Sound the alarm: The private insurance exchanges are coming!

Towers Watson merges with London-based consulting firm in $18 billion deal

By Aaron Gregg
The Washington Post, June 30, 2015

Towers Watson, the Arlington-based professional services company that operates a private health insurance exchange covering about 1.2 million people, announced an $18 billion all-stock merger with Willis Group Holdings, a London-based insurance and benefits firm.

The merger is the latest in a series of what Willis chief executive Dominic Casserley called “carefully targeted mergers and acquisitions” to expand his company’s international footprint. Last month, Willis Group acquired Evolution Benefits Consulting, a Pennsylvania health and welfare benefits advisory firm, and in late April it announced it would fully acquire Gras Savoye, one of France’s largest insurance brokerage firms.

Casserley said in a news release that the new company “will advise 80 percent of the world’s top-1,000 companies,” operating as a one-stop shop for large employers managing complex aspects of their human resources mix, benefits such as employer-provided health insurance and a range of other costs that affect companies’ bottom lines.

Because the new company will be based in Ireland, Towers Watson’s corporate tax rate will drop from 34 percent to a projected 25 percent.

This merger “is driven by business purpose, not from a tax planning standpoint but from serving customers,” said John Greene, chief financial officer of Willis. “The tax benefits that are derived just happen to be a nice consequence of the transaction.”

Towers Watson Chairman John Haley will lead the new company as chief executive, and Casserley will serve as president and deputy chief executive of the new company, which will operate under the name Willis Towers Watson.

Casserley said in a conference call that the merger was first conceived while Willis worked in partnership with Towers Watson on a health exchange.

The exchange “has rapidly grown to serve more than 1 million members in the United States,” Casserley said. “Many independent analysts believe that this is just the start, and that the business is at an inflection point, with the total market likely to grow significantly within five to seven years.”



By Don McCanne, MD

This mega-merger of benefits consulting firms is designed to capture the rapidly expanding market in private health insurance exchanges. Why should we be concerned?

The Affordable Care Act (ACA) was designed to protect the sectors of health care coverage that allegedly were functioning well - especially employer-sponsored health care plans. The greater changes enacted in ACA were aimed at the much smaller sector of dysfunctional individual and small group plans, plus expanding Medicaid for low-income individuals and families.

So how has it gone for the stable, well functioning employer-sponsored plans? Not so well. Even though there has been some slowing in the increase in health care costs, the increases have been in excess of inflation, and there appears to be a return to an accelerating pace of cost increases. Most employers are very concerned about the costs of their employee benefit packages, and they are already taking action to slow their nominal portion of the increases (though most economists contend that the employers’ portion is actually paid by the employees in forgone wage increases).

The most important measure already taken by many employers is to increase cost sharing, especially by requiring high deductibles that must be paid before most benefits kick in. This reduces the insurance premiums (or the contributions to the self-insured health trust) for the employer-sponsored plans since a significant portion of actual health care spending is shifted to the employees and their families. Other innovations such as tiering of drugs also shift more costs away from the employer. Plan beneficiaries also are reducing their utilization of beneficial health care services when they are exposed to high deductibles - a perverse disincentive that reduces spending.

The use of narrower provider networks also helps to reduce the employers’ contribution to health care payments. The employers' representatives are able to contract for lower provider rates in exchange for a promise of oligopolistic exclusivity. Also the responsibility for payment of costs for care obtained outside of the networks is shifted almost entirely to the employees. In addition, providers known for managing expensive chronic disorders can be excluded from the networks, impairing the ability of patient beneficiaries to obtain the care that they need.

The employers are still not satisfied. Some are now beginning to implement the use of private insurance exchanges. In this model, the employer no longer offers an employer-sponsored health plan but instead provides the employee with a voucher or voucher-equivalent to purchase from a selection of plans in the private insurance exchanges. Since the value of the voucher is fixed, the employee must bear the additional costs of plans that have greater benefits. Thus this is a shift from a defined benefit program to a defined contribution program; by controlling the value of the voucher, the employer is able to shift much of the future health care cost increases onto the employees.

If you look at the insurance exchanges set up by ACA, you will see that the standard plans are low actuarial value plans. The benchmark silver plan has an actuarial value of 70 percent - the patient is responsible for paying an average of 30 percent of the costs (though many qualify for subsidies). The bronze plans have an actuarial value of only 60 percent. Employer-sponsored plans formerly had an actuarial value closer to 90 percent, but with the plans offered in the private exchanges, employees usually will select plans that the voucher will cover. This is a great opportunity for employers to gradually shift the value of the voucher so that it would cover 60 or 70 percent actuarial value plans, just like in the ACA exchanges (except that no government subsidies would be available for the private exchange plans).

This move to private insurance exchanges represents a tremendous business opportunity for benefits consulting terms, as today’s article indicates (not to mention offshoring to Ireland!) That’s just what we need: more administrative complexity and costs in our system already tremendously overburdened with administrative excesses. These benefits consulting firms are selling health insurance products without bearing any of the insurance risk of those products. The private insurers, with all of their administrative waste and insurance product perversions, remain prominent players in the system.

These benefits consulting firms tout choice. The employees are free to upgrade to a high actuarial value Cadillac health plan if they so desire. Little does it matter that most of them have hardly enough funds to be able to purchase a low actuarial value roller-skate health plan.

As if the deterioration in employer-sponsored plans has not already been enough, this switch to using a defined contribution voucher in private insurance exchanges will be a disaster for affordable health care for employees and their families.

Rather than accelerating the move toward private health insurance exchanges, we need to accelerate the transition to a single-payer improved Medicare for all program. Or do we just sit back and watch people go broke and suffer?