Many brokers hold a small business portfolio for property and casualty insurance. Converting these same clients to employee benefits plans can be daunting because the requirements are so high and the profit margin so slim. Yet, proposed rule changes for Association Health Plans (AHP) by the federal government could make this conversion a much more compelling and financially rewarding proposition for brokers.
Small business benefits generally come with a much higher per employee price tag than larger companies. It’s also a much more complicated, time-consuming effort for brokers to manage small business benefits. Coupled with the financial realities of the insurance advisor business, it’s incredibly difficult for brokers to serve small business customers profitably. Many brokers are in no rush to upsell existing P&C clients into employee benefits.
Yet, small business owners want to provide affordable benefits to employees. Beyond doing the right thing, it’s a hiring and retention advantage often reserved for bigger companies. Unfortunately, owners currently have limited options for providing affordable healthcare benefits for their employees. The result, roughly 11 million small business employees do not have access to employer-sponsored benefits. In fact, employer-sponsored benefits for small business has dropped by 25% since 2010, according to The Wall Street Journal.
Fortunately, there is an effort underway at the Labor Department that could throw a lifeline to these small businesses and their employees. Currently, the Employee Retirement Income Security Act (ERISA) allows groups of business with “common business interests,” such as an industry or a franchise group, to form collective benefits sourcing programs under strict guidelines. A new rule modification proposed by the Department of Labor would broaden this “commonality-of-interest” definition so that small businesses can band together under less stringent industry, geographic, or professional interests, to form AHPs.
If successful, this change would mean that much broader groups of mom-and-pop businesses, franchises, smaller associations, and even sole proprietors could qualify for collective sourcing of benefits through an AHP. For these businesses, the benefits would be tremendous. Employer-sponsored benefits will now be within their reach because health benefits group purchased can typically deliver 10-30% savings compared to individual small employer purchasing. It will also widen the pool of available benefits to employers and employees and can reduce their administrative overhead.
For brokers, this is an enormous opportunity. The rule change will open up an entirely new segment of motivated and eligible small business clients. Because these organizations can band together as an AHP, it will be a much larger and higher performing client than usual. And since many may already be under management as P&C clients, it represents a “warm” sales opportunity already under your roof.
To prepare, brokers unfamiliar with AHPs should begin researching needed requirements now. Newly eligible AHP companies will need a trusted advisor that is well versed on the product and its requirements. Fortunately, a proven playbook already exists for how best to deliver these association style benefits.
Today, an AHP or Trust can be sponsored by a group member association and overseen by members of this organization. The AHP or trust’s role is to aggregate (and oversee) member needs and to secure coverage on behalf of its members. Most will then turn to a broker specializing in small business and program management to create a benefits portfolio for the members, negotiate with insurers on its behalf, and provide program management. Your goal as that advisor should be to deliver a turnkey solution for the collective sourcing of small business benefits.
An AHP can be set up using three different structures for medical and other benefits:
Fully Insured Medical: This is the easiest plan to administer and communicate. It requires no initial capital reserves and does not share risk among the members. Instead, the insurer takes on all risk with little or no financial outlay from the AHP at startup.
Self-Funded Medical: Insurers prefer this approach because it requires the AHP to fund some initial capital or financial reserves. This means the association assumes a collective financial risk for providing health care benefits to its members through an earmarked fund to pay claims. The advantage to the AHP is group-wide savings if the collective group has good claims experience over time.
Hybrid Medical: Also called a Minimum Premium Program, this approach blends risk for all parties and allows dividends or gain sharing for members based on good loss performance.
We have found that more than 90% of our association customers at Decisely opt for Self-Funded Medical plans because even though it brings with it some upfront costs, the potential savings over time are much greater. That cost-benefit calculation will vary for associations, so brokers should be thoughtful about their recommendation to clients.
Let your clients know that they should plan for roughly six months from contracting with a program creator/administrator, through insurer negotiations, to the final launch of any group purchasing plan. This will include the association formalizing their intended structure, including the formation of an AHP, if one does not already exist. A qualified ERISA attorney can guide this formation process to ensure proper compliance and governance.
It will also involve your helping collect the appropriate data for underwriting AHP members, developing the benefits offering, negotiating with insurers, and initiating the marketing and administration of the AHP program. Once this plan is finalized, the program administrator can begin activating the strategies, tactics and program administration required by AHP members, including call centers, website, reporting, enrollment, and administration. At this point, the new AHP is ready for launch for members and employees.
Ultimately, broader requirements of existing regulations will expand the universe of employees that can secure employer-sponsored benefits. Forwarding thinking brokers should be engaging now to ensure they are on the front end of this potentially once in a lifetime opportunity to bring those small businesses into the AHP fold.
ABOUT THE AUTHOR: As the CEO of Decisely, Kevin Dunn is building Decisely as the new standard in the benefits technology and brokerage insurance space. Decisely is a trusted advisor and turnkey SaaS technology for small business in the U.S. Kevin joined Decisely from Mercer, where he created and implemented the strategy and marketing for Mercer Health & Benefits private exchange technology. Kevin has over 20 years of experience in e-commerce and online distribution. He has co-created two start-ups within Fortune 100 companies and built the award winning Delta.com. Learn more at decisely.com.