Will employers all dump to State Health Benefit Exchanges?

We recently hosted our 2012 Market Advisory Council meeting in Omaha, bringing together a group of our fastest growing highly innovative customers to discuss the future of our market and product/service strategy.  Since many of our customers derive much of their annual revenue from providing COBRA and other employee health benefits administration services, it will probably come as no surprise that the future of employer sponsored health insurance is a hot topic in their board rooms.

I will start with an admission.  When the ACA was first passed in March 2010 we, like many, started with the assumption that virtually all small employers and many large employers too would dump to their State Exchange beginning in 2014 and discontinue offering employer sponsored health insurance.  The face value math seems simple.  The ACA employer penalties for failing to provide employer sponsored health insurance only apply to larger employers, and even then the penalties are far less than the cost of the employer contribution of virtually all employer sponsored health plans.  If we assume that the benefits which will be available through the plans offered in each state’s Exchange will be the same as those that are enjoyed by Members of Congress and that the premiums will be low given the large number of participants in the risk pool this seems to be a win-win for employers and their employees alike.  Many of our customers may recall conversations with us in 2010 and early 2011 where we urged a concentrated strategy for each of them to move “up market” fearing that smaller employers would be dumping to their State Exchange in 2014 and therefore no longer requiring COBRA compliance services.

At some point in 2011 my opinion started to change as a result of countless conversations with state officials preparing to stand up their own Exchanges and many throughout the health insurance industry.  I also may have read an online article/blog or two.  While many contributed to this change of opinion, the one which stands out most directly in my memory is an analysis written by Linda Blumberg, Matthew Buettgens, Judy Feder, and John Holahan of the Urban Institute in October 2011 titled, “Why Employers Will Continue to Provide Health Insurance:  The Impact of the Affordable Care Act.” I would like to urge everyone to read their complete analysis, but I will attempt to grossly simplify it here to the level which is easiest for me to comprehend.  Any inaccuracies in my paraphrasing are mine.

First, as employers, we offer employer sponsored health insurance today in order to attract and retain our employees.  There is no Act of Congress requiring that we do so.  Rather, the competitive labor market requires that we do so in order to successfully compete.

Second, it is likely that the plans offered through State Exchanges will not be high benefit low premium plans.  While their actuarial values and essential benefits may be mandated, the general expectation is that premiums will be high given the fact that the group pool will be dominated by those who are currently partially or completely uninsured and those who benefit most from the Advance Premium Tax Credits available to households with modified adjusted gross income below 400% of the Federal Poverty Level.

Third, the premiums individuals will pay in their State Exchange will be paid with after tax dollars.  This is significant and will not be lost on those higher earning employees who understand the benefits of pre-tax health insurance (those employees employers most want to attract and retain).

Given the above, employers who dump their group health insurance and send their employees to their State Exchange for coverage will be severely penalizing their higher earning employees.

Many have argued that employers will simply “gross up” their employees’ income to include the current amount of the employer’s contribution towards their employees’ group health insurance.  This will net/net the math for the employer and employee, right?

Wrong.  If the employer simply increases an employee’s income to include the amount the employer was previously contributing to the employee’s health insurance premiums, this taxable increase will cost the employer more than a pre-tax contribution to health insurance premiums.  Furthermore, the employee will be buying their health insurance in the Exchange with after tax dollars instead of pre-tax dollars under an employer sponsored group health plan.  Informed employees will demand that their employer increase their income not just by the amount of the employer contribution to premiums but also by an amount to cover the tax difference.  To remain competitive the employer will now be paying their regular employer contribution PLUS the tax offset, and the employer will be doing this with their own after tax dollars.  Then, the employer will pay their ACA penalty too.

The basic market dynamics of a competitive labor market for the most valuable employees will demand that employers either offer employer sponsored group health insurance or pay an even higher amount at the end of the day to compete successfully against other employers who do.  If 100% of employers were to dump to the Exchange then Exchange dumping could become a reality, but in a competitive labor market they will not.  Even if we see some employers dumping their employer sponsored health insurance in 2014, it won’t take long for them to either begin to lose their most valued employees or once again begin offering employer sponsored health insurance.

$112,000,000.

A group of enterprising business executives have received over $112,000,000 in start-up loans from HHS to build a State Health Insurance Cooperative serving Iowa and Nebraska.  That’s right, $112,000,000!  Six more Co-Ops have also been funded across the country.  Still more Co-Ops are in the proposal submission phase.

