Good morning, everyone. It's Matthew Borsch at BMO Capital Markets. Let me thank you again for joining us at the 2020 Healthcare Conference, and this special session in particular. Then let me introduce our industry guest, Steve Lewis, who is a senior leader in Willis Towers Watson's health and benefits brokerage and advisory business, and he's a veteran health benefits consultant to groups in the dynamic middle market. Through our discussion today, we're going to try to give you a snapshot of the health insurance market for employer-sponsored at this time as we work through the pandemic. We'll also touch on discussions with employers that are going on today as well as price, product, and other trends. Back to Steve for a moment, and I'll turn it over to him.
First, let me just highlight how over the years, Steve has had a very close and accurate take on key industry trends. All the way back in 2002, when I first met him, he pointed to erratic underwriting and servicing at one of the national carriers, which was not yet apparent to investors. He subsequently offered similar insights on carrier disruption in 2004 and again in 2007. In terms of the pricing environment, he's proactively called every major turn in the intensity of competition in commercial health insurance. With that introduction, I have a series of questions to ask him, but let me just first ask him to describe his role in working with employers and maybe any introductory remarks he wanted to make.
Great. Thank you, Matt. Appreciate that introduction. As always, great to be with you again. As you know, Willis Towers Watson is a leading global advisory, broking, and solutions firm with over 45,000 employees in 140-plus countries. Personally, I spend most of my time working in our health and benefits brokerage and advisory team, where we primarily serve employers with anywhere from 500 to 5,000 employees, helping them manage the cost risks associated with their medical, dental, life, and disability offerings, primarily. Our team is based here in the metro New York area, and although we work with clients across all 50 states and more than several foreign countries, my comments today will largely be based on the experiences of my team working with those employers.
That's great. Okay. Thank you, Steve. Let me dive right in here and ask you from the standpoint of employee benefits and health coverage, how have your employer group clients been handling the COVID-19 pandemic? Within that, to the extent you can touch on, have they made changes to help employees access healthcare remotely during the shutdowns? Well, I'll leave it at that, then I've got a couple more.
Great. Yeah, I think in general, employers have been looking at a range of options to assist their employees with their well-being, and that ranges from emotional to physical to social and financial. I don't think it'll come as a surprise to anybody that the real focus has been on telemedicine solutions. Probably a distant second, I would say, is behavioral health services. If not previously included as part of the offering, employers are certainly looking at how to round out those services in support of their employees.
Great. To the extent that you've had visibility on them, have some of your employer clients, to your knowledge, continued to cover workers who've been laid off or furloughed? If that's the case, for how much longer do you think they would continue to do that if necessary?
The short answer is yes, all of our clients have continued to provide benefits coverage for their furloughed employees. Given the cause of the shutdown is a healthcare event, it's our sense that employers have been very reluctant to take away that benefit and really view it as an absolute last resort. Additionally, and more so than in normal times, life and disability insurance have been incredibly important for employers to continue to provide. The core benefit package has largely remained intact thus far with our marketplace. You asked a question about timing, and candidly, that's a bit more difficult to pinpoint. I think it will vary by industry, by geography, and the economic recovery in general. I will tell you that we're in conversations with clients now knowing that those evaluations are picking up momentum, and our sense is that many of these furloughed employees will become terminated employees.
We would expect a lot of those decisions to be made based on what we know now, to be made by the end of this summer.
Great. That makes sense. Thank you for that. Maybe this next question, given your answer there, is less relevant. To the extent, do you have any thoughts here? Because you haven't seen it yet, but for those who do lose coverage, whether because of layoffs, presumably, or layoffs, I would imagine, can you make any generalizations about what these workers will do for coverage, when they lose employer coverage? Again, I take it from your answer, maybe you haven't seen much of that, but their options are, of course, they can be uninsured. They can continue with the employer under COBRA. That's expensive right now, unless Congress acts to subsidize it. Then you've got what you didn't have in the 2008 event, which is the ACA exchanges and subsidies there for people under 40% of the federal poverty level, and finally, Medicaid if they're-
Yeah. I think it's too soon to say based on how I answered the last question. My general sense is for consumers, like businesses, cash is king. COBRA would seem like a last resort type of option, and maybe Medicaid or even uninsured.
