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Abandon Old-School Ways
The new benefits model:
Healthier workers cut employer costs by reducing demand.
Fast Focus
- Healthcare costs will remain a problem until employers and brokers change their approach to the solution.
- The industry has reached a crossroads between old-school brokers and new-school brokers.
- While old-school brokers stand to become irrelevant, new-school brokers understand their changing roles – from providers of benefit design and selection to consumer healthcare advocates.
As we enter the new decade, I have a suggestion for forward-looking employee benefits brokers: Stop worrying about the fallout from any healthcare reform that might come out of Washington. Focus instead on other changes.
I believe we can expect to see the employee benefits distribution model significantly altered over the next three to five years—with or without Washington. Yes, it is clear we will likely have some degree of healthcare reform, but brokers will be just fine based on the existing proposals (thanks in large part to The Council’s efforts). However, the future does not look all that promising for many in the industry. Let me explain.
Any healthcare reform from Washington will not reduce healthcare costs for employers and employees. Many well informed experts, like those of us in the industry, argue that costs will actually go up. I agree with that assessment, and I am sure many of you do, too. Yet we all know that the rising cost of healthcare is a significant issue for employers and employees, and it will continue to dominate the headlines until both employers and their brokers proactively change their approach to the problem.
Dangers of Being Old School
Here is the industry shift that you will be facing: Having specialized in the employee benefits market for the past 15 years, I believe we are at a crossroads regarding the way many employee benefits brokers approach their business. Meeting at this crossroads are old-school brokers perpetuating legacy business models and new-school brokers better suited to tackle current challenges.
The old-school approach is based on some common traits:
- Continue business as usual and wait until the market goes back to “normal”
- Believe that differentiation comes from great service, technology and old-fashioned relationship building
- Focus on “spread-sheeting” and cost-shifting
- Focus on short-term results and ignore the system’s underlying problems.
The new-school broker understands that the world is changing as it relates to the delivery of employee benefit services and they need to be ahead of the curve. Common traits for the new-school broker are that they:
- Focus on innovation and long-term implications to reduce healthcare costs
- Include actuarial services, data analytics and claims analysis
- Incorporate wellness programs and disease management
- Reorganize the sales and service models to focus on different skill sets to address market challenges.
My belief is that the crossroads is dominated by old-school brokers who ultimately will become irrelevant in the market.
The old-school strategic course of action—to milk the cow—will ultimately result in falling revenues until they finally just disappear. Alternatively, some will play wait-and-see when considering selling their firms. Before they know it, the market will pass them by. They will ultimately sell at a significant discount.
The new-school brokers recognize that change is already here. To remain relevant, their strategic course of action is to focus on innovation. They’re grappling with the question of how to provide a fully integrated solution of products and services that will ultimately reduce healthcare costs for employers and employees. They know it involves changing attitudes of employers and behaviors of employees so that employees are held accountable for making better decisions that improve their own health. In the end, this is the only way to reduce costs and generate savings.
Some new-school brokers, while they understand what is needed to prosper in the future, recognize that they cannot do it themselves. These agencies are selling to larger, better-capitalized firms that can help them succeed down the road. These agencies are selling at a premium.
I believe it will come down to a simple equation: Can you adapt? Fine, then go forth and serve your clients in a truly transformative way, helping them make significant changes to their healthcare programs that will help bring down costs and result in a healthier workforce. Are you unwilling to adapt or too small to provide the necessary new services? Merge or sell to a larger, better-capitalized firm, or see your business slowly sink into irrelevancy. Sorry to be so blunt, but that’s what you get at the start of a new decade.
Changing Skill Sets, Clients
It is perhaps easier to proffer a prognostication on what’s going to happen than it is to offer concrete suggestions on how to successfully tackle these changes. But these ideas can be a starting point.
Historically, most successful employee benefit firms have been built on great customer service that often focused on relationships at the human resource level and how they can make the HR professional’s life easier while providing value-added services, all at reasonable premium levels. However, two changes in the market have made this business model flawed.
First, the concept of winning and retaining business through value-added services has been minimized because most firms are now able to access such products and services. This has significantly increased competition. No longer can differentiation be achieved through a combination of great service and one-of-a-kind, value-added services. Firms previously considered unique suddenly began to get caught in the commodity trap.
The second change was even more significant. As the rising cost of healthcare became a top priority for companies, the decision maker at many companies shifted from the HR level to the CFO and CEO level. Producers and account executives who built their skill sets to sell and retain at the HR level found themselves dealing with CFOs and CEOs who no longer valued great service as the key decision point. These executives were focused on the question of how you solve the cost of healthcare beyond cost-shifting and spread-sheeting?
In this scenario, many successful producers found that they could not sell as effectively, and many incumbents found themselves on the outside looking in, as the new decision makers were only interested in managing costs and justifying their returns on investments of various healthcare products and services.
Additional Challenges
Beyond the changing skill sets that will be required to talk to C-suite executives in an atmosphere of commonly provided service levels, employee benefits brokers are faced with additional challenges in a rapidly transforming marketplace.
- Healthcare premiums and related commissions will continue to decline for many old-school brokers.
- Economic factors will continue to reduce payrolls, resulting in premium decreases in the near term.
