Business Insurance RMIS Article

"Employers use online auctions to buy benefits"

April 24, 2006

by LOUISE KERTESZ

Software similar to that developed for online auction companies such as eBay Inc. and Priceline.com Inc. is increasingly being used by employers to put their employee benefits programs out to bid.

While few companies use online auction facilities as their sole resource when seeking benefits coverage, the cost savings that can be achieved are leading some companies to make significant use of the facilities during the benefits procurement process, experts say.

The process often works this way: A company decides to put all or several of its benefit plans out to bid. Working with benefits and procurement staff, consultants create request-for-proposal templates, and an online auction company contacts insurance companies and other vendors, telling them when the auction will take place and relaying to them the bidding rules.

Vendors can see each other's bids online. They see what their ranking is and have the opportunity to change their bid, said Tom Billet, senior consultant at Watson Wyatt Worldwide in Stamford, Conn. When the auction closes, the winning insurer submits its proposal to the company.

In another scenario, the process selects two finalists, and then the benefits and procurement staff visit the vendor before making a decision, said Mike Taylor, a principal at Towers Perrin in Boston.

And employers do not always use all of the options in the online auction process. Pitney Bowes Inc., for example, takes a more limited approach (see story, page 64).

"It's never done completely electronically," Mr. Taylor said. "It's not a perfect science. The dilemma with electronic tools is that by their nature, they are not flexible. There's only a certain amount of room to respond to a question, or questions force you into a Yes/No, and some issues are not geared for that."

While several software companies operate online auctions, Watson Wyatt has partnered with HighRoads Inc., a Woburn, Mass.-based software company, which developed its software specifically for the benefits market, Mr. Billet said.

"This is Watson Wyatt's tool for soliciting bids," he said.

"It's faster than faxes, it's standardized, it's consistent," Mr. Billet said. Previously, a consultant would put out paper RFPs, and then analyze them when they were returned by vendors. "With software advances, we could e-mail out a questionnaire and the results came back in Excel, but it was still largely a manual process."

The online auction "is more efficient, no question," Mr. Taylor said.

The online RFP system reduces a staff's workload and cuts the cycle time considerably, said Mary Haigis, HighRoads' chief marketing officer.

In addition, "with a paper-based system, you have to contact a smaller number of vendors because it's labor-intensive," said Ms. Haigis. "We already have vendors trained" in the auction software. "It's easy to bring on new ones, and you can double the number of vendors" responding to a bid, she said.

The streamlined process has encouraged companies to put their plans out to bid more often, resulting in savings. "We've had incumbents taking a renewal at a reduction of 20%," Ms. Haigis said.

Also, the auction process allows companies to more efficiently manage their benefits, she said.

The online auction process "keeps all of (a company's) records consolidated in similar electronic formats," she said. Once the auction is over, the information can be used in a variety of ways—for example, to preload summary plan descriptions and to manage a vendor based on performance indicators from the contract.

However, Mr. Taylor said, "I would argue that most employers are very demanding about the kinds of data they use to monitor the performance of their health plans, increasingly marrying medical outcomes with costs." The performance information generated by an online auction would mostly impact administrative fees, which are "a very small piece of the pie," he said.

UltraLink, a Costa Mesa, Calif.-based benefits and human resources administration firm, found that there were limits to the effectiveness of online benefits auctions when it started in the field several years ago.

"Virtually all our clients have said we don't really want to let competitors see each other's bids," said J. Stephen Ashley, senior vice president of client and consulting services.

Besides, "health benefits are really not yet a commodity" like tires or paper and don't lend themselves to the apples-to-apples comparisons of an online auction format, he said.

Rather than conduct auctions, Ultralink now, through an online tool called iProcure, sends out electronic RFPs for health benefits for about 12 large multisite employer clients "across all industries and geographies," Mr. Ashley said. UltraLink completes negotiations with responding health plans and other vendors face to face, he said.

For example, UltraLink brings "a tremendous block of business"— representing $100 million or more in claims—to Blue Cross & Blue Shield of Illinois, Mr. Ashley said. "We'll go in representing several clients and spend a day or two" in negotiations with that insurer, he said.

While the practice is expanding, the consolidation of vendors and carriers as well as at the client level is slowing growth somewhat, he said. "But clearly, employers are still looking for ways to manage cost increases, and being efficient in procurement and negotiation" is one way, he said.

Online Benefits Inc. in Uniondale, N.Y., whose main customers are brokers, offers a product called AgencyWare, an agency management tool that creates RFPs that go out to carriers on behalf of midsized-to-small employers, said Andrew Ceccon, chief marketing officer.

The tool "creates proposals online and brings them all into an online system, so that preparing presentation documents for a client is much more automated," he said.

Online Benefits wants to go a step further and conduct online auctions. "It's on our development calendar," and the company could be conducting them by the end of the year. One of their broker partners has asked for that capability, Mr. Ceccon said.

Online Benefits offers other tools that lend themselves to the online auction process, he said. One of them is Client Community, which is a broker Web site for each client. "We're hooking up AgencyWare with Client Community, and we're thinking of adding in a broker face to carriers, called Carrier Community."

According to Mr. Ceccon, "Carriers have been kept outside the broker-to-client conversation." With an online interface, carriers can put their bids in and see where their ranking is. Clients also "can watch the process; they can see there's no funny side deals going on. That's our concept."

There will, though, "be some resistance" on the part of carriers, Mr. Ceccon predicted. "HighRoads deals with big groups, so carriers see the advantage of cooperating" in online auctions. But a carrier may not want to change the way it responds to RFPs to get a smaller group's business, he said.