That makes sense. Do you see any lasting changes, maybe it's too early to say, but any lasting changes in benefits that result from this pandemic experience?
I hope so. I think there's the potential in a very positive way for the industry to be a bit more remote like other industries have been. Telemedicine, we certainly believe it is here to stay and will grow and expand. Behavioral health has come up with some excellent apps and some other solutions that create some remote access. I certainly expect there will be some lasting changes in that regard, for sure.
What's been your perspective on the responses that we've gotten from the insurance carriers so far, at least to the extent that you're seeing actions that are noticeable to you and to your employer clients?
On the positive front, the insurance carriers have been extremely proactive with updates, enhanced coverage for pandemic-related services ahead of and beyond governmental requirements in some instances, and increasingly appear to be coming around to a limited extent on premium credits and financial flexibility. Unfortunately, on the flip side, not only were most slow, still haven't fully got around to the financial relief aspect that employers so desperately need. I think they've sowed some bad will in that regard, particularly for employers that are financially struggling. It will be interesting to see how those conversations continue to emerge. I know we're going to get into a greater conversation on the financial aspect. I would add that the dental, life, and disability insurers on the non-medical side have been very aggressive with premium reductions, multi-year rate caps.
Clearly, less dollars at risk, it's been a very aggressive approach on those insurers.
Oh, fantastic. Well, that's very interesting. Let me shift over to the purchasing process, how do you think or know that the pandemic has changed the timeline for the annual shopping renewal of health coverage? What impacts do you expect on the annual renewal process, at least for those employers, and not all of them are, but those employers who are on a calendar benefit year?
Yeah. As you know, most employers do fall on that calendar year basis, and so it's been a bit of a mixed bag in terms of clients evaluating mid-year plan and funding changes, while others intending to stick to their normal path and plan. With respect to the impacts on the renewal process, I really hope to be wrong here. You were so nice and generous to say how I've made some good calls. I hope I'm wrong about this one. We're anticipating a very challenging renewal cycle with a lot of marketing efforts to try and create competition to the extent we can on behalf of our clients. The insurance carriers are in a tough spot.
Given the lack of claims utilization in the second quarter, it's likely to be, in our view, a very contentious renewal process with no clear view yet as to how the carriers intend to price renewals. Based on our experience, the way things have gone so far, we're not overly optimistic that the carriers will be taking a generous view. As I mentioned, they're in a tough spot too. Our approach for self-funded clients is to evaluate what did not happen as a result of the deferred care, evaluate to the extent we can what may return as pen-
Steve, we froze. Maybe I'm frozen here. One second. Can you hear me? Still on. Hopefully, this will be a brief interruption. I think that Steve has a lot to say here, and I'm really anxious to get him back on if possible. Let's just wait a minute here, and then I'll proceed with the questions. By the way, again, assuming we get back on, we will have an opportunity, if you use the app to ask questions, I can then pass them along to Steve Lewis. Apologize to those who are waiting for this to resume. We're trying to make that happen, but it hasn't yet, and hopefully we'll be able to get Steve Lewis back on very soon. Just me or is that everybody? Hi. Thanks, everyone, and welcome back. Managed to get Steve Lewis live now, and thank you for bearing with us.
It's a challenging environment to do these events virtually. We're doing our best here. We're going to just continue here, and I want to ask Steve. I think we answered the question about how the pandemic has perhaps disrupted the timeline, although a lot of that remains to be seen. I wanted to ask along with that, whether your employer clients, are they seeing the sharp drop-off in healthcare utilization to the extent they have visibility on it during this second quarter? Does that awareness, to your knowledge, vary at all based on whether they are fully insured or self-insured?
