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Outsourcing administration—the time is now.
 

By Amy L. Gurchensky
 
 
It’s hard to forget the abundance of merger and acquisition (M&A) activity that took place within benefits administration outsourcing last year. Major mergers resulted in the formation of Aon Hewitt and Towers Watson. Other notable acquisition activity in the benefits administration space included ADP acquiring Workscape; ACS, a Xerox Company, acquiring ExcellerateHRO; and Capita acquiring NorthgateArinso’s pension administration business in the United Kingdom. Perhaps all of the M&A activity is the first thing that comes to mind when thinking about benefits outsourcing.
 
 
The acquisition trend has continued in 2011 as well, but appears to have slowed down considerably relative to 2010. In preparation of NelsonHall’s next benefits administration study, we noted some interesting observations about the expanded role of health and welfare (H&W) services within benefits outsourcing.
 
 
Since the beginning of the year, M&A activity within benefits administration has been primarily focused on H&W services. Specifically, the transactions conducted have allowed service providers to expand capabilities in terms of the services being offered, geographies being served, and the size of its target market.
 
 
Examples of some of the acquisitions in the first half of the year include:

• Towers Watson acquiring Aliquant to strengthen its H&W offering,
including COBRA administration and flexible spending accounts. Through the transaction, it added approximately 75 clients.

• Sedgwick CMS announcing that it will be acquiring the Productivity Solutions unit of Nationwide Better Health to enhance its absence management capabilities.
 
 
Furthermore, while H&W acquisitions are commonly focused in the United States, the trend is expanding to Europe. In the U.K., Capita acquired FirstAssist Services Holdings to enhance its capabilities in workforce management services, which is essentially the European version of H&W services including telephone advice and assistance around health, well-being, and legal issues; international medical assistance; and absence management.
 
 
Aside from acquisitions centered on H&W, service providers have introduced new H&W offerings. There have been several corporate and public healthcare exchange offerings established by Aon Hewitt, Ceridian, and ACS in response to healthcare reform. Ceridian also added an employee assistance program (EAP) to promote healthy and productive workers. Outside of the U.S., Mercer launched a flexible benefits offering in Hong Kong and is planning to launch another service in 2012 that will offer lifestyle options and services on a cashless basis.
 
 
H&W can include an array of services from basic H&W administration (determining eligibility and enrollment) to reimbursement account administration to benefits continuation administration (i.e., COBRA and HIPAA). It is also expanding to include other offerings such as advocacy services and occupational health services. Other newer service lines in H&W include dependent audits, absence management, flexible spending accounts, and wellness services.
 
 
When looking at the changing trends in H&W, multiple drivers explain the increase in interest. First, there’s the changing regulatory and compliance environment, which includes the uncertainty around the Patient Protection and Affordable Care Act (PPACA).
 
 
Second, regardless of the regulatory outcomes, there’s the strong likelihood that healthcare costs will continue to increase. This has made employers more interested in managing the total cost of healthcare and shifting a portion of the burden to the employee. Finally, the increase in demand and the expanded service offerings mean new revenue opportunities for benefits service providers.
 
 
An example of a new H&W service that provides long-term outsourcing opportunity is flexible spending accounts. America’s Health Insurance Plans (AHIP) recently reported that enrollment in health savings accounts (HSA) has nearly doubled in the last three years, reaching 11.4 million people in January. With only 11 million of a potential 160 million using HSAs, there is certainly a lot of room for growth.
 
 
Nevertheless, it will be important for vendors to differentiate themselves in this expanded market with employee decision support tools and employer benefits analytics among other things. Employee communications is also not just a routine part of annual enrollment; it is a critical component in decision-making that impacts both the employee and employer’s bottom line. Having effective employee communication that stimulates the use of easy-to-understand interactive decision support tools with personalized data makes a world of difference in outcomes for employees and helps employers control overall costs.
 
 
Advanced analytics based on employee data and benchmarked data will help employers make balanced decisions between employee needs and total cost while maintaining competitive, but affordable, benefits packages. There is no better time than now to be in benefits outsourcing and for employers to have a service provider. It’s no longer just an administrative cost efficiency play; it’s managing the risk of major dollars that will either flow to the bottom line or create a drag on business competitiveness.
 


Amy L. Gurchensky is an HRO research analyst at NelsonHall.
 

Tags: Benefits, Contributors, Engaged Workforce

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