Corporations Unite to Lower Health Care Costs
A new agreement to share health care coverage information among some of the largest U.S. corporations – a sweeping effort to reduce surging medical costs – may potentially alter how administration service providers, such as brokers and pharmacy benefit managers, operate.
Known as the Health Transformation Alliance (HTA), the collective seeks to improve how companies provide health coverage and make the current multilayered supply chain more efficient.
The 20 companies involved include Macy’s Inc., American Express Co., and The Coca-Cola Co. Between them, they spend more than $14 billion annually on combined health care for 4 million people, including employees, their dependents and retirees, according to the HTA website.
The HTA’s first pilot projects are expected to launch in 2017 and will help employees obtain more affordable prescription medications. The rest of the major initiatives are planned for 2018 or later. The alliance has not yet indicated how they expect to reduce costs for prescriptions.
“This isn’t necessarily a totally new concept; it’s one that is timely and probably pretty smart,” said Chris Duncan, chief growth officer at EPIC Insurance Brokers and Consultants.
Duncan was a casualty analyst at Ford Motor Co. in the mid-1980s when the automotive company formed an alliance with dozens of other large corporations to help solve the U.S. liability insurance crisis. The companies in the alliance eventually formed XL Group plc. and ACE to provide product liability and D&O coverage.
“This is a continuation of what large employers have been doing for some time; consolidating purchasing powers and business driver insights,” Duncan said.
“I think it’s doable to bind together 20 companies and probably get a better deal than having the PBM in the middle.”
Since the inititative is still in preliminary stages, it is uncertain what changes the collaboration may bring to the corporations or the administration companies serving them.
“We are looking for innovators in the supply chain, the pioneers who want to break from the status quo and work with the group of pioneering employers who want to build a better way.” — The Health Transformation Alliance
“We hope to hear from the supply chain about how it can work with us to recast a system that everyone agrees needs to be improved,” the HTA said.
“We are looking for innovators in the supply chain, the pioneers who want to break from the status quo and work with the group of pioneering employers who want to build a better way.”
Suppliers are also trying to understand how the alliance may change their roles.
“This could be a revenue generating opportunity for Aon, but it will likely take revenue out of the market for smaller brokerage firms,” said Alex Michon, senior vice president with Aon Risk Solutions.
If corporations decide to cut out insurance buying, they may save broker commissions and that could reduce fees, Michon said. But large brokers usually play a dual role in helping obtain insurance plans as well as offering risk and compliance consulting services.
“With the right data and right analysis you could do some interesting things,” said EPIC’s Duncan.
For example, the companies could negotiate a national disease management program for diabetes or cardiac care.
“Literally 20 percent of your employee population will drive 70 percent of your costs so you can concentrate that intervention in a fewer number of partner or vendor intervention points,” Duncan said.
According to its website htahealth.com, the HTA plans to “facilitate contracting opportunities between members of the Alliance and service providers.”
Members will then contract directly with the service provider. The Alliance said it will not receive funds from these contracts or bear legal responsibility for the service provider’s performance under the contract.
“We have considerable work to do, and we expect this will take years to fully implement,” said
Bill Allen, the CHRO of Macy’s Inc. said, in announcing the Alliance.
“This is a major undertaking for each of us, but if we don’t do it now, the growth in health care costs will overwhelm all of us. We are proud to be pioneers who seek to transform and improve the way health care benefits are provided for millions of working Americans.”
“There’s a crisis in medical care and the biggest companies are bringing together their purchasing power to find solutions,” Duncan said.
“I wish them a whole lot of luck because what we’re doing now just isn’t working. We should all watch them carefully.”
The members of the Alliance are:
American Express Co.
BNSF Railway Co.
The Coca-Cola Co.
E.I. du Pont de Nemours & Co.
The Hartford Financial Services Group Inc.
IBM Corp. Ingersoll Rand
International Paper Co.
Lincoln Financial Group
Marriott International Inc.
NextEra Energy Inc.
Pitney Bowes Inc.
Shell Oil Co.
Verizon Communications Inc.
As they discuss their “merger of equals,” John Haley and Dominic Casserley emphasize a willingness to let the chemistry between their two legacy organizations develop naturally, rather than through top-down directives.
Haley, CEO of the newly created Willis Towers Watson, and Casserley, the company’s deputy CEO and president, sat down with Risk & Insurance® at the RIMS convention in San Diego to talk about the progress of their company since the Willis/Towers Watson merger was completed in January.
The merger combined a benefits firm with a global large cap network — Towers Watson — with Willis, which had a strong large cap presence in commercial property/casualty insurance broking globally, but was best known as a middle market player in the United States.
“When Dominic and I were sitting down and talking about this, we thought the real prize is if we can create an environment where we have people working together and where we think of ourselves as an integrated firm,” said Haley, a Rutgers University mathematics major who rose up the ranks from the early roots of the Towers Watson organization in 1977.
Sure, the two leaders talk to their teams about their talent mix and the business opportunities the merger presents.