Yeah. We think that it's going to be a very challenging renewal cycle, as I mentioned, before we got disconnected, right? The short answer is we do expect more employers to move to self-funded arrangements. Based on the emerging claims data we've seen, we've seen a sharp drop-off in utilization, upwards of 60% in some cases for April or May, so pretty significant. However, given the lag in claims, it's difficult at this stage to confirm which services have experienced the greatest drop. That's going to be really important to evaluate which services were dropped versus which services might come back. Until we get more of that data in the next few months, we won't be able to conduct that evaluation just yet.
Let me just come back to a point you made there, very interesting. You predict that we'll see some switching from some of your fully insured groups into self-insuring at this point?
We do. I think back to my earlier point that cash is king for consumers, it's also very much the case for businesses, right? For those employers that are fully insured, to be able to get that lag, if you will, in the cash payments could be the difference between survival and not for some of their businesses. Look, I think the answer is a little more nuanced, that if carriers' fully insured renewals are more reasonable than many were anticipating, and they're willing to offer grace periods or premium credits that go out 60 to 90 days, I think that could help certainly minimize that for smaller employers. There's a lot to play out here, I think if things remain as they are, yes, we would expect a bit more transition so far.
That might be a good point for me just to jump forward to a point that I was going to ask you about later, that is another factor in the mix here is the permanent repeal of the Obamacare health insurance fee. That's going to help on the fully insured side to some degree, maybe not a lot, but 2%-3% perhaps taken off of instead of a 9% increase, maybe it's a 7% increase or something. That might be the order of magnitude. What are your thoughts on that?
Initially, we saw the direct impact on employers when the industry fees were rolled out. As years went forward, it became a point of negotiations.
Okay.
Insurers began to realize that frankly, they were going to have to find that in other expense areas, whether it was the increase of their own expense factors, but as a separate line item, really became a negotiable point to the point where in 2020, it had little to no impact on employer pricing from our view.
Okay. Great. Thank you for that. In terms of the possibility of structural changes coming out of this, and again, it may be too early, but have you had discussions with any of your employer clients about the idea of maybe of their getting out of the coverage game? I know this has been a topic that goes back a long way with, or a few years I should say, with private exchanges and all that kind of innovation that hasn't necessarily come through. One of the ideas that's out there today, I don't know that it's getting a lot of traction, but is the idea that you give workers pre-tax funds through health reimbursement arrangements, which you can now do, and that they pick up coverage on their own.
Is that something you see anyone doing, or is it something that comes up in discussions?
Yeah. We haven't seen it yet, but the interest and level of activity has definitely picked up. While we don't expect a great deal of conversion for 1/1/2021, we do think it's going to be part and parcel to the process going forward. Most specifically, that individual health reimbursement accounts that I think you may be alluding to here, right, is the ability for employers to make that shift and transition. We do expect that to be a part of the conversation going forward as we've done that analysis for a number of clients already this year for what it might look like for 1/1/2021. Again, I'm not anticipating big movement for this cycle, but I do think it's part and parcel to the go-forward conversation.
Sorry, if I could just ask a little bit more on that. As you do that analysis, what parts of the outcome don't look good or maybe are problematic from an employer standpoint in taking that step?
Yeah. The geography of the pricing, right? Where there are robust competitive markets, you're going to see better pricing. Many of our clients tend to be spread throughout the country, have some rural locations. I think without real competition on the local level, it's going to be harder to have that financial impact that employers see from that alternative.
Well, that's very interesting. That makes sense. Thank you, Steve. Maybe if you could just comment on the broad topic of competition, and I think I know where you're going to come out on this, but it's important, obviously.
Yeah.
What are you seeing or anticipating in terms of the intensity of competition as you see it today versus what you've seen in recent years versus maybe much longer ago and back when we used to talk in the 2000s.
Yeah. As we've talked, you won't be surprised by this answer because we stay in pretty close contact, but there's nobody out there aggressively buying market share and bringing market down. Right? While that may be good news for your investors, not necessarily great news for our clients that, as we talk about, are looking to squeeze every dollar. There are, again, local markets where occasionally insurance carrier may be looking to grow market share, increase their presence in a particular market, and so we'll see something happen there. As a broad general theme, price intensity remains pretty muted.
