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SaaS health insurance brokers disrupting old order

Vendors including Zenefits and Lumity offer health insurance in their cloud HR. Disintermediation all over again? Local brokers are fighting back with some of the same technology.

Today, the traditional human resources software channel of provider-broker-customer is being turned on its head by tech companies intent on merging the roles of software providers and health insurance brokers.

This is particularly the case when it comes to the group health insurance market for small and medium-sized businesses (SMBs), which typically have 50 to 1,000 employees.

Vendors such as Zenefits, GoCo.io and Lumity are disrupting the market by providing employers with software as a service (SaaS) platforms to help them automate HR functions, including health insurance benefits administration.

These same vendors also act as health insurance brokers. That means when companies sign up for insurance using their systems, the SaaS brokers typically earn commissions from insurance carriers, such as Cigna, Kaiser Permanente, MetLife, Aetna, Humana and many others.

But even though these cloud-based providers are in the same industry, they each operate a little differently, said Adam Beck, assistant professor of health insurance at The American College of Financial Services in Bryn Mawr, Pa.

"They're trying to figure out what lane they want to be in," Beck said. "Are we going the full-service lane [providing software and benefits], or are we just going to do the software and everyone else provides the benefits services, or are we going to do somewhere in between? But their product is primarily the software."

SaaS health insurance brokers sell cost-savings, automation

Established in 2013, San Francisco-based Zenefits provides Web-based software to help SMBs automate their employee healthcare benefits administration in addition to other HR services, including payroll, compliance, paid time off and employee onboarding.

"You can take your existing benefits through [your carrier]," Beck said, "and plug the existing health insurance benefits into the Zenefits platform, and they do the work for you." 

Zenefits earns its money by taking commission from the health insurance carriers, said Colin Rogers, vice president of carrier relations at Zenefits. The software is also integrated with payroll systems, and Zenefits earns money from those providers.

"To serve as an online broker, we had to build infrastructure that shows companies the various plans and how to enroll in them," Rogers said. "On the back end, we automate the connectivity to the carriers to get them the enrollment data. We also enable businesses to scale their operations and meet the demand on the front end."

The name of the game is cost cutting through automation, according to Cliff Stevenson, principal analyst of the workforce management practice at Brandon Hall Group, Delray Beach, Fla.

"As regulations shift, by having a solution like these, the changes can be automated, and companies don't have to worry about complying with regulations," Stevenson said.

SaaS-based HR platforms and health insurance brokers help employers save money from not having to install their own software. In addition, companies can cut costs by automating manual processes.

"Companies don't have to update manually to comply with changing regulations -- all that can be done [by the vendors] through one central location and pushed out to customers," Stevenson said.

Zenefits, however, ran into some trouble early on, when it was accused of hiring brokers who were not properly licensed and trained to sell group health insurance. Founder and CEO Parker Conrad resigned earlier this year, a casualty of the situation.

Recently, the Massachusetts Division of Insurance began investigating Zenefits' business practices, following in the footsteps of regulators in California and Washington. For its part, Zenefits has said it is developing business practices to ensure compliance with all regulations.

Unlike Zenefits, which opted to assume the roles of broker and software vendor, Houston-based GoCo.io decided to combine its technology with the benefits advisors of Digital Insurance, an employee benefits company in Atlanta.

"We know how to do software, but what wasn't going to be easy was juggling that with becoming a benefit broker at the same time," GoCo.io CEO Nir Leibovich said. "So we built the best technology we could and we partnered with the most reputable and largest small and medium-size benefit broker in the country, Digital Benefits Advisors, owned by Digital Insurance. The way we monetize is we give businesses the software and make money on commissions."

GoCo.io's platform offers employers one online system to manage employee benefits as well as onboarding, payroll and other HR activities. Like Zenefits, GoCo.io also connects to the insurance carriers on the back end to send them employee data.

Another player among SaaS health insurance brokers is Lumity, based in San Mateo, Calif. Lumity develops and recommends health insurance plans to employers by comparing profiles of companies' employees to its own historical data, co-founder and CEO Tariq Hilaly said.

After it aggregates and anonymizes that data, Lumity presents the employer with a complete health profile of employees, and together, they determine the best healthcare plans to make available, he said.

"If you do this right, you can save people about 20% on the costs of their health insurance with no compromise in coverage," Hilaly said. "We're not just trying to cut costs, we're trying to make the purchase more efficient so both employer and employee can drive more value from it."

Although Lumity does take commissions from the insurance carriers, the vendor prefers to work on a per-employee per-month fee or a fixed-fee basis, he said.

"The broker is supposed to be a trusted advisor, a benefits consultant," Hilaly said. "So there are inherent problems. If the more you pay, the more [the broker] gets paid, that causes a conflict of interest. That's why we prefer to do it on a fixed-fee basis."

Local health insurance brokers fight back with SaaS

Not to be left out in the cold, local health insurance brokers are fighting back by teaming up with SaaS technology vendors to offer their customers the same automation as the Zenefits, GoCo.ios and Lumitys of the world.

One of those vendors is PlanSource, based in Orlando, Fla. PlanSource arms its broker partners with cloud technology to put them on an equal footing with the software companies turned benefits brokers, according to CEO Dayne Williams.

"This is a very crowded space, and a lot of companies say that they have a technology platform that will address the needs of the employers," he said. "We're taking a little different view of it. You have the Zenefits, and the companies like that are disrupting the broker and trying to bring a whole new value proposition to the employer. And they're using the benefits commissions to complement their revenue models."

PlanSource, in contrast, tries to address employer needs by empowering independent agents to do so, according to Williams.

"We're enabling them to be better," he said. "We don't go directly to the employer. We arm our brokers to where they can take our products combined with their consulting services and bring them to the employers to solve their benefits needs."

Los Angeles-based Take 44 is taking a similar approach. It is preparing to launch NextAgency cloud-based benefits software for local health insurance brokers.

"If a broker wants a level playing field against Zenefits, they have lots of options," said Alan Katz, co-founder and CEO of Take 44. "The challenges for the [software] vendors [are] making it easy enough for a broker who is not a technician and whose clients are not technicians to use the software. That's what's taking us so long: making it extremely simple to use and not overpromising."

Next Steps

Read a case study on Hixme health insurance software

Learn about public health insurance exchanges

Understand the benefits of private exchanges

This was last published in April 2016

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