Advantage Benefit Solutions offers a unique pricing model and management strategy that can decrease health insurance costs by up to 30%. Through cost indexing and other control methods, the company helped one client save over $1 million over two years by reducing premiums by 31%. Managing trends like increasing compliance requirements, unknown fiduciary liability, declining employee satisfaction, administrative waste, and rising health costs is key to reducing overall workforce costs and improving business valuation.

1. White Paper
Unique pricing model and management strategy decreases health insurance cost up to 30%.
Decreasing benefit cost can equal an increase in stock price.
Provided by:
Van Richards
Advantage Benefit Solutions
www.abs-insurance.com
4635 Southwest Freeway, Suite 750
Houston, TX 77027
(713) 665-8066 wk (713)320-6124 cell
Introduction
Managing human capital is a major challenge for businesses. The Human Capital Management
Institute has shown that workforce cost represents an average of nearly 70% of operating expenses in
most organizations including large organizations such as Fortune 500TM. i Through proprietary research,
Advantage Benefit Solutions has identified that there are five significant dangers that affect workforce
cost: increasing compliance, unknown fiduciary liability, declining employee satisfaction, administrative
waste and skyrocketing health plan cost. Management of these trends allow businesses and executives
to reduce overall cost of employee benefits by as much as 30%, reduce personal and corporate liability
and better comply with state and federal regulations concerning employee benefits. Besides the obvious
benefit of spending less money, reducing the cost of health insurance can have a positive effect on
business valuation. Studies show that a 10% decrease in workforce cost can equal between a 29% to 0.7% change in stock price. ii Implementation of control methods and unique expense pricing models
related to these dangerous trends with Advantage Benefit Solutions clients has yielded savings of up to
30% in healthcare cost. Below are overviews of the five dangers and a basic analysis of control
strategies.
Dangerous Trends
Increasing Compliance - Complying with federal and state regulations related to employee
benefits is time consuming and costly. Compliance entails specific action and notification to employees.
One of the most common violations is failure to notify employees of health insurance availability upon
terminations. IRS penalties are $100 per day and DOL penalties are $110 per day for each violation. The
new Affordable Care Act requires employers to provide fourteen new notifications to employees. Proof
of delivery of most notifications is essential for compliance. The first step is a written and repeatable
process that follows the employee from hiring to termination. Electronic coordination of employee data
with each employee benefit plan will solve this problem. Turnkey solutions are problematic. Unless
there is a responsible person to coordinate the system there is no employee data management system
that will function on its own. Employee benefit consultants play a key role in coordinating and servicing
the employee data management function.
Unknown Fiduciary Liability – The most prevalent source of unknown fiduciary liability is
disgruntled employees. In 2011 the Department of Labor had 233,780 inquiries into violations. The
number one source of those inquiries was employees reporting on their employer. The second highest
source of inquiries was form 5500 violations. Violations have become a large revenue source for federal
and local governments. Financial services giant JP Morgan has been fined approximately $20 billion
dollars over the past twelve months for various fiduciary violations. iii The employee benefits consultant
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2. or broker can play a significant role in helping employers meet compliance requirements. An annual
compliance review should be part of the annual plan review process along with an independent legal
review. Legal reviews should be independent so that findings can maintain client/attorney privilege.
Declining Employee Satisfaction -Top talent is critical to the success of any business. According
to a study done by Ernst & Young in conjunction with Rice University, nearly 90% of senior human
resources executives at 22 top international oil and gas companies believe their industry faces a talent
shortage and call the problem one of the top five business issues facing their companies. One of the six
strategies that Ernst & Young suggested to cope with the talent shortage was to develop a creative
retention plan. Putting more money into retention plans has been how most companies have tried to
combat talent retention problems in the past. iv The key to the success of retention plans goes beyond
expensive benefits or cash only incentives. A proactive communication strategy will improve any
retention plan. A Watson Wyatt study showed that even a below average benefit package supported by
good communication practices have a much stronger, positive correlation with employee satisfaction
than do above average benefit packages teamed with poor communication. v
Administrative Waste - Administrative waste can be difficult to reduce because you can’t always
see where your time and money is being spent. The two most common areas of administrative waste
with employee benefits is billing errors and how employers compensate third parties for benefit plans.
According to CFO.com PSS/World Medical overpaid $180,000+ in administrative fees to a medical
insurer because it listed the wrong number of employees. vi PSS/World Medical is an employer with over
4,000 employees. But billing errors are not isolated to large employers. Chemtrusion, a raw plastics
pellet manufacturer with 250 employees in 3 states was losing an average of $7,000 per month by
terminating employees too late after termination. vii The solution to both of these companies billing
problems began with a personal audit of the insurance company billing process and ended by
integrating the billing into a third party benefit data management system such as Plan Source viiior
Benefit Concierge ix.
