As service complexity and costs rise, the appeal of outsourced administration and plan design grows stronger for employers. Total benefits outsourcing continues to gain momentum as the idea of a single point of contact sits well with many HR executives.
Employee benefits have been a pillar in the outsourcing market, with companies turning to a broad array of vendors to meet their needs. The use of third-party administration of health and wealth services spanning from healthcare insurance to retirement to flexible spending grows each year, driven by organizations seeking innovative ways to improve services while cutting costs.
One trend increasingly seen in today’s buying habits reflects the broader HRO market. While the majority of outsourcing deals remain point solutions, a growing number of companies are finding that bundled solutions are the preferred way to go for those seeking to leverage economies of scale, reduce vendor complexity, and integrate information. That’s clearly the case in the benefits arena, where ideas such as total benefits outsourcing (TBO) are getting a warm reception. By sourcing many of these burdensome services from one provider, HR is able to focus more on strategic activities.
But beyond reducing HR’s overhead, organizations are also looking externally to find ways to improve the customer experience, whether it’s through innovative plans, more timely and accurate administration, or just plain better services. Bundled or separate, the outsourcing of employee benefits clearly continues to evolve to meet a variety of organizational needs.
“There’s been tremendous change in the way people think about doing this. It used to be the clients looked at different service providers and different point solutions. There was a focus on best-in-class for each individual solution,” said Jeff Miller, president of Mercer HR Services in Norwood, MA. “Just three years ago, a small percentage of the request for proposals (RFPs) we were getting were for total benefits outsourcing. What’s happening now is there is a lot of activity on this front. Half of our RFPs and two-thirds of our implementation pipeline are TBO.”
Miller pointed out that organizations are waking up to the fact that an integrated benefits solution is much more efficient both internally and externally than outsourcing to individual providers. He explained, for instance, that many of the administrators of defined benefits and contribution plans are realizing that the
people they serve are the same ones under the administration of healthcare plan managers. By combining data and integrating the service model, organizations can reduce complexity and costs at the same time. “They deal with a lot of the same info,” Miller added.
TBO, as Miller defines it, encompasses three pivotal components: health and wealth, defined benefits, and defined contributions. He is quick to point out that while companies prefer to have one point of contact to manage their benefits needs, they don’t necessarily expect one vendor to provide all the services. Instead, many buyers are looking to their master outsourcing provider to manage subcontractors that actually deliver healthcare plans or retirement administration.
Much in the way that HRO addresses many of an organization’s HR needs, TBO is aimed at fulfilling most of their benefits requirements, as well. Its rapid adoption reflects the recognition by employers that a holistic approach to planning and administering benefits will be more satisfying to employees, as well as be more cost-efficient for the organization.
The trouble with TBO, however, rings familiar with those well-versed with the HRO industry. Just as provider constraints have limited growth in the end-to-end, enterprise HRO market, the TBO segment also boasts only a handful of capable vendors. So while many providers can meet, say, a buyers’ requirements for its DC plans, very few can also address that company’s healthcare needs at the same time, Miller said.
DRIVER BEHIND OUTSOURCING
While the desire to reduce administrative workload maybe one reason for HR to consider outsourcing, there are also other drivers. According to a recent study released by Aon Consulting , the complexity of health and wealth services is increasing as more employers try to offer such help as personalized retirement planning, automatic plan enrollment, and online healthcare tools. While these steps can help employees better prepare for retirement or improve their health, the tools also add layers of complexity on the administrative side. For many organizations lacking the expertise or HR capacity, outsourcing is a logical solution.
If healthcare has surfaced as one of the most pressing issues in employee benefits, you can blame rising costs as the impetus. According to the Aon study, 21 percent of organizations surveyed are rolling out online healthcare tools this year; another 17 percent plan to do so next year. Furthermore, the
percentage of employers offering consumer-driven health plans (CDHPs) nearly doubled in 2007, growing from 13 percent in 2006. An additional 13 percent plan to offer CDHPs in 2008, and six percent are considering replacing their traditional healthcare plans with these alternatives. These and other measures are all in reaction to rising costs.
Tom Lerche, healthcare practice lead at Aon, pointed out that healthcare costs are rising at two to three times the inflation rate, and employers are looking for any ways to carve out savings. Some of these measures include employing health risk appraisals and biometric data to survey employees’ health status and to raise awareness. Then, using incentives such as lower employee premium contributions, they can help modify behavior to encourage healthier lifestyles.
In his practice, Lerche said Aon consults for organizations looking to improve productivity through improved wellness. When designing programs, Lerche said he may examine a client’s health claims history, risk profile, employee population, and other factors that affect claims and attendance.
One of the programs that has caught the attention of some organizations is a point-based system that rewards workers for healthy behaviors. For instance, if a female employee undergoes an annual mammogram as recommended by physicians, she may earn points. Other healthy behavior also will earn points that can be redeemed for rewards or additional incentives, said Lerche, who added that business leaders are beginning to realize the importance of preventive wellness and disease management as a business imperative.
“Wellness and health promotion are quickly becoming worldwide priorities,” he said, adding that executive buy-in is necessary to making these types of efforts successful. This may take the form of business leaders visibly supporting and participating in the program, as well as communicating its benefits to workers. “You can do a great job with vendors and with incentives, but if the business leaders aren’t behind it, it can fail.”
Mercer’s Miller contended that as complexity builds around the administration of these healthcare plans, companies will continue to look to outsource these functions to third parties. With data integrity and security always a priority, many organizations find it more difficult to build their own than to outsource to a provider with a built-out system.
“You’re acting as a facilitator of information between employers and health services providers. There’s a lot of change and updating of that data that has to take place—not just enrollment, but life events that happen during the year,” he said. “It’s a very intensive piece of work, and companies are adding and changing plans all the time.”
Even as healthcare costs command the attention of business leaders, another component of employee benefits is also causing headaches for many organizations. Retirement demands, already a problem for many underfunded pension programs, will reach a meltdown point as Baby Boomers begin to retire during the next decade. With many employers having frozen their defined benefits plans—and turning their administration over to outsourced service providers—they are now focused on DC plans.
One way in which companies are becoming more active is in monitoring these investments, said Susan Rosenbleeth, a principal in the retirement practice of Buck Consultants . She said an increase in metrics reporting is indicative of employers’ efforts to stay informed about returns and to manage financial relationships. At the same time, she said companies want to be able to share this information with employees and give them tools through the Web and other mechanisms to better manage their investments.
“Now the focus in on how the experience is for our employees,” she added.
In Aon’s study, about 80 percent of employers surveyed said they offer personalized online retirement tools to their employees. However, about the same number also believe that employees do not fully understand how to invest their DC plan assets.
The gap between identifying problems with retirement planning and fixing them doesn’t end there. The survey also found that while 98 percent of companies say it’s important to educate workers about how much money they will need by retirement, only 34 percent expect those workers to find this information by themselves.
Among the information that employers should provide are the value of sponsored retirements plus social security, a tangible savings target, and whether the employee is on track to reach a desired retirement savings. This information will better help workers to make decisions about retirement.
“We are asking employees to manage things themselves, but you have to give them tools—the information and call centers and all of these things that many companies are not equipped to provide,” said Miller, who noted that the “consumerism” of benefits administration is now occurring at a rapid pace.
Whether employers offer these tools through internal resources or an outsourcing provider will depend on the company. One thing is for sure: as the needs of employees become more complex, HR must invest in domain expertise to better manage a plethora of emerging issues.