The Value of Benchmarking
Benchmarking for Your Employee Benefits Plan
One of the things my clients want most is an idea of what their competitors are doing. Sometimes it’s just wanting validation on an industry trend, but often, they don’t want to be left to determine for themselves what industry leaders are doing. Knowing what’s normative, or benchmarking, is a valuable business tool. Benchmarking your employee benefit plans is something every employer should do for multiple reasons.
First, of course, is the basic fact that employee benefits have become part of the compensation equation in the American employment model. It’s important to know what level of benefits is needed to compete for talent.
Second, health insurance has become an enormous expense for all businesses and managing health spend is important, as is making sure the dollars are being spent as efficiently as possible. Knowing what’s a normal spend for your industry, region and company size is a must for managing these costs.
Third, by benchmarking your benefit plans, you can create employee enrollment and communications that effectively “sell” your employees on the value of your benefits and how it fits into your overall compensation strategy.
For example, group life and disability insurance premiums have been dropping for decades. If you haven’t benchmarked those plans regularly, you may be overpaying and/or have benefits below your peers.
There’s another big reason to benchmark your health plan, and it’s based on our economic model. I have clients who want me to “shop” their health insurance every year. They want to make sure they’re getting the best deal, and that I’m looking at all options. I don’t disagree with those goals. But, just getting quotes by shopping the market isn’t always the best approach. In a soft market, when prices are falling and there are many bidders (as is the case with group life and disability insurance noted above), the market is the most efficient means to establishing the lowest price. In a hard market, however, when prices are rising and there are few bidders (as is the case with health insurance), shopping the market is not the most efficient way to determine the lowest cost.
A better approach is to understand what your health plan costs should be – based on benchmarking. By comparing your health benefits and costs against normative data, you’ll discern not only what the correct price ought to be, but if your costs are out of line with the benchmarks. Then, before you shop, you can do some diagnostics to identify why your costs aren’t in line. You’ll want to understand things like:
- Are your demographics significantly different from the benchmarks?
- Is your claims experience unusually high (or low) compared to others?
- Are your benefit levels above or below similar firms?
- What other factors may explain the price of your health plan?
Once you understand the benchmarking data provided by your broker, then you and your broker can set a target price for your health benefits and develop an approach to get your costs (and, if needed, your benefit levels) in line.
I always recommend looking at benchmarks on three levels for health benefits: (A) firms in your industry, (B) companies of a similar size, and (C) employers in your region or with a similar geographic footprint (because healthcare claim costs vary widely from one locale to another).
Underwriters appreciate this cerebral approach and tend to be more flexible during the bid process if the broker articulates the purpose of the quoting process and desired outcome using sound data. If we move away from the ACA, which has restricted the ability to negotiate certain size employer health plans, benchmarking will be critical for larger employers whose premiums can be impacted by leveraging data. For more information on benchmarking and its value, contact the ‘A’ Team today.
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