HighRoads, a Boston-based compliance and benefits management firm, conducted a survey months after approval of the Patient Protection and Affordable Care Act, finding that, in general, employers believed that outsourcing costs for health benefits administration will increase because of the law.
Analysts polled 62 companies that employ approximately 2.7 million workers, with the average respondent having just fewer than 50,000 employees.
The employers reflect a wide variety of industries, with 17% in manufacturing, 8% in health care and 6% in automotive and banking. The remaining labor sectors included aerospace and defense, retail, transportation, electronics, food and beverage, and leisure.
The survey found that 35% of organizations administer their health and welfare benefits internally, while 65% relied on outsourcing.
Of those employers that manage benefits administration internally, 30% report that PPACA regulations will make them more inclined to consider outsourcing, while 69% believe the law will have no affect on their desire to outsource.
Peter Hirano, principal at HighRoads, thought the number would be higher, reasoning, "If I am insourcing it today, then wouldn't it be easier to have someone else do it for me, along with the ongoing administration?"
"In today's world, employers have to be compliant to a host of regulations issued by two or more federal agencies. It's clear that with the health law this administration is going to step up the requirement around compliance," says John Thompson, director of employee benefits at FMC Corporation, a Pennsylvania-based chemical manufacturing company.
The company, which employs about 5,000 workers worldwide, with 2,400 in the United States, outsources its health and welfare benefits, 401(k) and pension administration to three different parties.
For Thompson, outsourcing, especially in the wake of health reform, comes down to whether a vendor truly has the people and technology solutions in place to offer the company a decent value proposition.
"As a business, we have to make a decision as to whether we want to increase our staff due to the additional compliance requirements under the health law or partner with third-party vendors."
Thompson explains. The PPACA provisions are pretty generic in that they apply to most employers in the same way. In addition, the compliance requirements coming down the pike are very suitable for outsourcing.
Therefore, Thompson and his team are not looking to add staff because of the law's requirements, but instead will focus on partnerships with third-party vendors that are well-versed in health insurance compliance under PPACA.
"Each employer is going to have different opportunities and challenges about outsourcing. The ultimate solution for any given company is going to be based on the complexity factor and the organization's need to control data," says Thompson.
Under the health law, over-the-counter medicines are no longer eligible for reimbursement under health flexible spending accounts without a prescription or if the drug is insulin.
Before PPACA, the outsourcing team that managed flexible spending accounts would substantiate the claim and ensure reimbursement pursuant to the rules.
This meant making sure the expense was for medical purposes. PPACA's provision on OTC medicines means the outsourcing vendor has to change its system to reflect that claims should be backed up by a doctor's prescription.
"Employers count on outsourcing vendors to make all of this work, but things have gotten much more complicated from an administrative perspective, because the age-26 dependent coverage means more individuals are on plan, and there is tougher compliance on reimbursement of OTC medicines," Jennifer Henrikson, an outsourcing consultant with Aon Hewitt.
Adds Christi Rager Wise, senior vice president of management and marketing at Fidelity Investments: "We are curious to see if we are going to see more interest in outsourcing through health reform because about half of larger employers still insource. There is a good mix of companies trying to navigate this landscape on their own. We recognize they are probably having some challenges because there are so many things to accomplish."
For the HR/benefits outsourcing community, PPACA is the gift that keeps on giving, considering that the law is rolled out over so many years, says Linda Merritt, research analyst of HRO at NelsonHall.
Merritt believes the law will spur a short-term uptick in HR outsourcing, but forecasting long-term growth in problematic due to the uncertainty of the law.
"The law is good for business, but we may see a delay of when that really starts to turn into bankable revenue," she adds. Still, employers realize that certain parts of the law are here to stay.
Some employers who have been on the fence about outsourcing may now head in that direction. It's a competitive market, so pricing pressure is there among vendors. Companies should feel comfortable that they are getting services at fair rate, Merritt adds.
Analyzing market consolidations
The HighRoads survey also wanted to test employers' reaction to the wave of consolidation in the benefits administration outsourcing market that has occurred within the last year - the Aon and Hewitt consolidation, and the Workscape and ADP acquisition, just to name two.
Nearly 60% of firms that outsource their benefits administration programs were unsure whether industry consolidation in the outsourcing space will affect their costs or their service over time, while 30% believe they will see higher prices when they plan to renew or rebid their benefits administration work, according to the survey.
According to a survey by Towers Watson, the volume of merger and acquisition activity among benefits outsourcing vendors was high in 2010. Nearly 44% of large employers, companies with 15,000 or more workers, surveyed use vendors affected by merger activity.
Employers that manage their programs internally acknowledged that certain factors would cause them to outsource benefits administration, such as the ability to react in a quick and cost-effective manner to change requests (27%), lowering the cost of service (24%), and access to better technology (14%).
"From our analysis, organizations that outsource their health and welfare administration, and have a contract with associated pricing that was agreed to three-to-five years ago, may have an immediate opportunity to extend or renegotiate their contract at lower rates," Hirano says.
"This can effectively lock in a lower price now in exchange for a longer contract. However, if an organization has recently renegotiated with their vendor or made a transition to a new vendor, they should anticipate that costs may go up with renewal," he adds.
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