- The compensation model will continue to change from primarily a commission basis to a combination of per employee per month (PEPM) and fee basis.
- The small-group market will continue to be challenged and may become irrelevant and bypass the traditional employee benefits broker.
- Carriers and customers will continue to bypass the broker channel if brokers are not deemed to add value and reduce long-term costs.
The New Business Model
It is abundantly clear that Washington is not going to solve out-of-control healthcare costs. The root cause of cost increases is tied to basic economics: out-of-control demand. So the ability to control and ultimately reduce healthcare costs is to reduce demand or, in healthcare terms, utilization.
Historically, employee benefits brokers focused their discussion with an employer around premium comparisons and cost-shifting. In the future, a broker will need to focus the conversation around the consumer.
Much has been written about the consumerism model, but I have found a particularly concise outline of this business model in 2009 Benefits Selling—Oliver Wyman Broker Strategy Study. You could call this future model the “Four Quadrant Theory,” with each quadrant taking a different approach to utilizing the major drivers in the employee benefits equation. The two main changes this theory postulates will happen are (1) a shift from a products/benefits to a health management focus and (2) a shift from the employer (wholesale) to the consumer (retail).
The four quadrants, as outlined by the Oliver Wyman Study, are:
Lower Left Quadrant
Today’s market approach—focusing on products/benefits and the employer. Key discussion points are around high-deductible plans, benefit buy-downs, negotiated provider discounts and administrative efficiency.
Upper Left Quadrant
Focusing on employer healthcare affordability. Key discussion points are performance transparencies, value networks, evidence-based medicine and wellness programs. Health management has entered the equation but is still focused around the employer.
Lower Right Quadrant
Focusing on the consumer (retail) and products. Products and services in this quadrant include ancillary products, discount cards, voluntary products and consumer decision tools.
Upper Right Quadrant
Focusing on health management for the consumer. Key discussion points: health risk assessments, home-based biometric monitoring, health service shopping markets and personal health records.
The upper right quadrant is the business model of the future. This transformation will not take place immediately, but it will happen. I have discussed this transformation with many insurance carriers, and they see it not as an “if” but as a “when” scenario.
The broker community, however, has not fully embraced this model. Many are giving lip service, but I have met only a small minority of employee benefits brokers who truly embrace it.
But new-school brokers, along with their employer clients, fully understand that the only way to control costs is to prevent illness instead of spending money on healthcare after illness begins. Wellness and disease-management programs are the fundamentals of this strategy. Employers who embrace it realize that reducing absenteeism and prevention are just as important as the health plan. To accomplish this, brokers need to be able to deliver to, or partner with, vendors who use data mining to inform employers about the health risks of their employees and how those risks can be minimized.
Critical Action Items
For employee benefits agencies and brokerages who make the transition to being a new-school broker, the road is not easy, nor is it fully mapped in your GPS system. But for those willing to take this road, I recommend the following critical action items:
New Business Model—The ability to survive and be successful in the future healthcare distribution system will require you to shift toward wellness and health management. This implies a far more consumer-centric model that you must accept, adopt and implement. Your role will change from a provider of benefit design and selection to consumer healthcare advocate.
Client and Prospect Segmentation—Understand your clients’ and prospects’ needs, purchasing habits and lifestyle attributes. Then define what messages will work to reach “profitable” clients and how to effectively deliver this message. Know where to spend your time and money.
Market Intelligence—Know and evaluate your competitors and understand their strengths and weaknesses.
Performance Counseling—Help employers identify solutions with meaningful, quantifiable results. Provide guidance and benchmarks (e.g., analytical services) to help employers gauge program success.
Change Agent—Become a change agent for clients and prospects and provide support and education.
Brand Differentiation—Escape the commodity trap, develop your value proposition and deliver your unique experience.
Consumerism Conduit—Increase consumer awareness and accountability about cost and quality of healthcare, and educate them about upfront and ongoing personal decisions regarding health.
Lifestyle Management—Educate clients and prospects about lifestyle reward programs and the need to provide employee incentives for healthy living.
Technology Advances—Make sure your business model embraces healthcare technology advances.
Organizational Structure—Evaluate your sales and service organization chart and realize that historical models will most likely not work in the future.
People and Skill Sets—Create a new model for your future employee that addresses skill sets necessary in your new operation.
Compensation Strategies—Revisit historical compensation strategies throughout your organization in light of your changing business model.
Prospecting Strategies—Re-evaluate your organization prospects. “Raving fans”—whether clients, centers of influence or personal networks—must drive activity.
Hit Ratios—Realize that revenue compression and increased operating costs will require your brokerage to have a much higher hit ratio than the average firm.
All employee benefits agencies must understand that the future is going to bring significant change to the distribution system. Forward-looking brokers need to provide those integrated services or align with firms that can offer what employers will want.
More employers will be adopting a consumerism approach in which they understand that a healthier workforce not only reduces costs but improves absenteeism, productivity and efficiency, which improves the bottom line.
The successful brokerages of the future will provide innovative, integrated health management services and products that ultimately address the root cause of rising healthcare costs: the unhealthy consumer. These new-school brokers will thrive and prosper at the expense of old-school brokers, who will disappear into the sunset. Are you up for the challenge?
Robert Lieblein is a contributing writer and managing partner of Hales & Co.
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