Imagine: After decades of cholesterol and couch potato-hood, you awaken one morning to a stabbing chest pain. Fifteen minutes later, you're in the emergency room, your life flashing before your eyes. And a few frightening hours later, your doctor is giving you the news: It was heartburn, not a heart attack. Not this time, at least.
A reprieve
Health insurance brokers have been facing their own heart attack scenario in recent months, thanks to Congress's health care reform proposals. The pain started in earnest back in December, when the House and Senate passed a pair of reform bills featuring insurance exchanges, guaranteed issue, and administrative cost controls. These provisions may have sounded great politically, but they would likely cause a radical shift in the health care marketplace, potentially devastating brokers' business models. A few months later, there was a moment of relief, when Massachusetts Republican Scott Brown won Ted Kennedy's vacant Senate seat, depriving Democrats of their filibuster-proof majority, and quite possibly killing the plan completely. A few more weeks, and the corpse was twitching again, as the president and his congressional allies laid plans to revive reform once and for all through the budget reconciliation process. There are still questions about details and timing, but it looks like some form of reform is on its way sometime in the next few months.
What will you do about it?
The question is: what will you do now, knowing that some type of reform will eventually make its way to the market? Can the market transform itself, driving out cost and demanding higher quality? Or will the industry opt for the burgers-and-beer strategy: write off change as not achievable and enjoy whatever time it has left? The implications are immense; large portions of the health benefits marketplace not to mention American productivity hang in the balance.
In January and February, Oliver Wyman and Benefits Selling set out to understand how brokers thought about reform and how they planned to respond to it. More than 1,250 brokers responded to this year's survey, spanning the country and representing all employer size segments as well as the individual market.
In addition, we interviewed a cross-section of brokers to get a sense of the thinking that lay behind the survey answers. What we found is that while brokers saw reform as a huge disrupter, they haven't quite made up their minds about what will happen next or what to do about it. Nonetheless, there are increasing signs of innovation in the marketplace, as some brokers rapidly develop their business models to drive real results right now.
Bad news, but when?
In our survey, brokers agreed that reform would be disruptive for their customers and bad for their own business. Fifty-seven percent said reform would have a negative impact on clients and one-third said that impact would be major. By contrast, only 17 percent saw any positive effects for clients in reform.
The answers were almost identical when we asked how reform would affect brokers' own business. By market segment, large-group consultants and brokers were slightly less pessimistic than their middle-market and small-group counterparts. Almost half of respondents said that reform would drive substantial or major consolidation in the broker and consultant landscape, while less than 20 percent (most of them small-group brokers) foresaw a major or substantial move toward fragmentation.
Looking for stability
But despite this overall pessimism about reform, and the ongoing effects of the recession, most brokers reported that recent business was more or less normal - buy-downs have continued, but the recession has not brought about a massive downshift or bailout. Based on 2010 renewals, it appears the individual market has largely stayed the course with more than half of the market making no material changes. The group market, by contrast, reported that employers were proportionately spread across the spectrum of "no changes" to "major changes," and that this was consistent across the small-group, middle-market, and large-group segments.
"Employers are always skittish about major change in their health and welfare benefit plans," explains Kevin Murray of Risk Strategies, a diversified Heath/Welfare and P&C shop based in Northbrook, Ill. "In the face of instability in their own business, clients have wanted to keep the status quo on the benefits front."
Besides, there's a question of how much can be accomplished at this point through benefit design.
"The buy-down game is about done," Murray says. "You can only shift it around for so long. Brokers that play this game are commoditized and transactional they have no strategic plan to manage plan expenses beyond reducing benefits."
To the future
Looking forward to 2011, brokers foresee an uptick in employers' appetite for change. Within the group market, 54 percent of respondents indicated that employers will be somewhat more aggressive in the coming year, with an additional 15 percent taking a significantly more aggressive approach. Together, this predicts a busy year for brokers and consultants a full 70 percent of the market could be taking a good look at their strategies.
This increased focus on near-term strategies is attributable at least in part to the fact that many brokers see reform as three to four years off if it arrives at all.
"Reform's not until 2013 or 2014, and there's a lot of business to be written between now and then," says Bill Hammett of the Hammett Marketing Group. "Plus, there are a lot of hands that will touch the legislation before it becomes real, if it becomes real."
Vince Marinelli, a mid-market broker from Toledo, Ohio, is taking a wait-and-see approach, but he's skeptical about Congress's focus primarily on insurance reform. "The real issue is the underlying cost of care," he says. "It costs more to insure a Maserati than a Toyota. The cost of care is what drives higher premium not the other way around. That's not a reason to reform the insurance market."
Reform is inevitable
Even if you're skeptical about the tack being taken on reform, there is consensus that some form of reform is ultimately inevitable. And brokers in our survey said the proposed legislation would likely cause a shift in their business model. For example, when asked whether reform would cause brokers' companies to focus less on health care and more on ancillary products, 46 percent strongly or moderately predicted that this would be the case.