Yeah. Okay. That is what I expected, but thank you for fleshing that out. Apart from the intensity of price competition, can you offer any view on I know it's early for 2021, too early, but for maybe mid-year renewals, what level of price increase are you-- If there's any generalization you can make seeing for fully insured clients, and how does that compare with maybe what you saw last year?
Look, I think, pandemic aside, we wouldn't expect much of a change in that sort of settled down post buy-down negotiation on average in that 5%-6% range, where I think we've been when stuck the last couple of years. As we talk about, averages are always tough, and I don't want a client to hear me say, "Why is the average 5%-6%?" We're at 15%-20%. As you well know, it's very employer specific and claims dependent. As we talked about a little earlier before my technology glitches, it's very difficult to make predictions on where this is going to come out, and we're preparing for some difficult challenging conversations in that regard.
Would it be your impression that the way insurers are pricing is sort of taking normal trends, if you will, and just assuming a continuation of that?
I don't know. I think if you take normal trend off the claim base for second quarter, which is what you're going to use to price, typically use second quarter as a critical quarter to price the January one renewals, right? That data is really meaningless in projecting the future, right? The nuance to that is what services have been foregone and what are likely to come back. We have a slide we use in conversations with clients that I refer to as the toilet paper slide. It's different consumer purchases, right? At the beginning of the pandemic, everybody stocked up on toilet paper, and the healthcare providers a lot of people stocked up on maintenance prescriptions during the supply chain disruption, not being able to get their drugs, right? They couldn't stock up on preventive dental services. You can't reschedule multiple MRIs. Right?
There's things that we do as consumers in our everyday life that are very parallel to what we do in the healthcare sector, and understanding how those puts and pulls played out during this time is really going to forecast how we think. Look, some employers are going to have claims experience directly from the pandemic.
Right.
Right? Insurers absolutely are going to take a very hard stance on those that didn't get the 60% drop in utilization that most employers experienced.
Right. I wouldn't expect they'd price off of that, although Thank you. It's going to be interesting. No question about that, and I'm sure your services are going to be in great demand as people seek to work through that. Let me ask you, Steve, as you think about, sort of back up and think about what drives the intensity of price competition, as compared to maybe earlier years. We've been locked into this sort of pricing dynamic. It's been fairly disciplined, frustrating for you, I know, over recent years, that you complained with some frustration that it's been hard for you to drive meaningful negotiation out of this environment. To what do you attribute the change, versus the more volatile ebb and flow that I think we used to see in the early 2000s?
I think it's a combination of factors. You and I have talked about this in the past, right? To some extent, you've got the consolidation in the industry. You've got a lot of political activity or threats of political activity, which tends to make underwriters conservative. I get that, right? The business cycle has been an interesting one as well, right? We're coming out of a very long bull market and a relatively steady, healthy economy. I think all of those things have played a factor. We talked about this in the past too. It's seemingly the only industry where advances in technology don't drive costs down, but drive costs up. Innovation in whether it's MRI type imaging solutions or specialty pharma or what have you, it brings additional costs into the system that are life-saving, life-changing for so many individuals, but they come at a cost.
Well, that's interesting. In fact, that gets to my next question, really, which is, when you work with employers today on the drivers of healthcare cost inflation, what are some of the focus areas? There's the new biotech drugs, the new specialty drugs. There's obviously this traditional hospital utilization, and I'm not really referring to the second quarter because I know everything's thrown off right now. What are the areas that get attention, and what are some of the thoughts of how to handle those amongst your employer clients?
Yeah. The 3 biggest, you hit on number 1, which is on everybody's radar screen, is the specialty drugs, right? Those costs are significant and way more than what the medical savings they're producing in many instances, right? Strategies on that front include carving out the pharmacy, going to specialty solutions, much more stricter controls around the utilization and access points of that. The second probably biggest spike we've seen is individual large claimant costs. Just sick people tend to be getting a lot more care, and those costs for those individuals have been skyrocketing. We talked a little bit about on our last conversation, for self-insured employers, stop-loss costs have really risen, and that's because of these large claimants. I'd say the third area that goes a little unnoticed, but not an insignificant one, is out-of-network utilization for mental health and substance abuse care.
