Eric Foster, CEBS
Many of you have commented on past Compass Consulting articles on risk management for health plans, and that topic is always germane to successful performance of master policies. With that said, let’s take some time to expand the discussion to managing healthcare in volatile markets, alternative funding arrangements, and narrow provider networks.
There are several large-scale dynamics impacting the health-plan environment for PEOs. Those include:
- Merger-and-acquisition (M&A) activity among PEOs offering health plans
- Emergence of regional Blues plans in the space
- Level-funding in the small-group market
- Association Health Plans (AHPs)
- Changes to the ACA for 2019
M&A activity has built scale for a collection of PEOs, and acquisition interest in the market remains high. In addition, the buyer types have expanded to include private-equity players who like the financial profiles of PEOs but are largely unfamiliar with the unique dynamics of selling and managing PEOs. That phenomenon has significantly elevated top-line growth objectives for the PEOs involved, and for PEOs with health sales in their value proposition, that means increasing aggressiveness in health rates and the pursuit of new distribution channels to meet higher goals. Any PEO involved in competing with those PEOs appreciates how the sales dynamic changes. PEOs with health-enrollment scale can often afford to be quite aggressive on the health-plan design and pricing in order to close a deal knowing that they have ample premium to absorb near-term losses if they develop. That tactic requires other PEOs to be supremely selective in the opportunities they pursue and leverage all aspects of the deal cost to provide the best bottom line. Value selling, while more challenging than price selling, is often required for smaller PEOs to close sales in today’s environment. The could mean laser focusing on a specific geography and industry vertical to customize services and price points as well as partnering with distribution channels that are already connected to a target market. In our consulting experience, PEOs are still able to fine pools of blue ocean in a sea with increasing traffic. Selling into an existing payroll base also provides unique opportunities for PEOs that have established a value-added relationship and can cross-sell into master-policy benefits as an additional hook and revenue producer. Ongoing performance monitoring is paramount when competing in a healthcare-pricing environment where underwriting margins are extremely thin. So, access to weekly and utilization and claims data in a compliant manner, with an eye toward ensuring appropriate handling of protected health information (PHI) under HIPAA, is a key success factor after closing sales.
In addition to M&A activity changing the sales environment, Blue Cross & Blue Shield plans are showing increased interest across the county in offering master health policies to PEOs, including big players like Anthem, Health Care Service Corporation (HCSC), and state-based blues in MI, AL, and the Carolinas. Those players are challenging existing national players like Aetna and United with different pricing contracts and delivery systems. That could, in certain markets, change the cost basis of PEO master plans and allow for increased competition in markets traditionally supported by national carriers only. Blues plans should, therefore, be considered in a PEO’s plans to expand into new geographies.
Both M&A activity driving down price points and Blues plans driving down cost bases impact PEO competitiveness at point of sale. In addition, carriers are increasingly turning to level-funded products in the small-group market to step outside the ACA-directed community-rating requirements. Level-funded products combine a self-funded base plan with individual and aggregate stop loss, require funding at the maximum risk corridor up the aggregate-stop-loss point, and then offer clients a share of surplus if they outperform. By level funding, traditional small-group carriers are beginning to apply health underwriting to prospects of all sizes, including the use of personal health questionnaires and pharmacy-based risk scoring during initial review, are denying high-risk prospects, and offering flexibility in price points beyond the range prescribed by the ACA. To the degree the small-group market is introducing those risk controls and pricing parameters, they can be extremely selective and competitive in their small-group offerings, facilitating increased broker competition to PEOs. Further, PEOs that do not employ similar risk controls could begin being selected against by prospects seeking a lower cost basis than level-funding would supply to them. That increases the possibility of PEOs underpricing those prospects as the look to move back into a guaranteed-cost haven, further requiring PEOs to closely monitor their monthly performance data while not having direct access to PHI.