There were some differences by market: Small-group brokers were almost three times likelier than large-group brokers to say they'd be placing more emphasis on ancillaries (29 percent to 10 percent). And large-group brokers were almost twice as likely as their small-group and middle-market counterparts to predict no substantial change in regard to ancillaries (35 percent, compared to 18 percent and 19 percent, respectively). Overall, this is very consistent with the intent of both reform bills to streamline the small-group markets, with lesser effects on large-group employers.
Where's the Urgency?
Across our conversations with brokers, we found an array of strategies, with some truly pushing the envelope. Brokers see their future prosperity tied to maximizing product sales, extending and leveraging service capabilities, and, most important, driving long-term engagement strategies to bring down costs.
Maximizing product penetration
As in prior years, brokers report that ancillary products are critical to mitigating the effects of membership losses. In addition, they are focusing more on voluntary products as a way to help assuage employees during difficult economic times. Beyond these traditional plays, some innovative offerings are coming to market. Some brokers are working directly with employers and carriers on bundling strategies that combine high-deductible major medical plans with focused indemnity products. These plans have been well received by employees and have been shown to immediately and sustainably drive down costs for employers. In addition, some brokers are combining limited medical plans with stop-loss products to achieve a net lower cost position, while providing coverage that is meaningful for the majority of the population.
Providing indispensible service
While the prospect of online insurance exchanges has bred anxiety, particularly for small-group and individual brokers, some innovative brokers are investing heavily in service and technical infrastructure. While the exchange would expedite purchase transactions, they argue, the employer's aggregate cost of providing health benefits extends well beyond premiums and includes administration, education and management. For this reason, many brokers are investing in technology to ease administration and permit them to offer data exchange, analytic and other services.
Several brokers said carriers' cost-cutting has led to significant deterioration in carrier service, increasingly causing employers to depend on their brokers for support. In essence these employers are relying on brokers to fill the void created by their own smaller HR staffs and their carrier's headcount reductions. Wherever possible, consultancies and brokerage firms are looking to leverage investments in technology to bridge this service gap.
Interestingly, in our survey many small-group brokers said they were not investing in technology. This seems risky, especially when some middle- and large-group brokerages said they might look to apply their more robust service and technical capabilities to win in the exchange-driven small-group and individual markets post-reform. With the market already consolidating somewhat, small-group brokers will need to actively seek out ways to close service gaps or risk being be usurped by larger, more capable firms.
Cracking the cost conundrum
To a growing contingent in the broker community, the only real possibility for long-term success is to become a catalyst for market-driven reform. While legislation has focused on access, these brokers have been devising educational programs to engage employers and their employees, implementing rewards-based benefits, and pushing health plans to deliver more innovative cost savings and provider contracting models.
A middle-market broker from the East Coast stated this well, "Our firm doesn't want to work with a group just to shop rates. That doesn't work. We tell them it doesn't work. Our focus is squarely on educating employees about managing their health and then navigating the system if and when they need care."
Another said, "You have to tell people that it's not a credit card. You have to help them understand how this communal system works. You do not get anything for free, and not all physicians are the same."
Five years ago it was the rare firm that actively promoted 24/7 nurse lines or crowed about how many clinicians it had on staff. Today, however, employers are looking for sustainable solutions and increasingly recognize the need to commit to multi-year strategies that incorporate wellness strategies, employee education, and constant performance analytics. We have found examples of brokers and carriers partnering to bring worksite clinics to small- and medium-sized employers who have never attempted them before. Attractive ROIs are being quoted for these innovative few.
Leading brokers recognize the value of "bend trend" services and are abandoning commission-based compensation for consulting fee-based models. They are taking important steps toward a new model: robust employer/broker partnerships focused on local realization of lower-cost, higher-quality care. More and more employers recognize that they need to be the leaders of market-driven reform, and they are finding more consultancies and brokerage firms with the capabilities to support them in this endeavor.
In 2014...
Where will the health benefits market be in 2014? Will the narrowly avoided heart attack of this first (surely not the last) reform proposal create adequate energy and momentum to inspire a market transformation? Will brokers invest in their business models so they can support the forward-looking employers who want to drive market-based reform? Or will the market continue to focus on business as usual, failing to capitalize on an opportunity for real change?
As this year's study reveals, more innovators are sprouting up across the country, and the market is rewarding them. But there are also many brokers who are "making hay while the sun shines." Only time will tell if partnering employers will create engagement around the core issues plaguing the U.S. health care system, and lead to a grassroots revolution toward better cost and quality.
Oliver Wyman is an international management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. Oliver Wyman's Health & Life Sciences practice serves clients in the pharmaceutical, biotechnology, medical devices, and payer sectors with strategic, operational, and organizational advice. Deep health care knowledge and capabilities allow the practice to deliver fact-based solutions that are transforming health care.
Michael Main is a Partner with Oliver Wyman's Health & Life Sciences practice. Michael has over 25 years of health care experience and focuses helping carriers deliver durable and profitable revenue growth. Michael is recognized as an industry leader on issues surrounding health benefits distribution, and is frequently a speaker at industry events. He can be reached at michael.main@oliverwyman.com.
