We're at the beginning of the second quarter and only months away from the target date for the initial tactical and financial impact of the Affordable Care Act. So what are the forward-thinking advisers doing? What will distinguish them from the majority that will struggle and languish? As you might imagine, I've been asked questions like these quite frequently in the last 12-18 months. And some of our clients have been preparing themselves for the last two to three years for the impact that is now nearly upon us.
That's right. They have been slowly adapting to the new market realities and have positioned themselves for success. It's not too late to implement changes, but time is rapidly running out for those that have procrastinated. Those that will adapt will understand the need for market segmentation. They will have different strategies for how they deal with different size clients. In other words, they will provide different products, service offerings and capabilities that match the needs of employers by market segment. They will also match the staffing, expenses and enabling technologies to the market segments they choose to serve in order to optimize profits. And all their proactive marketing efforts will be directed at the more desirable employers in their local market.
The likelihood is that no one firm will intentionally try to serve every market sector, because the requirements and potential margins will vary widely. Specifically, in the under 50 employee market, most will employ a two-pronged attack. For employers with up to 25 lives, forward-thinking advisers are assuming that they will lose up to a third of their small-group clients, given the combined impact of the ACA's penalties and expenses and the emergence of exchanges. That, coupled with commission reductions, will likely result in a compensation loss of 40%-50% over the next two to three years for many in the small case market.
The implications are: no proactive marketing in the small case market; adjusting staffing to manage down expenses to maintain profits for as long as possible; and potentially preparing to sell individual health insurance and limited medical coverage to employees that may no longer have group coverage through their employer. And for most, offering voluntary benefits to these employees would also potentially make solid economic sense. Prudent advisers realize that they have incurred the client acquisition expense, and that they now need to monetize their client relationships in a new manner.
In the 25-50 life market, some advisers will explore the utilization of self-funded plans and even captives as a strategy to mitigate the impact of the ACA. And more employers are embracing this approach as a strategy for minimizing the regulatory compliance impact on their businesses. If you don't currently have the expertise, resources or capabilities, you may need to secure new talent and relationships.
And for the majority of clients in this segment who value their employees and intend to continue to offer employer-paid benefits, new approaches will be required. More employers may consider: defined contribution plans; higher deductible plan designs; HRAs and HSAs; benefit cards for claims processing or pharmacy management; and a myriad of combinations of coverage changes, risk transfer and funding mechanisms, and technology solutions. The emphasis will be on mitigating expenses for these employers while attempting to maintain profit margins for the advisers that serve this market segment. As you can see, serving each market segment will have different risks, rewards and requirements.
Perhaps most importantly, strategic marketing organizations will direct all their pro-active marketing efforts toward the 50- to 500-life market. Clearly many of the strategic comments made in the previous paragraph will apply in this market segment, so I won't repeat them here. There are significant implications for the caliber of talent that will need to be acquired, given the expertise, skills and "boardroom presence" that likely will be necessary. The staff resources will need to be more consultative and team-selling. Team client management will become more the norm as advisers offer solutions to solve client critical business issues. However, this consultative approach will also generate more revenue opportunities resulting from: the intelligent integration of voluntary benefits; executive benefits; HR consulting services; payroll solutions; wellness programs; financial counseling; and other products and services that enhance the employer-employee relationship.
The survivors will need to instill a sales culture where everyone on the team is part of the sales process and has personal sales goals, whether that is for new client relationships or up-selling and cross-selling existing clients. How staff team members are compensated will change as well. The whole approach to client engagement in winning organizations must become more strategic, and the survivors will create a multi-year roadmap for clients to manage all their major benefits decisions and expenditures. Successful benefits practices need to evolve so that team members become "human capital consultants" that are viewed as "trusted advisers."
The various action plans articulated here have been and are currently being implemented in firms that are innovative.
And yes, I realize that there are distinctly different capabilities, resources, talent and skills required to adjust to each employer market segment. I am not so naÃ¯ve to not realize that recognizing the opportunity is one thing, while executing the strategy effectively is an entirely different matter.
Do you have a strategy for managing your marketing activities and client engagement? What is your survival plan? What will be your distinguishing features? And please don't say, "Our competitive advantage is that we give good service." Excellent service is expected by every client and it just gets you in the game. It's not a game-changer in today's market.
The anatomy of the survivors will be significantly different in a number of other ways, and their characteristics will be both distinguishing and provide a sustainable competitive advantage. In future columns we will comment on a number of other strategies being contemplated by the benefits practices that will be high performance, growth-oriented businesses that will dramatically impact the market place. In the interim, contact us to discuss these observations further.
Kwicien is managing partner at Baltimore-based consulting and advisory services firm Daymark Advisors. Reach him at firstname.lastname@example.org.
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