We are often asked by our customers how we priced for COBRA and Direct Billing administration services at our former company.  Many administrators are not satisfied with their current pricing models and are looking for a better strategy.  This post contains our analysis of current pricing methodologies and offers several innovative alternatives.

The two traditional pricing models employed by COBRA and Direct Bill administrators have been either ‘Per Employee per Month’ (PEPM) or ‘Per Occurrence’ (PO).  Both of these models have their advantages and disadvantages. 

PEPM
We loved this pricing model at our former company because:

1. Easy for us to communicate to the prospective client.
2. Easy for our HR contact to understand, budget, and explain to upper management.
3. Allowed us to make sound revenue forecasts and budgets.
4. Easy for us to increase our pricing year over year to existing clients.
5. Easy for our Accounts Receivable department to manage.
6. We invoiced our services for the upcoming month.
7. Could impose early termination penalties based upon projected annual revenues.

The problems with the PEPM pricing models are:

1. Subjects the administrator to ‘inventory shrinkage’ risk.  There is not an efficient and accurate way for an administrator to verify that the employer is not subtracting employees of the billing statement each month.
2. As qualifying events occur, the expense increases to the administrator while the billing population shrinks.
3. Adds additional billing reconciliation burdens on the AR staff when a carrier bill does come in with an invoice.
4. Does not sync up work performed with revenue from the client.  PEPM causes an inverse (revenue to work) relationship with the client.
5. Empowers the prospective client to price-shop for administrators who offer the lowest PEPM fee.  This commoditization of pricing distracts the sales process away from the true value an administrator can deliver.

Per Occurrence
About 15% of our overall revenue came from a PO pricing model.  We liked this pricing model because:

1. The amount of work performed for the client was directly linked to revenue.
2. We could easily and accurately calculate monthly billing invoices -- eliminates the ‘inventory shrinkage’ risk.
3. Allowed us to calculate a ‘per letter processing’ cost and then add sufficient margin to ensure each letter processed was a profitable activity.
4. Processing events are emotionally more fun since the administrator is making money.  PEPM events cost the administrator money.

The problems with PO pricing models are:

1. Is more difficult to communicate to a prospective client.
2. Is more difficult for HR to understand, budget, and communicate to upper management.
3. Penalizes the company for a surge in qualifying event activity which can become a powerful sales tool for administrators who sell a PEPM model and are competing for the same piece of business.
4. Is hard for the administrator to make revenue and budget forecasts.
5. Billing occurs in arrears which expose the administrator to performing services for which they may never be paid.  Also, the expense associated with AR aging is introduced.

With the massive changes to COBRA looming on the horizon, it may be time to explore new ways to price for COBRA and Direct Billing services. Consider:

1. An administrator’s ‘same store sales’ are exploding.  With the contraction in the labor markets, more events from existing clients will come to administrator for processing.  Good news for PO administrators, bad news for PEPM administrators.  Invert this for perspective from your clients.
2. COBRA continuation periods will increase for a large number of qualified beneficiaries.
3. More qualified beneficiaries will elect to continue benefits under COBRA.
4. New letters and reporting requirements will increase the per client transaction costs

Alternative #1 - Bill based upon enrolled COBRA participants
Given the pending increases to COBRA elections and continuation periods, this pricing model empowers the administrator to match the work performed with the revenue earned. 

Alternative #2 - Bill based upon premiums processed
It looks likely a new type of qualified beneficiary is coming.  Assistance Eligible Individuals (AEI) will elect and pay a highly subsidized premium each month.  Since administrators will no longer receive 100% of the applicable premium each month, they may be able to have clients to pay for COBRA services by sacrificing a flat number of basis points off premiums each month, for example the administrator retains 2% admin fee + 30 basis points for all monies collected.

Alternative #3 - Bill based upon a mix of PEPM and PO
By creating a hybrid pricing model that balances the advantages of both while minimizing the disadvantages may surface as an attractive alternative for employers and administrators.

In conclusion, regardless which pricing model is adopted, administrators must always strive to ‘document the value’ of their services.  I always said to my sales team we only lost sales for one of two reasons a) we don’t provide the service requested; or b) we failed to document our value to the prospect.  Also, the downward pricing pressures for administration services will continue.  This will force every administrator to be hyper-efficient to make every single client relationship as profitable as possible.