A recent post seems to have stirred the pot with regard to the bidding process on large group health cases. I will take no particular side in this issue, but rather will attempt to share my experience in these kind of transactions and the way they have played out in the past.
In a large case, 1000+ lives, almost everything is negotiable. I say almost because some things such as premium taxes, retention allocation for fixed home office expenses and state mandated reserves are off the table when the negotiation starts. That leaves almost everything else open to discussion and negotiation.
If the client company has retained a consultant, that consultant will be paid a fee to assemble the data, submit to the carriers for review, analyze the bids and present them to the client along with a recommendation. In some cases the consultant is merely compensated for their time in the bidding process but will not be a participant in the final award. Other times the consultant will be retained on an ongoing basis to continue to provide advice but will not be the named agent of record. And some times the consultant may also bid the case, either exclusively or in conjunction with other bidders, in hopes of generating additional revenue as the agent of record for servicing the account on an ongoing basis.
Each involves different situations where the consultant may, or may not, remain in the picture and on the payroll in one form or another.
In light of the recent controversial post, let’s use the scenario where the consultant is paid a fee AND is allowed to bid on the business as the servicing agent of record.
When the data is submitted to the carrier, the consultant tells the carrier how much to build in for servicing fees. In some cases the carrier will fully disclose this financial arrangement in their proposal, and sometimes not. Whether disclosed or not, the service fees are in the carriers retention charges and in turn reflected in the rates.
In simplistic terms, the rates quoted consist of two or three items. The fixed costs, referred to as the carriers retention charges, and the claim charges. The claim charges may be broken down further into expected paid claims and estimates for reserves.
Retention charges include premium taxes, home office overhead allocation, reinsurance premiums, profit margin, network access fees and agent servicing fees.
Claim charges are an estimate of future expected paid claims + the reserve margin.
Within the retention charges the only thing really open to negotiation is the agent servicing fees. Everything else is mostly set in stone.
Claim charges are another animal entirely and where the bulk of the premium dollars lie. A typical split on a large case may see fixed costs in the 10% range and claims the other 90%. This is also the area where negotiations can have a major impact on the rate finally paid by the client.
In projecting the next years claims the carrier reviews prior claims history, including shock claims. The larger, non-recurring claims are pulled out of the mix as well as those claims that exceed the SIR (self insured retention) or stop loss level for the group. In smaller cases this might be claims in excess of $50,000. With a larger group the underwriter might choose to pull out claims excess of $250,000.
The net claims are trended to arrive at an estimate for next years expected paid claims. A margin is added to the expected paid claims to arrive at a final projected claim liability.
The projected claim liability plus the carriers retention charges are added together, divided by 12 months and then divided again by the expected number of employees in an average month. This rate is the composite rate to be collected and is expected to be sufficient to cover retention charges and claims for the group.
The final calculation is to split the composite rate into 2, 3 or 4 rate factors. A four tier rate structure would have an employee rate, another rate for employee + spouse, another for employee + child(ren) and a fourth rate for employee + spouse and child(ren).
The carrier proposal is then compared by the consultant against other proposals from competing carriers and presented to the client for review.
A wise buyer will ask for a full disclosure and a break down of the retention charges as well as claim trend factors & margins. As part of the buyers due diligence they should also review not only the consultants proposal but the actual bid as submitted by the carrier.
Once all the information is on the table, the final negotiations can begin.
I say final because a good consultant will have already negotiated some items with the carriers before ever making a presentation to the client. If claim projections appear out of line with other carriers, or if the retention fees are in misstep the consultant should have already pointed this out to the bidding carriers.
Some clients (mistakenly) make a decision based solely on the lowest combined premium. Others focus (also mistakenly) on the claim figures since they make up the largest portion of the total cost of the plan. The client may attempt to secure a lower rate by asking the carrier to review the total package, or just the claim figures.
Claims have the most wiggle room since a relatively minor adjustment to trend or margins can have a major impact on the final, total cost of the plan. In order to get the numbers in line the carrier can age the data by averaging the composite claim costs over an 18 or 24 month time frame rather than the most recent 12 months. They can also look for month to month trends in the claims that could show an improving claim factor (where month to month claims per capita are declining) as opposed to a deteriorating one.
Future claims can be trended at 10% vs. 12% and can significantly impact the final total. Claim margins are typically calculated at 25% but on occasion I have seen those margins reduced to 10%.
Adding all this up, an improving and re-aged claim history, plus lower trend for future claims, plus lower margin can make a 20% or more difference in the final TOTAL rate charged to the client.
All the while, nothing has ever been said about the retention charges.
Most buyers focus on the bigger number and completely ignore this fact. The cost of the plan over the next 12 months will vary only by the amount that is being charged to administer the fund. The future claims will be what they will be, regardless of whether they were trended at 10% or 12%. Future claims will be the same whether the margin is 10% or 25%. It does not matter if Aetna is paying the claims or Blue Cross or a TPA. The final result will be the same.
The ONLY difference in the total cost of running the plan is how much the carrier or TPA is going to charge to administer the plan. Everything else is extraneous.
How much a servicing agent is paid, and how that agent is paid, almost never comes in to play. In some cases the agent will ask the carrier to reduce the amount paid if it has a noticeable impact on the bottom line rate. This rarely happens.