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Putting Benefits Plans Out to Bid May Reap Savings

May 27, 2009
Related Topics: Benefit Design and Communication, Health and Wellness, Featured Article, Compensation
Scouting for a way to rein in health benefit costs, Florida Power & Light, the state’s largest electric utility, decided to start using a more open, competitive bidding process for its health and benefit plans.

FPL kicked off its new bidding system in late 2004 and promptly struck gold. By forcing providers of plans for vision, dental and other benefit components to openly compete for its business through an auction-style process where players can see one another’s offers, FPL figures it has saved $1.1 million annually in benefit costs.

And FPL did it without adding one person to its human resources department. Last year, the company put 11 benefit plans out to bid.

“Some people might be concerned about how much of their resources this will take,” says Melissa Miller, FPL’s director of employee benefits. “But it really doesn’t take that much.”

HighRoads, a benefit-plan procurement company based in Woburn, Massachusetts, that handles the FPL’s benefit bidding, says those levels of savings are not unusual, partly because so many companies opt to renew existing plans rather than regularly put them out to full, competitive bidding. HighRoads is touting competitive bidding as an antidote to the rapidly rising cost of health and benefit costs.

HighRoads recently completed a study using its own database, which includes 4,700 benefit plans at 137 large employers. The study found that overall health and benefit spending by companies in the database dropped significantly when aggressive competitive bidding was substituted for plan renewal.

For companies with self-insured health plans, overall plan costs were about 16 percent less when the component health coverage plans were put out to bid instead of being renewed. For companies using fully insured plans, the savings rose to 18 percent.

“I consistently found that those plans that originated from a bid were significantly lower in cost than those that [were] renewed,” says Lori Dustin, chief marketing officer of HighRoads. “I was very impressed by how large the difference was.”

Open process
Forcing vendors to aggressively bid against one another in an open, eBay-like platform such as the one that HighRoads operates invariably drives down prices, she says. The trick is to demystify the health plan shopping process and treat it more like a straightforward procurement effort similar to the way companies buy office supplies. The result is usually a reduction in costs, Dustin says.

“In the past, we have seen that the increase in health care costs sometimes has been twice the rate of inflation,” she says. “No one is being forced to justify or explain that, because they can’t.”

One reason companies just renew their plans is a concern that existing levels of coverage and benefit options are difficult to maintain by starting over with a new vendor. Companies typically invest considerable time and effort into crafting plans that meet their needs. Changing vendors midstream can be disruptive to a benefit plan strategy and potentially become a drag on recruitment.

But Dustin says the HighRoads study found those worries to be unfounded. Companies were in fact able to maintain their preferred coverage levels and options in the bidding process, she says. For example, deductibles for covered workers were unchanged after plans were put out to bid. The study concluded that with proper planning and information, benefits specialists in corporate HR departments were able to craft health plan requests for proposals that offered the type, style and level of plans they sought.

The study puts HighRoads at odds with much of the health care consulting community. At least some of the cost savings realized through the bidding process comes from cutting health care consultants out of the procurement process. While companies would typically still use outside consultants to help structure long-term benefit strategies, they would have less need of their services in procurement under the HighRoads system. Instead of having outside consultants work on procurement, company benefits specialists can do it themselves with the HighRoads bidding system. That is how FPL has been conducting its bidding procedure.

Right cost, but the right plan?
Not surprisingly, health care consultants regard the conclusions of the HighRoads study with some skepticism. While they say that controlling benefit costs is certainly a top priority for employers, they note that crafting and implementing a health plan that meets a company’s specific needs is a difficult task to get right. Once contracts are set, they need time to operate to prove their worth, and switching providers too soon can create unanticipated complications and employee dissatisfaction. As a result, a competitive bid that lowers plan spending may result in extra costs elsewhere.

“Health care is very complicated,” says Mike Taylor, a principal with Towers Perrin in Boston who heads up the firm’s global health care consulting practice. “It is all about making sure you have the right provider network, the right care management programs, the right incentives and plan design,” he says. “You can’t do that just by chopping and changing. If you keep changing, employees get confused, providers get confused, diseases get missed.”

Kerry Finnegan, a worldwide partner in Mercer’s health care advisory and enterprise practice in Chicago, which caters to U.S. companies with 2,000 to 5,000 employees, says the concept of saving money on health plan costs makes sense, but only as part of a broader strategy. Large companies are increasingly interested in finding ways of improving the health of their employees, a strategy that reduces costs by lowering spending on medical services.

“You can get a discount on a bill, but avoiding the bill is where the real opportunity lies,” Finnegan says. “Where large employers are focusing their time is on what drives cost from being incurred in the first place.”

Finnegan says that for self-insured health plans, most companies should already be squeezing discounts out of vendors, leaving little room for extra savings through bidding.

In fact, the savings at FPL thus far have come entirely from all the extras like vision and dental coverage rather than from the company’s basic medical plan. FPL has a multi-year medical plan that does not come up for renewal again until this year.

Dustin says that while the HighRoads study indicates companies can save money by putting their plans out to bid more often, it does not suggest that companies engage in excessive churn of vendors. Companies still need to be prudent about how often they put various plan elements out to bid.

Employers shouldn’t put every plan out to bid every year, particularly since many plans work best when allowed to run for several years. And companies need to keep in mind how many bids they can handle. FPL’s Miller says she likely wouldn’t put 11 plans out to bid in a single year again because of the strain on her department.

The biggest savings from the bidding process should be realized by very large companies with complex workforces, especially those with lots of unions and retirees, she says. Those types of companies tend to have numerous health plans operating simultaneously, giving different groups of workers access to different medical, vision dental, life insurance and other benefits. Some HighRoads clients operate as many as 500 separate benefit plans.

“Human resources people have a very, very difficult job,” Dustin says. “Their task is to prevent any disruption to make sure everyone is happy.”

And to control costs in the process.

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