Case study: Redesigning health and welfare benefits plans

Two programs, two challenges

A multi-state oil and gas service company required assistance in redesigning its health and welfare benefit plans, primarily for the following reasons:

1. Its population increased from 300 to 1,600+ employees over four years.
2. It recently acquired another company with approximately 500 employees in several different states.
3. Within the past year, it went public on the New York Stock Exchange and needed to attract senior executives.
4. It was vital to communicate and brand the company’s benefits program to convey its value to employees.
5. It was interested in ways to strategically comply with healthcare reform.

The legacy company had a solid benefits program, but this was better suited to a population of 300 employees as opposed to 1,600 employees. For example, it did not offer short- or long-term disability, a Section 125 plan, or vision coverage. Also, the voluntary life guarantee issue amount was low for a large employer. It outsourced the enrollment function and had a passive enrollment process. Furthermore, the contribution scheme required the employees to pay the majority of the medical dependent coverage expense. In addition to this, the company was experiencing a period of high turnover for employees working out in the field.

This situation contrasted sharply with the newly acquired company’s benefits program that compared favorably to large international oil and gas service companies’ programs; also, the majority of the employee’s medical costs were employer paid. The human resources (HR) team was heavily involved throughout the enrollment process, attended every open enrollment meeting in more than 10 locations, and encouraged the employees to call it directly with any questions.

The company’s intention was to merge all the medical benefits for both companies and develop a cost-effective benefits package that would be valued by employees and be competitive in the industry. It expanded its current HR team by hiring a vice president of HR (newly created position) to focus on making it an employer of choice and redesigning the health and welfare plans.

The move to higher deductibles

Milliman gathered financial, vendor, and plan design data from each company in order to thoroughly understand the current programs. A project team was created with various representatives from each company. Once we had a strong working knowledge of the current programs, we held a strategy meeting with the client to understand the company cultures, management risk tolerance, employee relations, service expectations, budget parameters, etc. These areas were discussed from a historical perspective of each separate company, but also from the perspective of the integrated company going forward. Milliman acted as the facilitator and the subject matter expert at the strategy meetings in providing consulting and actuarial advice.

The biggest hurdle was the merging of the two medical plans. Using the Milliman Health Cost Guidelines, we priced each historical medical plan, compared them to their actual experience, considered various combined alternative medical plans, and then advised on a go-forward basis using a decision matrix that included weightings for cost, coverage, industry competitiveness, and employee disruption. Once the 2013 medical plans were finalized, we completed a vendor search for administrative services only (ASO) and reinsurance coverage. We evaluated reinsurers that were bundled with the ASO vendors and standalone reinsurers in order to present all options to the client.

Based on the recent acquisition, we recommended that the client evaluate higher specific reinsurance deductibles. Using the large volumes of data associated the Milliman’s proprietary actuarial pricing model, Health Cost Guidelines, and claim probability distribution tables, we performed a Monte Carlo simulation to simulate 10,000 plan years for each plan member. Once we calibrated the model for group-specific factors such as age, gender, area, trend, and network savings, we measured the severity and frequency of large claims and compared these with each of the carrier’s premium quotes. We used the current stop-loss level as a baseline for comparison. Moving to a higher deductible level decreases the premiums but increases the company’s additional liability. Thus, the optimal deductible is one where the additional claims liability is equal to (or less than) the premium savings received. Using this logic alongside the company’s tolerance for risk, we were able to recommend a higher deductible level that made financial sense.

Other tools incorporated into our analysis include The Milliman Discount Benchmark Model and the Health Cost Guidelines – Dental model. The Milliman Discount Benchmark Model provides discounts at each major service category level to adjust the starting billed charges to the appropriate reimbursement level depending on the area and market. We compared the model results to actual discount reports from both companies. Using both sources, we were able to understand and measure the total cost impact due to network discounts.

Milliman’s Health Cost Guidelines – Dental provides a flexible but consistent basis for the determination of claim costs and premium rates for a wide variety of dental plans. The guidelines are calibrated for factors such as area, demographics, and plan design. Using these guidelines, we were able to anticipate future claim levels, evaluate their past claims experience, and estimate the impact of plan design changes.

During the redesign process, we incorporated many items from the Milliman Healthcare Reform Strategic Impact Study in order to minimize future additional transition items. This is an ongoing project as we continue to address the requirements under the Patient Protection and Affordable Care Act as regulations are released and finalized.

Solution expands benefits, lowers spending

From the strategy meeting, it was clear that the client wanted to enhance its employee benefits programs to be consistent with those offered by its competition. The challenge was to remain financially prudent in achieving this goal while integrating the two separate company cultures.

Milliman was able to expand the employee offering in key areas such as medical, basic life and AD&D, long-term disability, short-term disability, and flexible spending accounts and still save an estimated $300,000 in annual health and welfare benefit plan spend. A summary of the projected savings is shown in the table below.

Through the combination of expanding the benefits offered and adjusting the employer contributions by dependent tier, the redesign project was favorably received by employees. The client received positive comments from field employees, and the family tier enrollment increased compared with 2012. Also, due to the coverage consolidation, the client has been able to transfer employees between subsidiaries without any benefit differentials.