Additionally, states are asking for proposals for COBRA compliance administration within their SHOP HIX Exchanges.

Both Health Co-Ops and SHOP Exchanges will sell and service employer sponsored insurance plans and thus imposes COBRA compliance obligations on those employers with 20 or more employees.

There is no question COBRA will be around regardless of how the Supreme Court rules this June and your company’s focus should be on developing both the operational and go-to-market plan to capitalize on these exciting and substantial new market opportunities.

However, you should probably take a deep (and honest) look at your system and ask if it is capable of serving these new markets.  Here are some base-line questions to begin the process:

1.       Is your system a true enterprise-class SaaS platform?

ü  This is a real requirement needed to link all the various systems together needed to operate Co-Ops and SHOPs.  Old client server software systems are not appropriate to these new business models.

2.       Is your system provider currently encrypting all data whether at-rest or in-motion?

ü  Data security assurances and safeguards are a requirement within Co-Op and SHOP requests for proposals. 

3.       Is your system provider currently compliant with all federal and state data security standards?

ü  See #2

4.       Is your system provider currently compliant with various financial and banking security standards?

ü  See #2

5.       Is your system provider currently compliant with HIPAA?

ü  See #2

6.       Is your system provider currently capable of demonstrating documented financial and technical controls under a SSAE 16?

ü  The entire stack of services and vendors with whom you work with must demonstrate documented and tested controls to provide the Co-Op or SHOP their financial operations will not be adversely impacted by your organization.

Do you see a theme emerging?  It’s all about data security.  These new markets will require COBRA and Direct Bill administrators to operate at the very highest levels of data security and all your core system providers must be able to support your efforts.  Service offerings that meet these requirements will be poised for the greatest gains as these new opportunities emerge.

Benaissance's own Chief Strategy Officer Mark Waterstraat will be testifying before the Nebraska State Legislature this afternoon.  His appearance and testimony are in support of LB835 and LB838, both titled the "Adopt the Nebraska Health Benefit Exchange Act."  Mark has been tapped to provide critical insight, strategy, and industry expertise into the emerging world of state health exchanges. 

The year is almost over.  It is time to reflect on the past 12 months, look forward to the next year, and celebrate the hard working team at our respective companies.  In our 2010 end of year meeting, I predicted 2011 would be HEAVEN for Benaissance.  Was this year a good year for your company?  Was it a good year for Benaissance?  This blog posting is our answer.

I can say we surpassed both our revenue and EBITDA goals, strengthened our balance sheet, and made the good ole Statement of Cash Flow smile.  We landed some impressive customers, saw extraordinary organic growth in our existing customer base, and matured our systems and processes.  We grew our team, introduced some great enhancements, and worked to get closer to each of our customers.  We did, however, fail to land several customers we thought were locks.  We made some mistakes, but took time to learn from them and improve.  All in all, a good year.

Each year, I write down my goals and projects for the upcoming year.  I will share with you my 2012 Goals and Projects because I believe “What gets measured gets done”.  I also believe I am more accountable to my goals if a lot of people know what they are.  For Benaissance, 2012 will be a year of investment and transformation (not as adroit as “2011 will be HEAVEN”).

1.       Live life purposely
2.       Benaissance is a team project…not a workplace.
3.       Make sure the team participates in both the success and wealth of the company
4.       Help our customers grow and navigate health care transformation
5.       Do the right thing, make the right decision, believe in the future
6.       Focus on business intelligence to make better decisions
7.       Be aggressive because we believe in our business
8.       Be resilient at all times and under all conditions
9.       Protect data
10.   Be innovative
11.   Make sure each team member has both the authority and responsibility to do their jobs

My number 1 job for 2012 will be to institutionalize these eleven goals into our culture and encourage each team member to embrace, define, and personalize these goals.  If I am successful, Benaissance will have a tremendous year. I will be meeting with the team to review 2011 performance in great detail and share my vision for 2012.  I encourage you to do the same.