To review, we have new investors, new carriers, and new small-group products impacting the point-of-sale dynamics of PEOs offering master health plans. Further, it has become well known that the Department of Labor recently defined Association Health Plans (AHPs) to allow even sole proprietors to be classified as employers and has eased the basis for forming associations to require commonality of geography or industry but not both. Nor are they requiring the same level of services and oversight to be provided by the association in order to qualify for offering a large-group health plan as a single employer. We will not go into legal definitions and implications here, but associations offering large-group health plans can be established more easily than before and they could, in theory, offer more competition to PEO large-group plans. However, there is a key difference that demands note, which is that such AHPs cannot use health status as a basis of pricing and, therefore, are subject to pricing rules similar to the ACA small-group pricing environment. That should allow PEOs will appropriate risk-management protocols to outperform AHPs for comparable employers. So, although there may be renewed interested among employers to form AHPs, carriers have yet to show expanded interest in developing them. The prior bona-fide association definition has continued even after the AHP rules were established, and associations meeting those more strenuous tests have been giving the ability to use health status in their employer-based pricing. So, although the bona fide requirements prevent newly formed associations from qualifying as bona fide, those that have existed at least five years and meet the other requirements could pose a more competitive threat to PEO single-employer plans than in the past. PEOs that are being asked about AHPs could take the opportunity to explain the important pricing differences between those plans and PEO plans and suggest that partnering to access services and benefits through the PEO would be a better long-term alternative for the association members.
The final point to mention in managing healthcare in a volatile market is underlying changes to the ACA. Although the employer-shared-responsibility requirements for Applicable Large Employers still remain in effect for 2019, the individual mandate does not. As such, it is possible that underlying employee participation in a PEO’s health plan could drop, thus reducing the premium remitted by certain classes of employers and increasing their risk profile relative to their remaining premium. That further underscores the importance of compliant monitoring of ongoing performance data.
All other things being equal, the PEO sale that includes benefits will be viewed on a pure cost basis by prospects. The dynamics of the volatile marketplace just reviewed suggest that downward pricing pressure will be a consistent theme, and PEOs without ample scale will need to be aggressive and highly selective in the new clients they pursue. With that said, there are levers that could be pulled with respect to the health-plan offering, besides changes to plan design and insurance carrier, that could lower the underlying cost basis of the plan. Those levers include alternative funding. For purposes of this article, we will address the alternative of minimum-premium insurance.
Minimum-premium insurance is a change to the funding basis of the insurance plan without changing the underlying insurance status. Minimum-premium plans (MPPs) are filed by the same insurers offering traditional guaranteed-cost insurance although not all guaranteed-cost carriers will offer minimum-premium plans to PEOs sponsoring health plans. MPPs meet insurance-offering requirements in states where there are regulatory limits to self-insuring for PEOs while providing an element of risk sharing for the policyholders.
Claims are funded by cash held by the PEO on behalf of the employers and plan participants and then paid out as needed. Further, in some variations, the claims may be pre-funded by an estimate provided by the carrier and reconciled in arrears to reflect what was actually needed. There is pooling of individual claimants and a maximum funding cap that includes a risk-sharing corridor that is likely 20-25% of the carrier’s claims projection for the policy year. In return for the PEO taking performance risk, the carrier offers an administrative fee that is lower than what they would assess on a guaranteed-cost policy because their they do not need to include a risk load for performance volatility, and in a well-managed PEO master policy, the risk load ends up turning into additional profit for the insurer.
Knowing that a competitive overall deal price in the PEO’s offering is critical to a successful sale, which in our example includes the PEO’s health benefits, then the offered health premium will need to be competitive to not upset the entire deal. If multiple PEOs are offering similar health premiums with similar carriers, then the minimum-premium deal will entail a lower cost basis for the PEO and will enable the PEO with that plan to offer a lower price without jeopardizing performance. In short, the PEO with the minimum-premium plan will be able to offer a lower premium at the same performance target as the PEO with the guaranteed-cost plan and be in a better position to close the deal.