Employers, again, driving down access to high-performance networks, centers of excellence, eliminating out-of-network services where they can and are able to do so. I think there's also been some more aggressive alternative options emerging in the marketplace. A few years ago, I remember saying that I thought the third-party administrative market was basically dead. TPAs had come and gone, and there's a reemergence of TPAs with far greater technology solutions that are bringing a little more aggressive bend to the high-performing networks. We've talked a little bit about reference-based pricing, which tied to third-party administrators. There are some more extreme aggressive options that are taking place that I think, as we've talked about, would've happened even without the pandemic because of the increasing cost of healthcare.
Right. Where the mainline carriers are seeking to aggregate everything under their umbrella and preaching the virtues of managing everything together, you have these new solutions coming up, which are arguing for a different approach, which is let us focus on this one particular area, and we'll get a better outcome. Do I have that about right?
You do. That's a nice summation.
Okay. Not that I'm qualified to answer your questions. I'm not. Okay. That's fantastic. I guess the question I wanted to know, and we're actually getting pretty close to being through this, so the interruption was okay.
Sorry about that.
Not that we could have thrown additional questions. I do want to remind people that I have the portal open here. If you have a question that you want to pose to Steve, just send it in via the app. Hopefully it's working. I always ask you this question. Are there any of the carriers, and I know we don't want to get into naming names, but in further long ago years, we typically had one of the major carriers will be suffering through some problems, whether it's because of a systems conversion or the amount and intensity of acquisition activity, those have been some examples they've run into difficulty. That hasn't happened in a while. What do you see from the landscape today?
Yeah. Knock wood that we haven't seen that on a pervasive basis. Of course, there are spots here and there, and have some clients who say, "Well, what about this carrier? They did that to me wrong." We always unfortunately have issues here and there, but I can't point to any particular outlier that is significantly underperforming or unfortunately really outperforming their peers. You might have thought that the big mergers that are going on now might create greater disrupting, but that's not presently visible to us. On the flip side, we haven't yet seen the promises of those mergers. They're big mergers.
Right. You haven't yet seen, for example, CVS move forward with a health coverage product that's closely tied to their HealthHUBs . We're just not there yet.
We're having conversations about it. We're seeing some emergence of it, but I wouldn't say it's been delivered at the moment in our experience.
Right. Okay. If I could, just while we've got a few minutes remaining here, Steve, let me cycle back to a point you made on the drivers of healthcare cost inflation. To the extent you see these individual claimants that are significantly higher in cost than maybe was true a few years ago and emerging in the stop loss coverage for self-funded employers, maybe you don't have the answer to this, but do you think, or have you gotten a consensus from others on whether these people are getting better care or they're just getting more costly care?
That's a two-loaded question.
It is. That's why I saved it for way in the end.
Yeah. Look, I generally believe that the innovation that is emerging in healthcare is helping with better outcomes, longer lives, more quality lifestyles for individuals, certain disease states. I think the cost-benefit analysis is just impossible to prove out, and that's the real struggle, right?
Right.
Who's going to pay for this?
Yeah, that is indeed a complicated mission. You really need to have the population data, I guess, to do that. I guess I'm just a little bit surprised that on the specialty drug side, that you see companies emerging that really carve that out and do that separately. Isn't that challenging from the standpoint of marrying that with the mainstream medical benefits that they're getting?
Well, the pharmacy benefit management carve-out includes the specialty drugs.
Okay.
I didn't mean to suggest they're just carving out the specialty.
Okay.
Policies at that point.
Okay, fantastic. Thank you for clarifying that point. All right. Well, we've gotten through an awful lot here, Steve. Technology challenges aside, we got through our major questions, and it's been a delight to host you. Thank you very much, and we'll follow up soon.
Thank you, Matt. Appreciate it.