Towers Watson and Extend Health

The news that Towers Watson is going to purchase Extend Health is a very interesting development in the retiree health benefit landscape.  Previously, it appeared Extend Health was planning to go public via an IPO process, the S-1 filing for which can be found here on the SEC’s Edgar database.  At 6.5 times forecast FY 2012 revenue, who can fault Extend Health for selling at that valuation?

While many companies are looking at offloading retiree health benefits due to the associated financial and human resource burden the Extend Health Medicare exchange model is just one way of achieving these goals.  In fact, there are several Medicare exchange providers, and now Towers Watson seemingly has an incentive to only push their own.  Clients may be better served by advisors with a more objective view of the marketplace.  As such, this model may prove to be fraught with risk for Towers Watson, Extend Health and their clients.  In light of these risks, it seems the price paid may be a steep one for Towers Watson’s shareholders.

As Extend Health’s S-1 filing points out, the market for selling Medicare health insurance is highly competitive.  Because the market is competitive, plan design, product offerings and pricing are in a constant state of flux.  This can prove a blessing to Extend Health, but may not be a great thing for the firm’s clients.  Clients may be bewildered by the array of plans offered by the 75 insurers participating in the Extend Health Medicare Exchange.

Interestingly, despite having 75 insurers participate in the Extend Health exchange, according to the S-1, Mutual of Omaha and UnitedHealthcare, accounted for 58% of FY 2011 commission revenues.

Our previous blog post on Extend Health and the Medicare Exchange Model provides more insight into flaws with the exchange model.

The deal also looks somewhat suspect due to distribution related issues.  Towers Watson’s clients may not welcome an advisor selling an in-house solution that may not be the best available option for their specific circumstances.  This potential perceived conflict of interest may serve to depress the revenue growth of the acquired Extend Health.

Further, the section of the S-1 titled: Our Growth Strategies, discloses that one key strategy for Extend Health is to “Maximize our existing channel partner strategy and add new channel partners. We have established partnerships with leading health and welfare benefit consultants and brokers, including Gallagher, Lockton, Mercer, Towers Watson, Wells Fargo Insurance Services and Willis. We intend to leverage our existing channel partners and add additional channel partners to gain deeper and broader access to potential clients in both the private and public sectors.”

One wonders how willing Gallagher, Lockton, Mercer, Wells Fargo and Willis will be to sell services, the profits from which will serve to strengthen a key competitor…  These firms may seek out new partners with retiree specific expertise to help them objectively address their clients’ needs.

Many companies and municipalities are missing obvious cost savings strategies in retiree health benefits.  Transferring clients to the individual market is only one approach – and is available through other exchange providers such as UnitedHealthcare and AonHewitt.

There are also group retiree benefit strategies that can significantly reduce the cash costs, OPEB liability and administrative burden retiree health benefits place on employers.  For most employers, reducing cost through this approach can reduce costs without subjecting retirees to the complexity and lack of negotiating leverage inherent in the individual market.