When employers make decisions concerning how health insurance money is spent they are
making decisions on the use of employee money. That is a fiduciary duty that carries a high level of legal
responsibility for employers. If an employer does not have a transparent compensation arrangement
with their insurance broker, their method of compensation could be a breach of fiduciary duty. Fees
that are paid to brokers from insurance companies for sales incentives know as contingency fees are an
even more problematic method of compensation. The Risk and Insurance Management Society (RIMS),
an insurance industry association has taken a clear stance that contingency fees should be prohibited. x
Without transparency, the buyer really doesn’t have an idea of whether or not they are getting a quality
product for a quality price. Plus it could create a breach of fiduciary duty. Insurance compensation
agreements that are based on fees rather than commissions are very transparent and give employers a
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3. specific understanding of how they are paying for insurance. In addition fee based agreements give
benefit consultants and insurance brokers a clear choice when recommending products. An agreement
to NOT accept contingency fees assures that decisions are being made in the best interest of the
insurance plan and the employees.
Skyrocketing Health Plan and Benefit Costs – Health insurance costs are increasing at a rate
faster than employee incomes. Currently the expense of health insurance represents 31% of the
average annual family income. At current inflation rates within five years the average family health
insurance plan will represent 44% of income. xi This is an unsustainable rate of increase. Cost indexing
is an insurance pricing strategy that has proven effective in decreasing health insurance cost by as much
as 30%. The strategy centralizes on a pricing tactic that focuses on hospital and prescription cost. Tim
Moncure, CFO of Baker Nissan, a successful Houston car dealership states his experience with a
healthcare plan utilizing cost indexing. “By changing to a plan design that actually controls medical
costs, our premiums over a two year period decreased by 31% which resulted in saving our company
more than $1,000,000 over a 2 year period! I am happy we can add this amount to our bottom line
rather than giving it to the insurance companies.” xii
Summary
Corporate executives are facing increasing scrutiny and additional personal liability. Businesses
have a more difficult time complying with the myriad of state and federal regulations. Establishing a
compliance protocol is essential to remain profitable and reduce liability. Seeking innovative methods
such as cost indexing that reduce cost without sacrificing quality of benefits will help businesses to be
more profitable and have happier employees. Reducing cost reduces the amount of money that
employees and employers must spend on healthcare. Since there is a direct correlation between
workforce cost and stock price, executives and investors should seek to control employee benefit cost to
benefit stock price.
About Advantage Benefit Solutions
Advantage Benefit Solutions is a leading professional services company based in Houston, Texas.
ABS helps businesses create prudent practices to control the cost and liability of employee benefit plans.
The firm also helps clients manage the maze of employee benefit regulatory issues that they face. The
end result gives ABS clients the environment to recruit, retain and reward employees that will help
achieve their business goals.
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4. i
Higgins, J, and G Cooperstein. "Managing an Organization’s Biggest Cost: The Workforce." Human
.
Capital Management Institute. 5 Oct 2009. Web. 21 Feb 2014.
ii
Higgins, J and Atwater PhD, D. “Linking Human Capital to Business Performance.”
.
Human Capital Management Institute. 5 May 2013, Executive Summary
iii
Eavis, P. “Steep Penalties Taken in Stride by JPMorgan Chase”
.
New York Times 7 Jan 2014, Web. 22 Feb. 2014
iv
Pyron, D. “Solutions to the Recruitment and Retention Challenges”
.
Society of Petroleum Engineers Journal (Jan 2013)
.
Web. 22 Feb. 2014
v
Watson Wyatt Worldwide, “WorkUSA Study 2004/2005: Effective Employees Drive Financial Results,” .
January 2005.
vi
Krass, P. "Precious Resources."
.
CFO.com. 16 Jun 2003: n. page. Web. 23 Feb. 2014.
vii
Stefanick, M. Personal Interview. 07 Jan 2013.
viii
http://www.plansource.com/employers
ix
http://thebenefitconcierge.com/
x
Risk and Insurance Management Society, . "RIMS NEWS." www.rims.org. Risk and Insurance .
Management Society , 6 Feb 2009. Web. 23 Feb 2014.
xi
Claxton, G, M Rae, N Panchal, and A Damico. "2013 Employer Health Benefits Survey." http://kff.org/. .
Kaiser Family Foundation, 12 Nov 2013. Web. 23 Feb 2014.
xii
Moncure, T. Personal Interview. 13 Jul 2013.
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