Top brokerages share why they’re invested in exchanges (or not)

An employee benefit advising firm doesn’t become a top brokerage by ignoring industry trends. Perhaps the hottest trend in benefits right now is the exchange distribution model. In EBA’s ongoing series of discussions with heads of many of the country’s top brokerages, leaders at Mercer, Arthur J. Gallagher & Co., Lockton and Pacific Resources share their approach to the exchange system and how they see private exchanges impacting the future of benefits.

In the wake of the Affordable Care Act putting a spotlight on exchanges, there’s been “a lot of disruption” and a certain extent of “noise” around private exchanges, points out Paul Rogers, president and COO of Pacific Resources.

The Mercer Marketplace in particular has experienced “rapid growth” in its second year — a source of pride for president and CEO Julio Portalatin. The system now has 247 clients across nearly all industries and employer sizes totaling more than 1 million eligible lives between the active and retiree space, according to Portalatin. Last year, the exchange averaged $800 in savings per medical enrollee, he adds.

However, even with the success of the Mercer Marketplace, Portalatin is quick to point out, “It is not where we start our conversations with our clients.”

Also see: “The top 50 large-group employee benefit brokerages in the U.S., part 2”

Analytical approach

In fact, he says, “The way we work with clients remains essential and virtually unchanged.”

Mercer advisers start by asking themselves where a client wants to be, what is getting in the way of that goal and what Mercer can do to help them achieve their business objectives, says Portalatin. Then, if after that process the Mercer Marketplace seems like the right fit, “we of course wouldn’t hesitate to recommend it, because we do believe it is the best exchange solution on the market,” he says.

At Chicago-based Pacific Resources, Rogers and partner Paul Barden, CEO, started really studying the exchange model approximately two years ago and decided to launch a private exchange consulting practice in the process. “We see that as a significant growth opportunity for our organization,” says Rogers. “But more importantly, it’s meeting a pretty important need at the client level. So we’re real happy about that direction.”

Also see: “The top 50 large-group employee benefit brokerages in the U.S., part 1”

Like Portalatin’s approach at Mercer, Barden says Pacific Resources views the decision for an employer to use an exchange platform as part of their overall benefit strategy. “Once we understand what is the direction of their benefit strategy, an exchange solution may be one of the things that we’ll RFP or vet for them,” he says. “But that would just be part of the solution. We don’t lead with the exchange as a practice for us. It’s a practice within the overall benefits strategy that we talk with our clients about first.”

Such an approach allows the firm to ensure they are not going in a preordained direction, in this case, toward an exchange, without knowing what makes sense for that individual company and how it plays into their overall corporate strategy. It’s about providing a long-term view for clients, Rogers adds: “Working with our clients in the marketplace, first to understand what are they potentially gaining and what are they potentially losing by moving to an exchange and really spending time with them to understand what their vision is five and 10 years from now.”

No exchange

Looking at their business model, Pacific Resources made the strategic decision not to go beyond consulting on exchanges by creating one of their own. “We just philosophically don’t feel the way we’re wired and developed as an organization, we don’t want to create our own exchange,” says Rogers. “We’d rather just stand shoulder to shoulder with our clients to help them understand and bring greater clarity to what’s going on and what’s emerging as a potential solution for health and welfare.”

With more carriers and brokerages developing their own exchanges, Rogers predicts “a void in independent advice” and wants Pacific Resources to fill that void.

For Kansas City, Mo.-based Lockton, Aetna’s Nov. 3announcement that it will acquire private exchange operator bswift validated the firm’s position to focus on being a “trusted adviser, as opposed to being an exchange owner and sponsor,” says President Mike Brewer.

Also see: “Aetna buys bswift: Why benefit brokers must pay attention”

The acquisition confirmed Brewer’s suspicion that a lot of carriers are going to have their own exchange platforms. “It would be, I believe, arrogant of us to think that we could create the one best whiz-bang exchange platform that was best for everybody,” says Brewer. “I think somebody in San Antonio’s carrier needs are going to be different than somebody in North Platte, Neb., and I think we need to be able to recognize that and sniff out the best exchange option for them.”

To that end, Lockton’s strategy “has been not to invest so much money that our answer had to be the answer,” Brewer adds. “We weren’t trying to validate an investment by moving a lot of merchandise. I like where we are.”

That said, Lockton is open to all opportunities in the future. “Eighteen months from now, things could change,” he says. “There is a lot of uncertainty in our business that creates a lot of angst, but it also creates a lot of opportunities.”

The benefits distribution model

There are a lot of different theories about how exchanges will affect the benefits distribution model in the long term, but Mercer research shows that about one-third of the employer-sponsored benefits market will experiment with private exchanges in the next five years or so, according to Portalatin.

“Even with this rapid growth change, there’s still going to be two-thirds of the market which will not be on a private exchange in that timeframe,” he says. “So to us, the exchange model is one strategy employers can use to provide a positive, cost-effective personalized benefits experience to their employees. And there’s a lot of other wide arrays of strategies we’ve always worked with our clients on.”

Jim Durkin recognizes there is a lot of attention on private exchange strategies right now as the industry sorts out how such systems work and how they can potentially help customers. As president of Gallagher Benefit Services, a subsidiary of Arthur J. Gallagher & Co., he sees the exchange model providing “the employer the opportunity to give their employees a whole host of choices that they might not have been able to offer in the past.”

Also see: “The country’s top brokers: Poised for growth”

Gallagher has a tool on its platform that assists employees with the extended choice offerings by walking them through the decision-making process to determine which choice makes the most sense for each individual employee, Durkin says. “So not only is there a choice, but there’s a tool in place that helps those employees navigate all of those choices,” he adds.

Part of the deliverable of an exchange platform, Durkin says, is the benefit administration capability that comes with it. “You’re giving people choice, you help make the decisions and then you’ve got a platform that helps manage that process,” he says. “Ultimately, I do think that this is going to give our customers the opportunity to control their costs and give our customers the opportunity to look very seriously at adopting a defined contribution strategy for their employee benefit program.”

Editor’s note: This is the second in a series of articles where the leaders of many of the country’s top brokerages share their visions for the future of the industry. Other topics to be addressed include shifting client services, obstacles to overcome and ongoing innovations that are changing the industry.