capitalizing on benefits

Meeting clients' health care challenges

Employee benefits account for 35% of this Southern California agency's revenues

By Len Strazewski

Employee benefits costs don’t always have to go up. Despite steadily escalating health care delivery costs, some employers are seeing their total health insurance costs increase only marginally or not at all.

Is it that their agency is negotiating a better deal or that the economy is finally putting some downward pressure on rates and premiums? Or are employers simply insuring fewer employees as lay-offs mount up? Maybe some of each, explains Joel D. Davidowski, executive director of employee benefits at Kessler Advisors in Santa Monica, California.

And then, there is the specter of federal health care reform and the unknown demands presented by a total makeover in the way Americans fund and receive their health care. But regardless of the causes, the summer of 2009 may go down in modern history as the time when the health care costs tsunami finally began to recede—for good or for ill.

“In the last 90 days there have been more challenges than ever for employers in trying to manage their health care costs. The medical inflation trend is about 11% nationally and continues to go up,” Davidowski says. And the federal extension of COBRA health insurance continuation benefits and the mandated employer subsidy of benefits have added an unbudgeted increase in total costs.

“But our clients are telling us they can have zero increase in the employer’s liability for benefits. Zero.”

Why the sudden belt-tightening, after years of accepting increases as a regular cost of business? The economy has everyone worried and profitability has been squeezed to nothing. Davidowski cites a local client whose profitability has been reduced to 3% to 4% by economic pressure.

“The initial premium increase with the present trend is usually in the range of 12% to 20% from the health plans,” Davidowski says. “But that’s just the initial offering. After negotiation with some plan design changes, we can get the average increase down to 4% to 6%.”

This indicates a good job of negotiation but in the context of the profitability crunch, it still is too much of an increase for cash-strapped employees.

“You can see—and the employer can see—that if they could just eliminate the increase or if they could eliminate employee benefits, they could seriously improve profitability,” he says.

As a result, Davidowski is seeing surprising changes in employer plan designs that transcend the common increases in deductibles, co-pays and co-insurance. Employers are talking about restricting benefits in new ways, including offering health benefits only to employees and eliminating family or dependent coverage.

Some are considering barring working spouses who are eligible for coverage from their employers from participating in what could be less expensive family coverage, he says.

“I’m seeing things out there that I haven’t seen in 20 years in the employee benefits business,” Davidowski says.

Kessler has a long history in Southern California. Founded in 1956, the family-owned and operated agency has been a mainstay in the area’s property/casualty insurance business and has been developing its employee benefits practice since Davidowski joined the firm in 1995. The agency has about 70 employees, including about 20 in the employee benefits division, which accounts for about 35% of revenues, according to Chief Executive Officer Steven K. Kessler.

Kessler says the agency serves a wide range of employer groups but specializes in mid-sized firms with 100 to 1,000 employees. Groups of this size range provide the best economies of scale for the agency and the best opportunities for more sophisticated plan design and cost management solutions, he says.

Among its largest health plan providers are Anthem BlueCross/BlueShield of California, Cigna, United Healthcare and Aetna.

While many agencies have chosen to expand employee benefit sales simply as a way to boost revenues in a perpetually soft property/casualty insurance marketplace, Kessler says the agency began to pursue employee benefits more as a way to provide full service to its clients and eliminate the prospect of sharing its relationship with other agents or brokers with an employee benefits specialty.

The total account management strategy allows the agency to institutionalize a cross-selling strategy that maximizes existing client relationships and encourages a comprehensive approach to new business, he says.

“Property/casualty and employee benefits producers are given incentives to cross-sell and work as a team,” Kessler explains. Together, the producers explore the business operations of the prospective client and identify the most pressing needs of the organization.

“We don’t know where the pain is until we learn about the business and can identify what we can do to be of the most help. Once we understand their pain, we can offer the knowledge and expertise that can directly apply to their most significant concerns,” he says.

For many client companies, “the pain has been in health care,” Kessler says, as the long history of rising costs has taken a toll on the balance sheet. As a result, the agency has had to develop a broad range of employee benefit products and services and health plan relationships to respond to individual client business strategies.

“We find ourselves partnering with human resource departments to provide services that help fulfill their organizational needs, whether it is enrollment, benefit communications or regulatory compliance.”

Davidowski agrees. The days of simple renewal marketing are long gone, and the Kessler employee benefits department is designed to provide “a total solution” in benefit services. While health care is the most significant client problem and, generally, the most expensive concern, Davidowski says the agency also has had to develop expertise in human resource technology to assist with enrollment and administrative services, voluntary supplemental benefits and personal executive financial services such as estate planning.

While a few Kessler clients have experimented with health savings accounts (HSAs) or health reimbursement accounts (HRAs), the consumer-directed health plan model has yet to prove its value in cost savings for the agency’s group sizes, according to Davidowski. Cost savings are more manifest in larger self-funded plans of 5,000 or more participants.

Wellness and health risk awareness have also been less of a factor as employers struggle with their overall costs and profitability. “Wellness and health risk management are important and may be the only real long-term strategy to control increasing costs,” Davidowski says, “but it is difficult to get clients to invest in programs when the economy poses so many budget problems.”

The agency also maintains a practice in retirement plans, deferred compensation and executive benefits. Among the key issues in employee benefits management is not simply plan design and cost management but integration of the total benefits package with a client’s human resource strategy, Davidowski says. And while health benefits are a critical component of what it takes to recruit and retain top employees, it isn’t the only component.

Ancillary benefits such as long- and short-term disability insurance, dental insurance and vision care are still important components, though many employers are shifting the funding of those benefits to employee-paid voluntary supplemental programs, Kessler executives say.

And some employers are also re-examining their retirement plan strategy as a way of modifying their human resource approaches. Some are modifying vesting on employer contributions to defined contribution plans to accelerate accumulation of value to provide incentives for key employees. Others are creating non-tax qualified deferred compensation programs to offset losses in 401(k) plans for key executives with approaching retirement needs.

However, the evolution in the employee benefits environment has many implications for the agency. While health plan rates continue to increase, group health insurance premiums are down more than 15% for the agency as California employers reduce their headcount through lay-offs and reduction in hours, and continue to cut back benefits.

The downward trend also affects account profitability, Kessler adds. He estimates the cost of value-added services (such as COBRA, FSA administration, communications, etc., provided free of charge) to be about 7% of the health care revenue; but as the revenue recedes, the cost of service tends to remain about the same.

As a result, the agency is exploring fee-based compensation that would more accurately reflect the valued-added services the agency provides.

“California already requires disclosure of compensation from commissions, so the information is already available to our clients. It is becoming more important that they also realize the cost of the value-added services we provide as the demands of their account increase,” Kessler says.

In the meantime, one more issue hovers in the background. National health reform, a high-profile objective of the Obama administration, remains unresolved, and both executives point to the difficulty of uncertainty about the future environment of private health insurance.

This past June, two major media polls indicated that an Obama administration proposal to reform health care—with compromises from various stakeholders—had substantial national support. The evolving proposal would most likely require employers to continue to provide a minimum level of health benefits for employees or pay a tax contribution for a public alternative plan.

A Wall Street Journal-NBC poll of 1,008 respondents indicated that 55% of respondents said they favor the plan supported by the president, while 35% said they opposed it. A similar poll of 895 respondents conducted by The New York Times and ABC reported support from 44% and disapproval by about 34%.

“We just don’t know what we will be dealing with in the future,” Davidowski says.