Courtesy of the EBIA Weekly:

The President has signed the Trade Adjustment Assistance Extension Act of 2011, which generally reauthorizes the Trade Adjustment Assistance (TAA) program through December 31, 2013. Among other things, the legislation increases the health coverage tax credit (HCTC) to 72.5% of the health insurance premiums of certain eligible individuals and their qualifying family members for eligible coverage months beginning after February 12, 2011. The HCTC is generally available to eligible individuals under the TAA and Alternative Trade Adjustment Assistance (ATAA) programs (which assist individuals who have become unemployed as a result of increased imports from, or shifts in production to, foreign countries), and to retirees receiving PBGC pension benefits, who have lost their employer-sponsored health coverage.

EBIA Comment: The HCTC applies in limited circumstances and should not be confused with the 65% COBRA premium subsidy under the American Recovery and Reinvestment Act (ARRA), which is generally not available after August 2011 (see our article) and was not extended by this legislation. The HCTC premium credit has been increased to 72.5% from the 65% credit that has been in effect since the expiration (in February 2011) of the 80% credit put in place under ARRA (see our article). For more information, see EBIA’s COBRA manual at Section XXXIV (“Special Issues: The Health Coverage Tax Credit (HCTC) and the Special Second COBRA Election Period”); see also EBIA’s Cafeteria Plans manual at Section XVII.F (“Cafeteria Plans and the Health Coverage Tax Credit (HCTC)”).

 Available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr2832enr/pdf/BILLS-112hr2832enr.pdf

At Benaissance, we take documentation very seriously.  We believe in running a mature, process driven business where we can expect predictable results each and every time.  Our experience has proven these strategies translate directly into profits and efficiency.  “If it isn’t written down, it never happened” has become a motto to live by.

To get a perspective on the just some of the various documents we maintain:

1.            Accounting Procedures & Policies

2.            COBRApoint, SPMpoint and HBEpoint User Manuals

3.            Customer Support Policies and Procedures

4.            Data Security Manual

5.            Disaster Recovery / Business Continuity / Disaster Mitigation Manual

6.            Employee Handbook

7.            Employee Training & Management Policies and Procedures

8.            HIPAA Security Manual

9.            HIPAA Self-Assessment Risk Analysis Manual

10.          Human Resources Policies and Procedures

11.          IT Policies and Procedures

12.          New Customer / Deconversion Procedure Manual

13.          PaymentServices Customer Manual

14.          PaymentServices Internal Policies & Procedures

15.          Safety Policies and Procedures

16.          SSAE 16 Master Controls Document

17.          IT Incident Response Manuals

Each manual is owned by a department and assigned to a manager within that department.  Every time we make a policy or procedure change; it is immediately documented and distributed to key stakeholders.  Each document is versioned and obsolete manuals are archived for future reference.

Having well documented policies and procedures empower the company to better align resources, detect deficient procedures and hold staff members accountable to the standards set by the company. 

If your documentation is lacking, I strongly encourage you to make this a 2011-2012 priority.  I know it is never fun to program in Word, but it is worth the effort. 

TripleTree Research just posted an interesting blog on the state of public health insurance exchanges.  This mandate as prescribed by the Affordable Care Act promises to be an important topic in the future of benefit administration.  The link is below to check out the article.

http://blog.triple-tree.com/2011/09/09/the-clock-is-ticking-for-public-health-insurance-exchanges/

This is one of those questions investors and board members love to ask.  Having an answer will help your business. 

Be careful, however, in how you answer.  If you answer with a lot of strategies, this will show the investor or board member that your company is lacking focus.  No business has the resources to pursue more than two or three new projects at once.  If you do not have a strategy, then the investor or board member may conclude you’ve lost your entrepreneurial drive.  They may conclude that the competition is ready to blow past you like a teenager texting on the interstate.

The COBRA and non-COBRA administration service sector is experiencing an unprecedented period of transformational change.  It’s the Serengeti Plains out there and ‘change’ always kills the slow companies and fattens the progressive and aggressive companies. Are you thinking about that "next step" in your business?

McKinsey estimates as many as 35% of Americans could receive health insurance coverage through a state or federal Health Benefit Exchange as defined under PPACA.  The good news is this is not 100% (excluding Medicare  and Medicaid) of Americans.  This begs the question, where are the remaining 65% going to receive their health insurance coverage?  If you guessed, Employer Sponsored Group Insurance, you’d be correct.  It is our expectation that COBRA will remain an employer law and responsibility for Employer Sponsored Group Health Insurance plans.

