“An outsourcing increase is a positive thing for benefits departments. Benefits staff are working smarter and more efficiently by choosing the mix of outsourcing, co-sourcing and insourcing that’s right for them. More benefits departments are adding staff members, creating balance and strategic focus among departments.”


Julie Stich
Research Director, CEBS
speaking at the International Foundation of Employee Benefits Plans

Benefits managers are inveterate trend watchers. How does this year’s trend in specialty drug costs project for next year? And we watch each other – is there any trend in the kinds of changes other benefits managers are making? For many of us, the worst kind of surprise is to be told of a new benefits trend from our boss rather than the other way around.

One of the trends in benefits that is capturing more benefits managers’ attention is outsourcing. For most benefit managers, outsourcing a significant portion of their department’s activities is not new. How long has it been since we outsourced the claims administration of our medical plans?

According to a national survey conducted by the International Foundation of Employee Benefit Plans, more than one third of plan sponsors increased their outsourcing of benefits functions between 2014 and 2015. The main reason for this was to obtain greater specialized expertise (47.8 percent), especially around legal compliance issues. Other reasons heavily cited were access to superior technology, the desire to lower operational costs and to reduce liability/risk. Implicit in the survey’s responses is the notion that by outsourcing more functions, benefits managers can better focus their efforts on the management of their strategic challenges. And there was clear consensus about what those challenges are: compliance with benefits laws and regulations (72.6 percent) and rising health care costs (51.9 percent).

Since outsourcing is a staple of benefits management, we should keep in mind that the cost/benefit analysis of outsourcing opportunities should not be limited to comparing a vendor’s fees to your gains from staff re-deployment, or your savings from staff reduction. There may be other costs inherent in outsourcing some functions, including ones we’ve long-since outsourced. That is because benefits managers may, without really thinking about it, cede authority over strategic and cost-sensitive subjects to vendors that were seen primarily as providing administrative-only services.

Consider your TPA’s “Medical Manual” (sometimes called Medical Standards, Medical Protocols or Coverage Guidelines). This internal rule set describes in detail what medical services will be covered, under what conditions and what services won’t be covered or will be subject to clinical review. Do you remember that all-day “implementation meeting” you had with your TPA, going over pages of detailed questions about how they should administer your plan? Maybe by the fourth or fifth hour of really detailed Q & A and repeated statements that “our standard is … and sorry, we can’t do it that way,” your brain was fried and you started succumbing to the choices your TPA gave you. Nothing sinister was going on, but what that meant was that the TPA’s preferred way of doing things was starting to prevail. That can be an expensive shift. Because that’s how the TPA starts paying (with your plan’s money) for such items as expensive hospital outpatient infusions and inappropriate back surgeries. Is that the way you want it to be? Behind-the-scenes items like these may reflect not just the TPA’s “medical” judgment, but also how the TPA negotiated with network providers, and it most certainly will affect your costs.

Similarly, our PBM contracts are not just about discounts, rebates and fees. They also govern such cost-sensitive matters as the placement of drugs on the formulary tiers. The contracts generally also defer to the PBM regarding prior authorization protocols and their adherence. The contracts also specify which drugs will be covered, and when, for extraordinary cases, like Hep C. All of these subjects can have a big impact on plan cost and bear close scrutiny.

In bilateral PBM contract negotiations, it is tough for benefits managers to understand all of the nuances of prescription drug sourcing and clinical management. But, it is naïve to think your best interest is their best interest. Their job is win and retain your business while maximizing shareholder value. They win your business by convincing you and your advisor that they are best suited to serve your plan members and to charge you no more than any of their head-to-head competitors. Outsourcing your drug plan administration is about operations and customer service, but it is even more so about sourcing and managing your plan’s drug spend.

All of that said, outsourcing to free oneself to more effectively tackle today’s major issues in employee benefits management can make all the sense in the world. However, benefit managers need to be careful to assess how much it is outsourcing work, and how much it is outsourcing decision making and control. Optimally, your vendor will provide best in class pricing and enable better plan management. The best vendors are also forthright and transparent with your data. They also work hard and with you to secure medically appropriate products and services for your plan members.

If your vendor is frequently putting barriers in the way of your efforts to get great care to your plan members, and at the lowest net cost, it may be time to find a different vendor. If they are protecting their position more than yours, it may be time for a change.