Reverse auctions lower costs of employee benefits

Maricopa County has found a new use for reverse auctions: employee benefits contracts. The Arizona county has used online reverse auctions to save 32 percent on a new employee life insurance contract and another 36 percent on a pre-paid dental contract.

The county had already been successful using reverse auctions during the last couple of years for several commodities — from flour to inmate shoes to canned fruit [see “Total Transparency in Real Time,” Government Procurement, June/July 2011]. More recently, conversation in Maricopa County turned to how the procurement tool might be used for employee benefits contracts.

The county uses a BidSync software system to administer online reverse auctions. Multiple pre-qualified suppliers openly bid against one another electronically in an allotted time frame, prices decrease as the auction progresses, and suppliers are allowed to see each other’s bids. The BidSync system notifies suppliers of the auction and provides a link to allow them to bid.

Matthew T. Bauer, procurement supervisor for Maricopa County, Phoenix, Ariz., managed the reverse auctions with Steve Dahle, a part-time strategic procurement officer who handles benefits procurement for the county since his retirement. Bauer says Dahle was especially helpful in getting executive buy-in for the plan. “Steve has been here forever and understood how this is a good benefit for the county,” said Bauer.

Mercer, the county’s employee benefits consultant, had never heard of reverse auctions being used for employee benefits but projected the county might save 10 or 12 percent by using the tool. Results of the reverse auction exceeded everyone’s expectations, and the consultant confirmed the county’s new prices are among the best they have seen.

A key to successful reverse auctions is to provide a strict and standardized set of requirements that the contractors/vendors have to meet to eliminate variables and ensure that any bids are apples-to-apples comparable, said Bauer.

More benefits, less cost

The county used reverse auctions for a $12 million employee life insurance contract and a $859,093 pre-paid dental plan, both covering three years.

The county provides basic life insurance equivalent to each employee’s yearly salary free as a benefit. In addition, employees may purchase supplemental life insurance at multiples of their pay for an additional premium. Premiums are computed at a fixed rate per $1,000 of salary.

The county saved almost 63 percent of the county-paid portion of employee life insurance, and employees will save just over 26 percent. The total savings for the next three years is more than $5.8 million, which is more than 32 percent lower than previously paid. The county is also increasing plan coverage; specifically, the maximum electable coverage has increased from 4x salary to 5x salary, with the ceiling increasing from $500,000 to $750,000.

In the reverse auction, the rate for basic life insurance (paid by the county) decreased from 12.5 cents per $1,000 in salary to 4 cents per $1,000. The vendor also provided supplemental life insurance rates in ranges covering anyone under 25 and up to 70 and older, with separate rates for smokers and non-smokers. The employee-paid rates of the winning bid ranged from a low of 3.2 cents per $1,000 in coverage for non-smokers under 25 to a high of $1.80 per $1,000 of coverage for smokers over age 70. The county passes the full costs of the supplemental premiums on the employees, who benefit from the average 26 percent savings.

The life insurance contract calls for a fixed price for three years and an option to renew for an additional three years. Escalator language allows negotiation of an increase in the event of renewal. Eight vendors competed for the contract, and there was a total of nine bids during the reverse auction, which was held between Sept. 16 and October 18, 2011. ING won the contract.

Pre-paid dental reverse auction pays off

The reverse auction for pre-paid dental services is projected to save $1 million (over the next six years, compared to a previous contract and taking into account the yearly escalator.) The savings are 36 percent without a reduction in plan design. For example, the current rate of $10.67 for a single employee will be lowered to $7.99 under the new plan, and the $30.63 rate for an employee and his or her family will be lowered to $22.03.

Some of the savings will benefit the county, depending on how much the county decides to subsidize the premiums; the rest will benefit the 1,700-plus plan participants. The reverse auction was held between May 31 and July 17, 2012, and there were 10 bid changes during the auction. The new pre-paid dental plan will begin in July of 2013 with Cigna as the supplier.

Bauer says education of the vendor community is critical. Maricopa County held a pre-proposal meeting of suppliers before deciding to go forward with the reverse auction approach, and there was initially some resistance from vendors, although they ultimately participated.

“In a time when many companies and its employees are paying additional money for less comprehensive benefits, it is a great success for the county to be able to lower its premiums,” said Bauer.

‘Define what you’re looking for’

Timing is everything, says Bauer. “Especially with life insurance, the market is opening up. Agencies are competing for a lot more business, so it’s an opportunity in terms of timing to go out to bid. The reverse auction just further increased the competition we had.” Bauer speculates that suppliers might lower prices to enter new markets or to boost market share. Participating suppliers likely have a range of prices they would agree to, including an optimistic and a pessimistic price.

Seeing what other suppliers bid provides transparency. Bidding tends to escalate toward the end of an auction with contractors waiting until the end so as not to “show their hand” too early in the process, says Bauer. “In the end, vendors ask themselves: How much do I really want this business?”

Having specific parameters is important to ensure a reverse auction is fair to everyone, says Bauer. “What you need is a predefined plan and understand what you’re putting out there,” he said. “If you’re looking for them to propose different services, it’s very hard for vendors to bid apples to apples. One vendor might provide a super-premium package and another a bare-bones option.”

“You have to define what you’re looking for so as not to have vendors misunderstand,” Bauer said. “You need to develop specs to meet the needs of the county and try not to be unduly restrictive, which can limit competition.” Because there are many variables in plan designs from one vendor to another, the upcoming renewal of Maricopa County’s health benefits contract will be handled through an RFP.

Look for new opportunities

It’s also important to confirm that the winning bid has the resources to fulfill the contract, Bauer noted. If the contract specifies at least 200 dentists available to provide services in Maricopa County, that number should be verified before awarding the contract, he said.

Also, conformance to minimum bond ratings or overall financial stability is important. “We may ask for additional financials if we have never worked with them before,” said Bauer, given that there is a lot at stake providing benefits for Maricopa County’s 13,000 employees. In the end, respondents to the reverse auctions were solid, nationally based firms such as ING, Hartford and Prudential

“It just shows there are a lot of opportunities to use reverse auctions,” said Bauer. “It’s not just for commodities. You should look at different types of services. Ultimately, you’re spending taxpayer dollars so you want to spend them as wisely as possible. It’s another tool individuals can use to reduce their contracted spend.”

In Maricopa County, construction-related procurement has just been brought into Bauer’s department, and he says there may be opportunities to save in the construction area with reverse auctions.

The news related to employee benefits is encouraging. “Costs are skyrocketing in the area of benefits for county employees, and benefits are getting reduced,” said Bauer. “We were able to reduce the costs to the employees and county and increase benefits.”

“It made sense that it would work, but we had never seen it before,” he said.

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