As rising costs ignite frustration across the nation, a little-known aspect of our employee benefits purchasing system offers an opportunity to save billions on healthcare. This solution doesn’t require Congressional intervention; instead, it invites us to reexamine existing frameworks to reduce expenses and improve access for millions of Americans.
U.S. employers pay a staggering $1.2 trillion on healthcare benefits each year, with about $300 billion (25 percent) wasted. According to a new report from Mercer, they face a nearly 6 percent rise in health insurance costs, and that will make 2025 the third consecutive year in which employer healthcare costs rise by more than 5 percent.
While many employers accept that healthcare prices will always increase, we reject that notion. If employers paid more attention to how they purchase healthcare, they could save billions each year—while providing better care for employees.
Let’s start at the top, right where the benefits are purchased. Benefits firms are relatively unknown players outside the benefits industry, but the health plans they recommend dictate where 164 million Americans receive care and how much it costs.
Since there are so many insurers in the market, analyzing these vendors requires a high degree of skill and experience, and this is why so many employers rely on benefits firms to help them with the vetting and purchasing process.
Although there are several types of benefits firms in the market, 81 percent of U.S. employers use benefits brokers to help them understand which insurance products and healthcare services to buy. Unbeknownst to most employers, benefits brokers are generally not incentivized to help employers get the most value for their money. This is because brokers get paid by the same insurers with whom they are tasked with vetting. Since this compensation is typically paid in the form of commissions and/or bonuses, brokers actually make more money when costs go up—not down.
In other words, 81 percent of employers unknowingly expect a fox to guard their henhouse. Making matters worse, the finance and HR teams, who ultimately decide which products and services are purchased, often have little or no training on benefits.
Note: in the small group market (2-50 employees), most states do not allow commissions or fees to be carved out of insurance products, and therefore, benefits firms are generally not able to control their financial alignment with these employers.
Given these dynamics, is it any wonder healthcare has become a top three expense, of which 25 percent is wasted?
No.
Seeing the vital role benefits firms play and the misaligned incentives brokers have with employers, we want to highlight several viable alternatives to the brokerage industry that can save U.S. employers, employees and communities billions of dollars each year:
- Hire a chief benefits officer. Instead of outsourcing benefits consulting, procurement and management services, some mid-size and large employers bring these resources in-house by hiring a “chief benefits officer.” It can be hard to find such specialists, and they can be expensive, but some employers, including Mark Cuban, see the value in having this level of control.
- Replace your broker with a fee-based benefits firm. Since these firms do not accept compensation from vendors associated with health plans, they are in a better position to provide employers with unbiased recommendations on which products and services to buy. In addition to procuring and analyzing the traditional products sold by brokers, these firms often create customized health plans by piecing together best-in-class solutions. Such firms often charge a flat fee for each employee enrolled in the medical plan. Still, some charge an employer a monthly or annual fee, and others include some performance-based compensation by retaining a percentage of the savings generated.
- Adopt a hybrid approach. A less common approach is for employers to use a broker for program management and a fee-based firm for consulting and procurement. While the approach can reduce compliance risks for employers and improve the return on the employer’s benefits investment, it may result in additional upfront costs and administrative work needed to coordinate roles, responsibilities and execution.
It’s worth noting that on January 1, 2022, the federal government’s Consolidated Appropriation Act of 2021 was enacted. Aiming to protect employers by increasing transparency and accountability, the CAA requires benefits brokers to disclose all forms of compensation to employers, which should clarify who has a conflict of interest. Since brokers get paid by vendors, some ERISA attorneys consider this an illegal transaction.
With health insurance benefit costs rising at steeper rates, employers should do more by reevaluating the role of benefits brokers and exploring alternative options. Employers can make more informed decisions that enable them to fulfill their fiduciary responsibility and maximize the return on their benefits investments.
