious role
in all of this, it appears that it is time to remove the employers and
their benefit managers as well. By switching to a single payer financing
system and funding it through equitable taxes, we can be sure that
everyone would be paying their fair share, including members of the
business community, while nobody is wasting funds on the middleman money