Competing in the New World of Benefits Brokerage

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 health care coverage and the cost of serving employers who are looking for ways to manage health care 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 agency Neace Lukens say they hear the same concerns from employers about benefits, regardless of the size of their companies.

“Number one is the cost, the out-of-control cost on the health care side,” says Scott Heiser, a senior vice president of Neace Lukens and president of its BeneSolv division.

Heiser says the market has changed from comparing offerings from carriers to where there is more 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.

Mike Sullivan, 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.

The cost concern is forcing employers to seek out options to traditional group plans, according to brokers.

Some brokers are seizing this time as an opportunity to really 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 is 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.”

Some of 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 like 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. 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 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-based agency began offering employee benefits in 1993. 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. 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 variety of services Neace Lukens offers today includes 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, it offers 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 and then devise plans to both manage the most common claims and guide the employees on how to stay healthier.

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 mitigate the risks that the employees assume and voluntary benefits that help individual employees supplement and fill some of the gaps caused by high deductibles and benefit changes.

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.

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 also work to do to educate employees about their option. At the same time that employers have been adopting consumer-driven plans, health insurers have been cutting back and driving all of the response and education on benefits to the Internet, which doesn’t work for everyone, according to Heiser. Neace Lukens sees its role as filling that gap in client services, too.

To help pay for these expanded services, Neace Lukens is 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 moved toward a fee-based system for several reasons. For one, Neace Lukens did not want to “be beholden to carriers” if they changed commission levels. Also, 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.

Neace Lukens sees employers accelerating their adoption of consumer-driven health care 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 health care and it will be up to the employee to decide what to buy from the menu of benefit options.

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 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.

The Digital Way

Had Neace Lukens decided to get out of the benefits business completely or outsource its small accounts, Digital Insurance in Atlanta might have been one option.

“Our view is relative to benefits is you’re either all in or you need to figure out how to partner or get out,” says Mike Sullivan, chief marketing officer of Digital.

“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.”

Digital started in 2000 as an online seller of benefits to small businesses but soon dropped that strategy. Instead it started partnering with larger agencies already in the benefits business that weren’t efficiently serving the smaller groups. It helps them serve these accounts on an outsourced basis. This strategy has put it in position to handle the small and medium-sized accounts for some the largest brokers – including Aon and Mercer.

Under its “co-opetition” strategy, Digital is also buying up a 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 basically 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 health care reform represents.” These agencies will also need infrastructure and they will need products to compete.

“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. 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.

And benefits brokers who do not have an ability to serve these individuals and families within the groups are going to 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 health care.

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 health care costs.

“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.”