A recent report finds health-and-welfare outsourcing services are growing at four times the rate of pension-related services -- demand that is being caused by complexity and administrative requirements of the healthcare-reform law, experts say.
The Patient Protection and Affordable Care Act's prime objective is to give more Americans access to healthcare. What it may also be doing is fueling a spike in the growth of benefits-administration outsourcing, as employers seek help in navigating recent, and ongoing, healthcare-reform measures.
According to a recent report by Everest Group, a Dallas-based advisory research firm, the global BAO market is growing at a rate of 12.5 percent this year and has crossed the $5-billion mark.
In fact, Everest Group's report, Benefits Administration Outsourcing Annual Report, The BAO Market: Mature Yet Dynamic, found that buyers are outsourcing health and welfare services at four times the rate they are outsourcing pension-related services.
Overall, Everest Group estimates the untapped annual contract value of the $5.4 billion global BAO market is about $20 billion to $22 billion.
"While cost reduction, compliance and improving employee engagement continue to be drivers of BAO adoption, the theme for 2010-2011 was healthcare reform in the United States," says Rajesh Ranjan, research director and a leader of Everest Group's business process outsourcing research program.
"Healthcare reform brought increased enrollment and introduction of insurance exchanges," he says, "along with increased regulation of insured and self-insured insurance plans."
Although these reforms will take a number of years to take effect, he says, there are several provisions affecting employer-benefit plans this year. Consequently, Everest Group is seeing buyers looking at outsourcing as an option to understand the reforms, navigate the complexities and identify new savings potential.
Most interesting, Ranjan says, is that BOA for health and welfare is hardly a new market, but, due to the healthcare-reform law, it has become very "dynamic" within the last two to three years.
"Service providers are also investing in creating better communications and decision support," he says.
The Everest Group analysis includes all BAO contracts comprised of at least one of the following service segments: health and welfare, defined benefits and defined contribution; contract length of at least two years; buyer employee size of 3,000 employees or more; and service providers that offer benefits as a stand-alone outsourcing service.
In addition to new deal signings, Ranjan says, several second- and third-generation deals are also shaping up the overall BAO market.
"Instead of auto-renewals, several existing buyers are more deliberate in their end-of-term strategy decisions and often evaluate their next-generation option by going out in the market," he says. "If you look at parts of healthcare reform itself, it's very complex, so understanding it and how to go about implementing it is challenging. And that has been confounded by ... internal expertise lost during the recession."
In addition to the complexity are the administrative requirements, says Barbara Drames, vice president of benefits at Oasis Outsourcing, a professional-employer organization in West Palm Beach, Fla.
Drames says the PPACA clearly is pushing more employers, especially smaller and mid-sized ones, to seek more outside help because they don't have the back-office support to meet the PPACA's regulations.
"With all of the different notifications and disclosures needed, it certainly would pique my interest if I was a small or medium business," she says. "It becomes a more interesting proposition. Now, you not only have the normal benefits process, but healthcare is becoming so much more complex as the PPACA regulations continue to roll out.
"We are not surprised by the Everest Group report. In fact, we expected it, based on our experience with clients over the past year or two," Drames says.
And that's not likely to change, according to Rohail Khan, executive managing director for total benefits outsourcing at Dallas-based ACS.
Healthcare reform will forever change the landscape of health and welfare outsourcing, he says, as the complexity of future plan design and delivery to employees will outstrip the ability of organizations to comply effectively.
For one, there is the difficulty to fully fund internal innovations, including new technologies that improve efficiency, he says. At the same time, employers are looking for cost reductions in functions that don't drive top-line revenue growth.
"Organizations will need to partner with firms that are not only knowledgeable, but proficient in all areas of healthcare reform," Kahn says. That would include exchanges, new enrollment rules, guidelines (as well as how to more effectively enroll employees), the impact of technology (such as electronic medical records), and have extensive payer relationships in order to be best positioned to adapt to these changes.
"Preparing now and choosing the right partner with all the right capabilities and offerings will lessen the impact later," he says.
Apart from the healthcare law itself, Kahn says, other critical issues driving the health and welfare BOA uptick include:
* Focus on cost management -- The "double-dip" recession is forcing companies to focus on core, revenue-generating areas and outsource more of the other non-core functions;
* Focus on driving employee-behavior change -- Employee-behavior change drives utilization of healthcare and ultimately lowers costs when employees act. To engage the workforce, however, requires more domain competency and investments than companies can invest in on their own, so they are looking for partners that will invest in this capability.
* Innovation and investments in technology and service-model capabilities -- This is not a core revenue-generating function for any company, unless they already are in this business.
Jeri Stepman, a San Diego-based senior consultant with Towers Watson, says the Everest Group report is consistent with what she is seeing in terms of significant activity in health and welfare segment.
"By its nature, healthcare is more dynamic than pension," she says. "There already is more opportunity for innovation on the health side. But health reform in its broadest sense has driven home just how dynamic healthcare can be. So employers understand that the need for a strong partner in healthcare-benefits consulting is even more acute.
Stepman says decisions employers make now can have a long-term impact as the healthcare-reform laws take effect during the next four to five years.
"Employers also want the ability to be nimble, because healthcare reform will no doubt undergo some degree of changing and tweaking," she says, adding that no matter what changes take place, there always will be massive reporting and compliance requirements required by the law.
"All of those pressures have contributed to this growth trend," Stepman says. "They have, at the very least, caused employers to talk to their providers, especially at renewal time, when they can get a chance to ensure that they can meet these new challenges brought on by healthcare reform and other factors, such as rising costs."