Opportunities Expand for HRO: Health Care Exchanges

Private health care exchanges are a hot topic, and the number of HRO service providers with such an offering is expanding. In addition to current providers including Aon Hewitt, Extend Health, and Xerox/ACS, Mercer announced a suite of health care exchange offerings last week.

It’s no surprise that health care exchanges are increasingly popular since the benefits extend to both employers and employees. While employers reduce liability and administration while accessing better plans or prices, employees obtain access to competitive pricing, employer subsidies, and assistance with selecting the plan best-suited for their needs.

Here is a brief synopsis of the existing health care exchanges in the market.

Retiree exchanges: These exchanges typically help retirees select a Medicare plan and/or supplemental insurance products based on their medical needs and budget. Service provider offerings typically include:

• Call center services to assist retirees in selecting a plan including assessing needs, evaluating options, and enrollment into a plan
• An online portal for shopping plans
• Written materials / communications such as booklets, letters (e.g., appointment, confirmation of coverage, and annual enrollment letters), appointment reminders, etc.

Retiree exchanges were the first type of exchange to appear in the market, and as a result, there are a few service providers with such offerings available. Extend Health has its ExtendRetiree exchange. Aon Hewitt added its retiree health care exchange in March 2010 when it acquired Senior Educators, Ltd. In 2011, the exchange was renamed “Aon Hewitt Navigators.” Xerox/ACS launched its retiree exchange, “My Medicare Advocate,” in October 2010.

Among the exchanges it announced last week, Mercer launched its Retiree Medical Exchange. Its exchange leverages any employer subsidies available for coverage by converting current and future retirees to a DC model where they purchase individual coverage most-suited for them.

Active employee exchanges: While the retiree exchanges are focused on individual coverage, the exchanges for active employees are focused on group plans.

Aon Hewitt’s offering, for example, provides employees with a credit to purchase health coverage that can be accessed through its private exchange. Once employees log-on to the exchange, they will select health care coverage from group options that are standard levels of coverage with varying levels of reimbursement.

The Mercer Benefits Choice Exchange (MBCE) allows employers with 100 – 1,000 employees to contribute a set amount to a HRA. Employees then use decision-support tools to select coverage and enroll online.

Mercer’s other offering, Mercer Health Advantage (MHA), allows self-funded employers with >3,000 employees to enroll employees in new medical plans beginning January 1, 2013 that will save the employer 5% or more. Employers will also get access to dedicated MHA clinical care management with ongoing oversight and audit capabilities.

Benefits administration is a major and mature HRO service line. Health care exchanges present a welcome new growth opportunity for HRO and more options for employers and active and retired employees. Expect more benefits service providers to add to the available service offerings.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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M&A Activity in Benefits Administration: Round 2

Following the benefits administration merger and acquisition (M&A) frenzy of 2010 that resulted in some major consolidations including Aon Hewitt, Towers Watson, Xerox/ACS and ExcellerateHRO, to name a few, are we poised to see round 2?

The second wave actually began in early 2011 and tends to consist of the more established providers, in their own right, acquiring Tier 2 health and welfare (H&W) administration companies in the U.S.  Examples include:

• Towers Watson acquiring Aliquant in January 2011
• Sedgwick, a leader in the leave of absence administration market with ~20% market share, acquiring the productivity solutions unit of Nationwide Better Health in May 2011
• Morneau Shepell, the leading total benefits outsourcing (TBO) provider in Canada, acquiring SBC Systems Company in January 2012.

As of last week, we can now add ADP to this list since it signed a definitive agreement to acquire SHPS Human Resource Solutions—a subsidiary of SHPS, Inc. ADP has actually been making key acquisitions to strengthen components within its benefits administration offering for the last 18 months. It started with Workscape, which added compensation management services, and was followed by Asparity Decision Solutions for decision support tools and analytic capabilities.

Now, the SHPS acquisition strengthens ADP’s leave administration and reimbursement account administration offerings. The HSA and HRA components will be especially important considering the rising cost of health-care and the transition toward high-deductible health plans paired with these health savings accounts.

The H&W acquisition trend is also expanding beyond the U.S. It started in September 2010, when Capita – a U.K.-based HRO vendor providing total retirement outsourcing (TRO) exclusively in the U.K. – acquired FirstAssist Services Holdings for £12.5m. Then it continued when Mercer acquired REPCA – a brokering and advising firm for health and benefits (H&B) plans – to strengthen its H&B administration offering and advisory services in France.

The remaining question on my mind is whether U.S.-based TRO providers such as ING, Great-West, T. Rowe Price, etc. plan to jump on the H&W acquisition bandwagon to provide a one-stop shop for benefits administration like Fidelity Investments.

I’m eager to see who will make the next M&A move in benefits administration.  In the meantime, it’s always fun to hear about cross-selling opportunities that resulted in contract scope expansions.  Stay tuned.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

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The Changing Shape of DB and DC Administration

Practically all large market organizations have already outsourced defined benefit (DB) and defined contribution (DC) administration. Therefore, DB and DC administration contract activity is more about competitive wins.  When reading these contract award announcements, the first question I ask myself is, why did the client change service providers?

Some clients have a preference in the type of vendor used due to the large-scale financial worth of these portfolios. Some client executives prefer the independence of a non-financial administrator like Aon Hewitt, ACS/Xerox, or Mercer, while others prefer the industry closeness of a financial-type provider like Fidelity, T. Rowe Price, or Vanguard.

Other reasons for changing vendors include client dissatisfaction with the existing service or wanting to obtain a lower price or perhaps both.  Another cause revolves around vendor consolidation for both total retirement outsourcing (TRO) and total benefits outsourcing (TBO), which also includes health and welfare (H&W) administration. Consolidation is driven by a desire to reduce the number of vendors to a select few. Mergers and acquisitions also add to consolidation as integration occurs.

Last year produced a string of TRO and TBO contract awards due to consolidation, including the following:

• HP in North America: Fidelity became the exclusive TRO provider for HP, which had ~162,000 participants from EDS being served by other providers
• Office Depot: Fidelity was awarded this new TBO contract from three different providers that had administered the 401(k), H&W, and stock plans.

With an estimated $11bn market at stake, both financial and non-financial administrators need to remain competitive in the TRO and even TBO space. As a result, benefits administrators are offering additional service features such as automatic enrollment and automatic contribution escalation for client-employers, and resources to educate participants so that they become more accountable for their retirement savings.

This strategy is reinforced by Aon Hewitt’s recent survey of 500 large market U.S. employers representing more than 12m employees. The survey found that just 4% of employers are very confident that their employees will retire with enough savings, down from 30% last year. Examples of services and solutions recently launched to create a competitive edge include:

• Aon Hewitt’s DC advisory offering: providing online personalized advice and professional management with Financial Engines serving as a sub-advisor
• ADP’s strategic advisory services group: helping clients maximize the value of in-depth benefits data and analysis
• Mercer’s RetireTALK: an interactive website with hypothetical scenarios, designed to motivate and educate users on retirement planning
• Fidelity’s myPlan tool: offering online retirement advice based on answers to a few questions.

The Aon Hewitt survey also found that only 10% of employers are very confident that their employees are taking accountability for their own retirement success.  The remaining issue then is how to encourage employees to utilize these services and solutions that are already available to them and which service provider will best help both the employer and employees achieve their goals.

Amy L. Gurchensky, Research Analyst, HRO, NelsonHall

 Interested in reading the latest HRO news from NelsonHall? Subscribe to our newsletter by emailing amy.gurchensky@nelson-hall.com with “HRO Insight” as the subject.