The price of having a minimum-premium plan, though, is increased oversight. Not only is it incumbent on the PEO to have the best new-business underwriting processes in place, but it is also important to have compliant access to ongoing performance data (which would typically entail an outside party that protects the PEO from receiving PHI). Small businesses typically hire and lose employees at a greater percentage of their annual workforce than larger employers, and even employers that have been on a PEO’s health plan for years can have significant changes in the actual individuals that are covered under the plan. New hires into existing groups typically carry higher healthcare utilization as a cohort, and those need to be evaluated continuously to ensure the PEO plan is adequately funded. Also, because the PEO holds cash that may not be needed in the near term and may be held as reserves, it is essential that the PEO pursue a compliant trust structure for the funds and not comingle them with other assets.
Smaller PEOs and new entrants may find it difficult to entice carriers to offer guaranteed-cost insurance plans to them because of the risk the carriers will bear, especially when the plans are young and enrollment is relatively low. The minimum-premium-funding alternative opens up more opportunities for PEOs to have conversations with traditional carriers, and the carriers’ main concerns shift to the PEO’s financial status and their risk-management partners and controls. So, the key benefits of minimum-premium plans for PEOs include the ability to secure more carriers in more markets while remaining compliant with state insurance requirements, the ability to provide a lower cost basis than under guaranteed-cost plans (which increases competitiveness for new sales), and the ability to hold surplus cash in reserve. However, that comes with the PEO transitioning into a risk-management role and, because that role necessarily entails unique risk-management models and the use of PHI, it is highly recommended that PEOs pursue expert advice and guidance when approaching such plans.
Narrow Provider Networks
Of final note is a mention of narrow or limited-provider networks and their impact to the cost basis of insurance plans. Such networks limit the in-network classification of providers to a smaller group of individuals than their traditional managed-care networks. In doing so, they hope to drive utilization into their most cost-effective providers.
As covered in the February 2018 article by HealthAffairs “Are Limited Networks What We Hope and Think They Are?” the organization Catalyst for Payment Reform reached out to a dozen health plans offering narrow networks and found that there was no consistent formula applied for designing such networks in terms of price level or quality assessment. The insurers primarily considered which hospitals and physicians would accept a certain price level for care and quality was a secondary consideration. There is the potential for the experience of the members to not be at the quality level PEOs hoped for if the networks were selected primarily based upon cost.
Narrow networks require a preponderance of provider access and, as such, are typically limited to larger geographical areas and may come in the form of an Accountable Care Organization (ACO), which is designed to integrate data and manage conditions within the limited provider base in order to produce better care outcomes. Given their metropolitan focus, they are not available in the majority of health insurance markets. Further, they complicate the insurance sale because- on the surface- two similar plan designs presented to a prospect could have widely different cost profiles based upon the underlying requirement of a limited provider network, and that underlying requirement might not be clearly disclosed and understood by those buying the coverage. That could create an unintended problem for the PEO that is fielding calls from a client and employees that assumed they bought something different than what they have.
From a competitive standpoint, it’s vital that PEOs offering master policies gather information at point of sale on a prospect’s current coverage and that the PEO understand if the current coverage utilizes a limited-provider network. That can often be determined by the plan name used by the incumbent carrier for their offered plan design, although it would have to be researched to be evident. A PEO offering a full network will need to sell primarily on value when competing against such plans because simply meeting the price point of a limited-provider network would likely lead to poor performance. The prospect might be going to market because of employee dissatisfaction around their provider access but that might not be disclosed up front. PEOs should research and confirm if that is the case.
Health-insurance markets are ever changing for PEOs, and volatility is a measure of risk as well as opportunity. Changes in the competitive landscape, funding arrangements, and provider networks could help or hurt PEOs at point of sale, and PEOs asking additional questions during the sales process will be rewarded. Combining a better view of the sales landscape with best-of-breed performance monitoring will help PEOs capitalize on sales opportunities and add long-term value.
T. Eric Foster, CEBS, is EVP and Chief Consulting Officer at Compass Consulting Group based in Jacksonville, FL