"It's the cost, stupid"

By Barbara Gniewek, PwC

“It’s the cost, stupid” was an article published in a prominent medical journal almost a decade ago, which identified the cost of care being delivered as the main culprit of runaway health care costs.  Simple, right?  But in a time when everyone was pointing fingers at the uninsured, insurance companies, drug companies and others, the reason health care was costing so much was the price of services. 

Now, fast forward to a new way of delivering employer sponsored benefits -  Private Exchanges - and not much has changed. While recently conducting evaluations for a few clients I kept hearing that catchy phase – “It’s the cost, stupid”. Our work with these clients included evaluating proposals from various exchanges – which can be very challenging as every exchange uses their own assumptions, even when a fixed set is provided.   As part of our evaluations, we keep driving to understand the cost.

The key to pulling the trigger on an exchange is understanding the reasonableness of the projected savings, the services the exchange is (or isn’t) providing, and the cost, which is an amalgamation of several different fees:  technology fees, administration / outsourcing fees (not always), vendor fees (including ASO fees or insurance costs) and commission / consulting fees (if using a consulting / broker exchange, which most employers are at this point).  In addition, several exchanges may also collect fees from carriers to offset the cost to employers via overrides.  While employers see the value proposition of an exchange typically hinging on the promise of savings, the real story on cost suddenly caught my attention.  Why? Because the economies of scale one would expect on an exchange, like decreased consulting and streamlined plan administration, do not automatically seem to port (transfer), especially as you go up-market (larger employers). 

This became very obvious when evaluating proposals on behalf of a very large employer.  Since, we’ve helped several employers evaluate exchange offerings we have become familiar with the cost of the technology as well as the cost of the benefits administration.  We have even worked with other consultants/brokers and know the cost of their services. So, when we saw the exchange fees broken out on a PEPM basis in these proposals, we were surprised to see that the consulting fees were significantly higher under a private exchange (for the consultant model) than they were for off-exchange strategy, financial and communications consulting services.  We’re not talking a 20% increase, but more than double, or triple the existing spend in this instance.   

Incredulous, we dug in. We asked, why does it cost more?  Most clients and I expected that the amount of work is actually less on the exchange because so much is built into the platform and therefore should show some group purchasing savings.  However, the answer we heard was “we still have to do a lot.” “A lot” included securing proposals (albeit through an expedited process), pricing by region (model already built and part of the exchange offering), and providing change management and communication efforts (already built into the PIX platform).  On an on-going basis it means vendor and renewal management.

Well, while I understand that implementing an exchange can result in additional costs to set up contributions and rates regionally, it’s harder to understand why an employer would pay more when so much should be built in.  This cost becomes an even bigger issue in subsequent years, when the communication / change management and pricing/contributions should be less intense efforts.

The good news is by drawing attention to it we have been able to facilitate significant reductions in fees, for many clients.  The bad news could be for those early adopters that chose to go with their incumbent: you might be paying too much.  So, when looking at exchanges and the promise of savings they offer, it is very important to understand how this is determined and what assumptions are being used.  Exchange vendors are more than willing to provide information about any expected savings, but may not be forthcoming about their sources of revenue.  If you already signed up, be sure to check your costs as you renew your exchange contract.   Remember, it’s the cost, and I encourage you to really dig into what an exchange is charging and what services you are getting.  Depending on your size, the difference could be very significant.