Big Bets on Exchange Tech Signal Consumer-Friendly Future for Benefits

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By Scott Carver, President of PlanSource
NOTE: This post originally appeared as a featured blog post on Employee Benefit Adviser

Recently, Aetna announced it will spend $400 million to acquire bswift, a fast-growing benefits administration and exchange technology provider.

Due to the big-name company involved, this transaction made the headlines in business news. But, really it was just the latest and most significant of a series of transactions that, taken together, send some very strong signals about how the market is viewing the importance of these technology platforms in the fast-changing health care and benefits industry.

As we shift towards a defined contribution model for benefits, people are betting that a technology-empowered consumer experience will be the winning competitive strategy. There are a limited number of truly viable, comprehensive exchange platforms in the market today, which has created a somewhat heightened sense of urgency for firms who have designs on being big players in this space to get into the game.

We first saw this in 2013 with the successful initial public offering of BenefitFocus in September. Shortly after that, in November of 2013, professional services firm Towers Watson acquired Liazon, a company that develops and delivers private employee benefit exchanges, for a reported $215 million.

This past October, a cloud-based provider of benefits education and enrollment technology by the name of SmartBen was acquired by Hodges-Mace, an employee benefits communications company, leaving even fewer independent exchange technology providers in the market. The SmartBen deal was a private transaction so terms weren’t disclosed.

In a closely related transaction, in March 2014 we saw yet another highly successful IPO. Castlight, which offers health information via the Web to help corporate customers reduce insurance costs, went public with a $1 billion market cap.

What does all this frothiness around these technology platforms mean? The market has seen the future of health care and benefits administration and those platforms are the cornerstone.

The whole industry is undergoing a radical change, which is being pushed forward at a rapid clip by deadlines for the Affordable Care Act. Within two to three years, health care and employee benefits programs will undergo a dramatic shift to defined contribution models, just as we saw happen with retirement plans 20 or so years ago. Employers will attempt to gain some control of costs by contributing a set amount toward employee benefits, while transitioning responsibility for selecting and buying them to the end consumer.

As that happens, companies are trying to do two things. First, employers still want to play the role of conduit for employees get their benefit portfolios, so they are looking to brokers for tools to help their employees understand their options and make decisions about what plans are best for them, what they should spend and so forth.

Second, insurers and benefits providers are looking to gain brand equity and customer loyalty before someone actually injures themselves or has a health episode where they have to have care approved or file claims. They want to cement the relationship with the consumer well in advance of that.

It’s the consumerization of health care and benefits, and technology will support a business-to-consumer model for insurance companies and benefit service providers to effectively interact directly with individuals. We saw this happen in the mutual fund industry as part of the shift from company provided pensions to self-funded 401(k) plans. Plan providers such as Fidelity, T. Rowe Price and Morningstar now have these robust online platforms with information and resources like modeling tools and calculators for people figure out the best way to invest their money to fund their retirements.

Right now, health insurers are lacking these tools. The benefits consultants who help employers manage their benefit portfolios also lack these tools, and big infrastructure and business process outsourcing companies are also aggressively seeking ways to adapt to this changing landscape.

This is why we’re seeing such demand for this technology. There’s a rush to find platforms that have the weight, the breadth and the functional sophistication to be able to provide not only that direct consumer engagement experience, but also be able to handle all of the processing that has to happen in the background once consumers make decisions. That includes connecting all the stakeholders in the ecosystem, managing those relationships and all the associated data, and administration that has to happen when people’s life circumstances change.

It’s extremely expensive to build these platforms. What Aetna and Towers are saying is, “hey, we’d be better off buying now to get going quickly rather than spending the next 10 years trying to build it.” It’s a race to market.

And the market has spoken. Whether you own it, build it or partner with one of the remaining independent platform companies, you’d better have a technology strategy or it will be difficult to win in this rapidly changing game.