But since the firms merged in January, Haley and Casserley say they have been happy to let members of the two legacy firms reach out to one another, to start solving customer challenges together under their own steam and see how they gel as teammates.
He reiterated that point in a May 6 WTW earnings call with analysts.
“As I travel to the various offices and see firsthand the collaborative sales efforts and hear about our market success, it’s clear our colleagues are not waiting for a top-down integration mandate or reporting tools to go to market,” Haley said.
“We don’t know exactly what all the new capabilities, the new products and services are going to be,” Casserley said in San Diego in April.
“We do know that we are creating a unique organization, which is truly global and which is integrated as opposed to operating in silos,” said Casserley, a University of Cambridge graduate who before the Towers Watson marriage oversaw the completion of Willis’ acquisition of the large French brokerage Gras Savoye and its 3,900 colleagues at the end of 2015.
Willis bought its first stake in Gras Savoye back in 1995, taking a third of the French firm at that point in time.
The Relevance of Scale
Both men lead firms with a history of making big deals.
Just to name a couple, Towers Watson was formed by the merger of Towers Perrin and Watson Wyatt back in 2010. Haley oversaw that merger.
A big part of the Willis middle market presence in the United States stems from its 2008 acquisition of Hilb, Rogal and Hobbs.
Scale comes into the Willis Towers Watson combination in a couple of ways. Haley sees the fact that Towers Watson and Willis are coming together as two same-sized companies as an advantage.
“It is much easier to create a working environment when you have two roughly equal-sized firms than when you have one that is much larger than the other,” Haley said.
Pre-merger, according to company statements, Willis had more than 18,000 employees. Towers Watson had approximately 15,000.
Scale, as in bigger size, is also a consideration in the investment realm according to Casserley.
Among other responsibilities, Casserley oversees investment and reinsurance for WTW.
“The merger enables an uptick in client service and enables us to make some investments that might have been harder for us to do as separate firms,” Casserley said.
Although both Casserley and Haley have plenty of experience in acquisitions, and this is a busy time for M&A in general, Haley said Willis Towers Watson and its leaders are concentrating on clients and merging their cultures, rather than casting about for more acquisition targets, at least for now.
“For the first 12 to 18 months, it would have to be an exceptional opportunity,” said Haley.
“It would have to be unique and something that if we let it pass we would never have the chance again,” he said.
As it stands, the global reach of Towers Watson and its client list are a grand opportunity for Willis.
“One of the things we know is that if you don’t have the relationships ahead of time it is very difficult not to finish second,” Haley said.
“The merger enables an uptick in client service and enables us to make some investments that might have been harder for us to do as separate firms.” — Dominic Casserley, deputy CEO and president, Willis Towers Watson
On the other side, adding the legacy Willis expertise in property/casualty insurance broking gives legacy Towers Watson team members one more tool to bring into their conversations with clients.
“We have client relationship directors that are responsible for understanding their whole business strategy and for understanding the key people and for bringing together the appropriate subject matter experts. What we are doing now is we are adding one more subject matter expert,” Haley said.
“We are not asking them to do something new or fundamentally different from what they’ve done before.”
“The grand prize is having our folks work together across lines and work cooperatively with clients to identify and solve those problems.” — John Haley, CEO, Willis Towers Watson
Casserley stressed that the fact that Willis can now take advantage of Towers Watson’s large cap relationships doesn’t mean that Willis is turning away from its strength or its relationships in the middle market.
“This is not a pivot,” Casserley said.
The merger also allows the benefits-focused legacy Towers Watson employees to bring yet another tool to their clients, the insurance expertise of the legacy Willis employees.
“We don’t know what the solutions we come up with will be,” Haley said.
“But we do know that the human side and the risk side are related. We think they are not only related today but they are going to be increasingly related in the future.
“The grand prize is having our folks work together across lines and work cooperatively with clients to identify and solve those problems.”
Casserley said how the Willis Towers Watson colleagues find those solutions as part of a new, integrated platform is an exciting unknown.
“It may well be applying property and casualty techniques to a benefits problem and vice versa,” he said.
“Or it might be applying an actuarial analysis to a property/casualty risk in a way that hasn’t been done before. You won’t know that until you see the teams literally intertwined,” he said.
Using Data to Get Through Hail and Back
4,600 hailstorms have rained down on the U.S. as of the end of July according to the National Oceanic and Atmospheric Administration. And these storms have left damage behind, cracking unprotected skylights, damaging exterior siding, dimpling rooftops and destroying HVAC systems.
While storm frequency is almost on par with last year’s 5,400, the rest of the picture isn’t quite the same. For example, the hail zone seems to be shifting south. San Antonio, Texas, a “moderate” hazard hail zone area, typically sees four or five hail storms a year, on average. Year to date, more than 30 storms have been reported. Overall, Texas has suffered nearly 20 percent of all hail storms this year.
Liberty Mutual’s Ralph Tiede discusses the risk hail poses to large commercial property owners.
