Aggregation Models for Health Care Systems
Are any of the non-medical employee benefit aggregation models marketed to Health Care Systems effective?
Many Health Care Systems have aggregation as a central tenant in their purchasing strategy. For example, when they are purchasing patient bedside products for all of their locations and entities under one master purchase order, they are able to leverage the aggregate volume in the negotiation of a lower per unit cost.
Picking up on the prominence of the aggregation strategy within the Procurement departments of Health Care Systems, a multitude of brokers have introduced their own “aggregated” non-medical employee benefit strategies. They position their “aggregated” program with Procurement in order to gain an introduction into Human Resources.
There are basically three aggregation models being marketed, currently, to Health Care Systems:
- Some brokers such as MedAssets and Sagewell Partners (now an Alliant company) are promoting the advantages of aggregation. Their version of aggregation involves utilizing either a single or a small number of preselected carriers – generally not in the top tier. While the pitch they make to the Health Care System is that they are able to negotiate better rates due to the size of their block of Health Care Systems, there is a high likelihood that each “participating” Health Care System is still actually being underwritten on their own based upon the group’s demographics, plan design, location, and experience – not unlike when a Health Care System goes to market on their own. There may or may not be an initial lowering of the expense structure by the carrier in order to acquire the business; however, at renewal, the lower expense structure will likely no longer be applied. In addition, service levels may drop by moving to a lower tier carrier.
- Other brokers have pursued an aggregation model which is targeted at extremely large Health Care Systems. The pitch to theses jumbo Health Care systems (e.g., Catholic Health Initiatives (CHI), Mercy Health (formerly Catholic Health Partners - CHP), Child Health Corporation of America (CHCA)) is that each member of the Health Care System will benefit by purchasing their non-medical employee benefits through the parent organization. In doing so, the carrier quotes based on the demographics, plan designs, locations, and experience of the collective members under the parent organization. For the smaller members, this aggregation model may give them access to enhanced plan designs, services, and rates. For the larger members, they may be supporting the collective underwriting of the smaller members. The real advantage, however, that is pitched to the parent organization is that brokerage revenues are shared with the parent; and, then, in some instances, the parent distributes a dividend to the participating members. The unfortunate aspect of this revenue sharing is that the broker’s revenue is likely in excess of prevailing market levels and, as such, higher than would normally be charged to the expense structure; so, the question becomes - are plan participants funding employer expenses?
- Premier is a group purchasing organization, which is comprised of member Health Care Systems and Providers, Their primary focus is on negotiating aggregated contracts for products and services used by the members in which they have leveraged the purchasing volume of all members. Remember the patient bedside product example above? Then, after being able to demonstrate quantifiable savings in the product and service categories in which they have fixed contracts with suppliers, they leverage their success to get an introduction into Human Resources. Once the door to Human Resources is opened, in the case of group life and disability programs, Premier’s insurance arm (Premier Insurance Management Services), recommends a third party consultant (Universal Benefit Solutions), to provide evaluation and benchmarking services. The third party consultant then evaluates the member based upon the member’s own demographics, plan design, location, and experience. Similar to aggregation model number 1 above, there may or may not be an initial lowering of the expense structure by the carrier. Otherwise, each member is underwritten by the market on their own. As with aggregation model number 2 above, there may be a sharing of brokerage revenue.
Unless these “aggregation” models are/can be measured against proposals from the top tier carriers, it can be difficult to gauge the efficiency of the pricing, the actual impact on plan participants, and the service levels that will experienced..
How do the numbers behind the curtains of Aggregated Pricing look?
While the underlying premise that the combined spend of a large number of entities in the same industry, such as Health Care Systems, is worth examining, pulling back the curtains is just as worthwhile. Some questions to ask are:
- How were the carriers offered as the pre-selected vendors chosen? Based on a personal relationship? A bid process – limited or full?
- What is the broker’s due diligence process around verifying that the pre-selected carriers continue to be the best option?
- What will the total brokerage compensation look like as a percentage of annual premium? What impact will these high levels have on the expense structure of your plans? It is not uncommon for the brokerage compensation levels charged back to the plans in these “aggregated” models to be eye popping! For example, although not marketed specifically as aggregated solutions, we see Health Care Systems such as Health Management Associates (HMA) allowing $5,295,055 to be paid to brokers in 2011 on $40,165,253 in premium (i.e., total compensation paid to brokers was 13.2% of premium). Then, on January 27, 2014, HMA was purchased by Community Health Systems (CHS), which itself had allowed brokers to earn $3,242,434 in 2011.
- Are the reduced carrier margins, which are central to the various “aggregation” models, actually offset by the brokerage compensation that needs to be built in to the overall expense structure of the case?
- Will the selected carrier guarantee that the expense structure/tolerable loss ratio used in the initial underwriting process be used for renewals?
- Are the dividend payments in part funded by the employees and their dependents? If so, should the employer be benefitting from their transfer?
- Will brokerage charges assessed against the plan exceed dividend returns?
- When these plans are offered with either fixed employer pricing or the promise of reduced employer outlay, how is the fiduciary affirming that cross-subsidization of plan assets is not occurring?
What Happens Once a Health Care System Adopts an Aggregation Model?
Once a Health Care System has entered into an “aggregation” model for their non-medical employee benefits, it is very common for the decision makers to be lulled into the “flow of acceptance” and for the following to happen:
- The participating employers begin endorsing aggregation as a valid concept, especially to their peers in the Health Care System market.
- Senior management becomes a champion of the aggregated offering due to the dividends they receive. Lower level management seldom has the opportunity to explain not only how increased plan expenses, that result from the higher broker compensation, are actually greater than the dividends received; but, also, how plan participants are likely offsetting employer costs.
- Apathy sets in; and, no one steps up to challenge the status quo.
Personal relationships are developed at all levels, whether on a national or local basis. For example, the brokers who promote the “aggregation” models to Health Care Systems are very effective at building relationships with decision makers who attend seminars and conferences focused on Health Care Systems.
There are a lot of moving parts involved in your non-medical employee benefit decisions already. Considering an aggregation model add another layer of complexity. Our hope is that this blog post positions you to ask the hard questions so that you are assured that your decision is the best one possible for your organization and your plan participants.
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