The Incredible Shrinking Insurance Industry
By: Alison Schofield
Market consolidation in the group insurance industry means employers have fewer options when it comes to choosing an insurer for their benefit plans. This concentration means plan sponsors can expect to see new approaches to providing coverage for their employees, says Alison Schofield, of Mercer Human Resource Consulting.
Changes have been sweeping the group insurance industry over the last decade and will continue into 2004 and beyond. These changes are occurring largely as a result of the significant consolidation we have seen in the group insurance industry, which has concentrated group insurance coverage as a result of several mergers and acquisitions over the past years.
In 1992, the top five life insurers in Canada had about 50 per cent of the total group life insurance business in the country. By 2002, the top five held closer to 80 per cent of the market.
These changes will bring new things to group benefit sponsors and employers.
Employers will see changes in their relationships with insurers and in how they structure the benefit plans they offer to employees. Perhaps most important of all, employers are going to have to finally address an issue that has only been dabbled at over the years – serious rethinking of their objectives for providing benefit plans in the first place.
Market consolidation means employers have fewer options when it comes to choosing an insurer for their benefit plans. And, as often happens when companies are operating in a market with limited competition, the service options available are reduced while costs go up.
Some of the problems directly resulted from the acquisition of insurers, when plans had to be converted or integrated into another system, sometimes more than once as when Metropolitan Life’s Canadian business was acquired by Mutual Life which was subsequently bought by Sun Life. In at least one extreme example, employers whose plans did not fit the model of the acquiring insurer were simply terminated as policyholders. '
M & A Fallout
Outside of this M & Afallout, the stories of issues abound – errors in simple transactions, slow turn-around times, endless booklet redrafts, and 1-800 numbers which add confusion instead of resolution.
One of the most challenging issues for employers to deal with is the loss of interest in accepting risk. Pooling costs are skyrocketing and the risk component of insurer administration costs is off the chart. From a practical point of view, it is difficult for plan sponsors to validate the need for increased costs and to confirm a competitive price tag for risk, particularly in the post-September 11 era.
In one particular case, a plan with about $1 million in life insurance premiums incurred a small deficit after several years of positive experience. After using the funds in the Claims Fluctuation Reserve, the deficit was down to around $60,000. At this point, the insurance company told the policyholder that their risk charge would increase that year from 0.2 per cent of premium to 7.3 per cent. That’s an increase of roughly $80,000.
Group insurers are making every effort to automate and transactionalize the services provided. This drive to efficiency makes excellent sense to the shareholders of the insurers but also may have a significant impact on customer service and, particularly, the amount of customization available.
Too many carriers today are limiting their roles as expert adjudicators and choosing instead to offer universal benefits that don’t necessarily meet individual needs. A story will illustrate this point:
An employer has a plan that has a ‘reasonable and customary’ limit of $1,000 every five years for an insulin pump, which typically costs about $5,000 plus additional monthly supplies. According to this insurer, anyone with Type 1 diabetes is eligible, even though medically, not everyone with Type 1 diabetes actually benefits from a pump. In this instance the claimant needed the pump to manage his diabetes and remain productively at work. To increase the benefit to a higher level, the insurer proposed a rate increase that would generate a premium increase of about $50,000 for this 500 life group. The rate increase required to increase the benefit was so high it was clear that this particular insurer has chosen to pay a restricted benefit amount – in this case 20 per cent of the expected cost – to anyone who makes a claim, rather than paying a larger portion of the cost but restricting payment only to those who can demonstrate a real medical need justifying the insulin pump. For an employer whose objective for group health insurance is to pay for medically necessary treatment and services – and not for lifestyle choices – this manner of adjudication is inadequate and ineffective.
Insurers today are streamlining and automating their services and offering onesize- fits-all solutions. At the same time, the costs of insurance administration, outside of the costs of claims, have gone up. When we look at our national data base of insurer expense charges, we can see that expense costs have increased by two per cent to three per cent of premium for life and longterm disability plans.
On the other hand, the expense charges on health and dental plans have remained relatively flat in recent years. Of course, there has been little need for similar increases to health and dental expenses given the double-digit increases to the claims on which these charges are based over the past few years. A four per cent claim settlement charge to a $500,000 health plan generates an expense charge of $20,000. When that $500,000 increases by 15 per cent each year over five years (as drug costs have been doing), the insurer’s four per cent charge now generates about $35,000. This is an increase of about 75 per cent. This is similar to the way the tip paid at a restaurant varies according to how much is spent, rather than on the quality of service.
Given this background we can expect even more changes to come and a lot of these changes will effectively adjust and balance the things that have gone askew in recent years.
We are going to see new, smaller niche players enter the market to exploit the current shortfalls in services offerings. No matter how limited the options are right now, employers are going to look for the service they need. Employers will seek out protection from the risk of high claims, and efficient administration services that connect to employees on a more personal level. Employers need, and will increasingly look for thoughtful, medically based adjudication of health, drug and disability claims, and preferred provider arrangements that allow choice and save money. Some of the large insurers will no doubt rise to these challenges. But they won’t be the only ones to do so. In 2004 and beyond, we’re going to see new providers arise and others perhaps come in from the United States and Europe, and they’re going to deliver the special expertise employers and their employees need.
This is already happening. For example, medical service companies and EAPs are expanding into disability management to adjudicate self-insured disability plans in direct competition with large insurers. In some cases, these specialized companies are delivering fully outsourced services, even extending to disability management of long-term claims where the liability is owned by the plan’s group insurer.
New Breed Of PBM
Pressure will also increase for a new breed of Pharmacy Benefit Manager (PBM) to adjudicate drug claims based on medical efficacy and intervene in the process to ensure full integration with government plans, not simply act as an information conduit between the pharmacy and the insurer. Of course, this type of provider will require determination from employers to accept change since this kind of claim management will require employers to stick to their guns and fight back the inevitable resistance from employees that will occur.
In the near future, we may also see insurers unbundle their charges so that custom services will be available at additional prices because employers will no longer be willing to pay higher prices for routine services. When this happens, plan sponsors will insist that insurers demonstrate greater transparency and accountability.
In 2004 and beyond, more employers – and not just the large ones – will demand comprehensive and meaningful service agreements. These demands will go beyond guarantees on turnaround times for claims and the agreements will have some teeth and provide protection from the costs of any changes not requested by the employer.
Of course, there is still a significant gap between what needs to happen and what employers are prepared to do. Even as prices have increased, employers have resisted the need to grapple with the conflict between employee expectations and plan cost management. Employers will have to make some hard choices and get their hands dirty to make some decisions about what employees will need to be responsible for and what will be covered under benefits plans.
So, it will come down to plan philosophy. Employers will need to ask themselves: “What are we prepared to do to ensure that we’re offering employees a meaningful benefit plan without paying unreasonable prices and assuming unnecessary risk?” Before this question can be answered, fundamental questions concerning plan objectives and how benefits fit into the total compensation picture must be addressed. Decisions may be made to simplify the plan design so less money is spent on administration, freeing up money for plan expenses. Alternatively, higher deductibles and out of pocket limits may be imposed so money now spent on low, routine claims for large numbers of employees may be used to fund the high catastrophic expenses for the small group of employees with special needs.
Until a clear framework is established, plan sponsors will find it very difficult to make the tough decisions that will be required to manage plan cost effectively while still delivering medically necessary benefits to an aging, and demanding workforce.
Alison Schofield is a principal in the health care and group benefits practice at Mercer Human Resource Consulting.
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