The resulting damage is different too, with air conditioning (AC) units accounting for more than a third of the insurance industry’s losses, a greater proportion than in previous years. “In some cases, we’ve seen properties that sustained no roof damage but had heavily damaged AC systems. This may be a result of smaller hail stone size coupled with high winds,” noted Ralph Tiede, Vice President of Commercial Insurance and Manager of Property Risk Engineering at Liberty Mutual.
Despite the shifting trends, however, these losses are largely preventable if commercial property owners understand their exposures and take steps to mitigate them. By partnering with the right insurer, a company can gain access to the industry-leading resources and expertise to make it happen.
Understanding the Risk through Data
A property owner might know that his property is located in an area prone to hail, but could underestimate the extent of damage a storm could cause. Exposed skylights, solar panels, satellite dishes and other roof-mounted equipment can translate to serious losses.
Three trends that have emerged this hail season.
This is where Liberty Mutual’s property loss control engineers offer critical guidance for customers with large property exposures.
“Our property loss control engineers go out and inspect locations to develop loss estimates,” said Tiede. “They’re looking at the age and condition of the roof, the material it’s made of, and whether equipment is exposed or if there are adequate safeguards in place.”
Liberty Mutual can combine this detail with the hail data it has collected for more than 14 years and use this extensive library to help customers understand their exposures. The company’s proprietary hail tool looks at customer-specific factors, such as roof type, age, condition and geocodes, to better identify potential losses from hail. The tool provides a more detailed view of hail exposure on a micro level, as opposed to more traditional macro views based on zip codes.
“This way, we’re not just looking at a location’s exposure, we’re looking at an account’s cumulative hail exposure and providing a better understanding of where the risk is concentrated,” Tiede said.
Having a good understanding of a company’s specific exposure helps the broker, buyer, and insurer develop an effective insurance program. “Two customers may be in the same area, but if one’s building has a hail resistant roof, protected skylights, and hail guards for HVAC equipment and the other’s has unprotected sky lights and no hail guards or screens on rooftop equipment, they are going to have different levels of exposure. In both scenarios, we can design an insurance program that fits the customer’s situation and helps control the total cost of property risk,” said Brent Chambers, Underwriting Consultant for National Insurance Property at Liberty Mutual.
A Liberty Mutual property loss control engineer consults with the customer on ways to reduce or mitigate the exposure from hail so that the customer can make an informed decision as to where to deploy capital. “It’s not just about protecting a building’s roof and rooftop equipment. Roof damage can lead to extensive water damage inside a building and in some cases disrupt service, both of which can be costly for a business. By focusing on locations with the most exposure, a risk manager is better able to mitigate future losses,” said Tiede.
Actions commercial property owners can take to mitigate the risk of hail-related damage.
Liberty Mutual property loss control engineers also provide recommendations specific to each location. “We know that hail guards work, so we encourage clients to use those to protect HVAC equipment,” said Ronnie Smith, Senior Account Engineer for National Insurance Property at Liberty Mutual. “Condenser coils in air conditioning systems are fragile and easily damaged, and units don’t necessarily come with built-in protection. It’s important for property owners to take this step proactively to prevent a loss.”
The average cost to fix a condenser coil is $500, but replacing a coil can run at least $500 per ton of cooling, a measurement of air conditioning capacity that refers to the amount of heat needed to melt a ton of ice over a 24-hour period. As one ton of cooling typically covers about 250 square feet of interior space, replacement costs can quickly add up.
Replacing an entire AC unit can run more than $1,000 per ton of cooling. In a 250,000 square foot property, the replacement could easily reach $1 million. Given the increase in hail-related AC damage this year, these are numbers worth knowing.
Other risk mitigation recommendations include regular roof maintenance, such as inspections and repairs to small damages like blisters and installing protective screens over skylights.
“If a roof needs replacing, we also suggest using materials that have been tested and approved by an independent certification laboratory and are durable enough to fit the location’s exposures,” Tiede said. “The last thing a commercial property owner wants is to replace a roof again six months after it’s installed. Experience has shown that ballasted-type roofs are the most resistant to hail damage.”
Using Data to Develop Solutions
When a property owner has an understanding of the size of its exposure and potential losses, it is better able to work with its agent or broker and insurer to develop an insurance program to manage and mitigate potential risks.
“The data and advice we provide help clients focus on the largest risks and better mitigate that exposure,” Smith said. “The more data you have, the more you can understand your risk on a granular level and manage it.”
This data-driven approach to preparedness makes Liberty particularly well-suited to serve large commercial properties with multiple locations in high risk areas.
Prices for roof and air conditioning repairs and replacements have risen over last year, Tiede said, and are likely to grow more expensive as older equipment becomes obsolete. Property owners will be forced to buy newer, pricier replacements than perhaps they had originally planned for.
And if this year’s storm trends are any indication, hail is sometimes an unpredictable foe.
Amidst these shifting trends, the value of an insurer’s expertise in identifying, mitigating and managing hail exposure will be immeasurable to large commercial property owners.
For more information about Liberty Mutual’s commercial property coverage, visit https://business.libertymutualgroup.com/business-insurance.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.