Background
In 1992, Benecon began providing a cooperative employee benefits program for a group of municipalities in Lancaster and York Counties in Pennsylvania. It was the first time Benecon initiated a group purchasing model for employee benefits –a model that would soon become known as the company’s Cooperative Model. Benecon recognized that clusters of businesses or in this case, municipalities, could pool their money together and buy products and services as a group and realize substantial savings. Benecon presented the idea to take this shared approach with employee benefits and several municipalities signed on in the beginning of 1992.
Situation
“We were experiencing dramatic double digit increases in our health care renewal premiums. With Benecon leading the way, we have been able to control our costs for more than a decade. Benecon has been at the forefront in developing concepts and programs to assist us with cost containments. Their knowledge of the health care industry and their willingness to invest their time and resources provides our group with the ability to control our destiny against the giants in the insurance market.”
Barry Smith, Manager, Manor Township
Action
This is a clear example of using actuarial expertise to gain the upper hand in the negotiation or competitive bidding process. Competitive bidding, in and of itself, is typically a way to bring down cost but won’t necessarily get you down to the most appropriate price.
Most employee benefit brokers faced with this situation would simply move to another carrier and try to beat the $1,000,000 price and settle for perhaps $900,000. Using competitive bidding, brokers can usually find another carrier to undercut the first carrier – who enters the fray asking what price they’re up against (assuring that they don’t shave off too much of the price). But when the real price should be dramatically lower than the quoted renewal price, competitive bidding won’t work.
Through the use of proprietary actuarial tools and years of experience in working with and for carriers, Benecon’s in-house actuarial staff understands the nuances of potential price driving components. This enables them to determine what the true price should be in this case, $300,000 less that what was initially proposed. Benecon was able to walk into the carrier with actuarially sound information indicating that the true price should have been $700,000. The framework of the conversation changed and the advantage shifted to the client.
“Benecon understands the needs of municipal clients and the pressure upon local government to control costs. The cooperative gives the small guy some much needed clout to negotiate with the large carriers. This strategy has resulted in substantial savings for the participating municipalities.”
Charlie Douts, Manager, West Hempfield Township
Result
Simply put, Benecon delivered its client astounding savings. Since 2002, the year with the proposed $1 million renewal, the Cooperative has gone four more years without reaching the initially proposed $1 million renewal. Additionally, the consortium has grown to incorporate 14 more members, more than doubling its size to 27 member municipalities. The Lancaster and York County Cooperative remains a Benecon client to this day. The group is part of Benecon’s most impressive statistic –a 100% client retention rate with cooperative clients.
Ten years into its relationship with Benecon (2002), The Lancaster and York County cooperative’s plan came up for its scheduled renewal. Their incumbent reinsurance carrier quoted a renewal price of $1 million……..an increase of 43% over the $700,000 the group paid in the previous year. This dramatic increase precipitated an aggressive review by Benecon to find an alternative at a more reasonable price.
Medical rate calculations based on national statistics don’t apply to every situation but are commonly applied by carriers, in many cases leaving room for errors and the inappropriate categorization of a client or group. Subject to the art of the negotiation process, a carrier will sometimes present the group with an inflated number at the outset, with the intent to settle on a lesser, but still profitable, number. In this case, the number was so exorbitant that Benecon, using its actuarial prowess, decided to review the specifics and develop a renewal rate of its own.
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