We believe administrators who aggressively move ‘up market’ into the national or larger employer market (500+ employees) will be well positioned to maintain a viable and profitable continuation benefits administration business.  Those administrators who continue to only serve the small to medium sized employer are at the greatest risk to experience erosion in their revenue base due to a shift by small employers and consumers to individual health insurance plans through Health Benefit Exchanges.  Many studies are predicting that the majority of sub-100 life employers will dump to or move into their state exchange in 2014 or 2015.  If you run a COBRA administration business dominated by sub-100 life groups, it could be gone by the end of 2015 if you don’t take action now.

Also, those continuation benefits administration firms who pursue classic direct billing opportunities for pre- and post-65 retiree services are well positioned to weather health care reform.  It is not likely those employers who have benefit packages inside a collectively bargained agreement will be able to terminate their obligations simply due to PPACA.  Direct billing needs for employers with collectively bargained agreements will be present long after the last health care reform legislation has been implemented.  We probably don’t have to point out that you only find employer sponsored retiree health insurance plans among larger employers.

If you are an administrator whose revenue base is primarily derived from the small and medium sized employer market, redesigning your operations to pursue large employer business is a project you must undertake today.  Larger employers are represented by larger consulting and broker firms.  All are very experienced ‘buyers’ of COBRA and Direct Bill administration services.  To prepare, ask yourself these questions:

1. Is your entire operation SAS 70 Type II (SSAE 16) reviewed?
2. Do you have audited financials and a strong balance sheet?
3. Are your operations and those of your key partners fully HIPAA and HITECH compliant?
4. Do you have well documented, tested and reliable disaster mitigation, business continuity and disaster recovery plans?
5. Do you have the appropriate insurance coverage levels in place for professional liability, employee dishonesty, property and casualty and third party liability?
6. Are you represented by experienced professionals for tax, audit, legal and human resources?
7. Do you have a highly scalable operation that experiences a lower cost per transaction as volumes increase?
8. Do you have full web-based solutions for all key stakeholders in the benefits ecosystem?
9. Does your technology platform support both COBRA administration and individual direct bill (i..e retiree health insurance billing) administration in one integrated platform?
10. Does your technology platform cleanly and clearly track custodial cash with posted and adjusted remittances/disbursements so that your clients can always see “where their money is?”
11. Are your internal business intelligence systems in place to really know what your costs are and how to profitably price a large employer?
12. Is your company capable of complying with complex Service Level Agreements?
13. Do you have the right talent on staff to grow the business 10X?
14. Does your current call center and technology meet large employer expectations?
15. Are all your marketing materials, including your website updated to present a polished and professional image of a mature administration company?

When we ask our customers this question, we usually get a response like, “we provide COBRA compliance administration services for employers and their members.”  While this is a true statement, it is more of a description of a service provided, not the definition of their core competency. 

We actively engage customers in helping them rethink conventional thought and encourage them to look at their businesses from a different perspective.  In doing so, our customers usually see new opportunities, but I’ll get into that later.

Our customers run highly efficient, profitable, and scalable individual subscriber billing businesses.  This is the definition of their core competency for the business they run.  Currently, their operations and service teams are configured to administer a well-defined federal regulation called COBRA.  Stated differently, their individual subscriber billing businesses are configured to follow a discrete set of business rules dictated by federal regulations.  Changing these business rules does not greatly alter their core competency.  If we change the business rules slightly to perform pre- and post-65 retiree billing, state continuation, or health benefit exchange administration, the core competency of the business does not change.

A case study from one of our customers reveals the distinction between service provided and definition of their core competency.  Shortly after realizing their specialization in individual subscriber billing, this customer was able to sell a much broader range of innovative individual subscriber billing solutions.  They expanded their offerings to include car loan payments for a large auto dealership, church tithing to a local church, and association dues billing for a Community Association Board.  These three deals added more enrolled lives than their entire COBRA population.  The added new revenues were immediately accretive to the business and drove profitability to record levels.

Customers who realize they are individual subscriber billing specialists, powered by SPMpoint and HBEpoint, are able to diversify their current revenue streams, strengthen their relationships, and position themselves to take advantage of the evolving health care industry. 

One final thought.  Changing the mind-set of your company begins with you.  Only when you completely embrace the definition of your core competency as the description of our business, will your staff follow and your distribution channel will embrace your core competency.  Just in case you need another proof point before you’re convinced, take a look at Apple.  Apple was a maker of personal PCs.  They recognized their core competency was more than this alone and now they're in almost every home, with a market capitalization $100B more than Microsoft.