The Power of Variable Cost

As the January 1 renewal season begins to heat up, we are reminded how the high ratio of variable cost offered through the Roundstone medical captive solution benefits employers. In most cases, the variable cost is greater than 80 percent of the total spend, which means the employer only needs to negotiate 20 percent of the renewal.

Despite this reality, advisors and employers continue to focus significant time and resources on negotiating a renewal rate which only impacts approximately 20 percent of the total spend. What would happen if all that time and effort was applied to areas that impact the 80 percent variable cost, such as wellness programs, biometric screening, pharmacy spend, etc. This approach would have a far greater impact on the bottom line.

We recently had a case where the employer hired an outside consultant, as well as a second, independent advisor, to analyze the renewal. If you include the HR manager, there are now four different people analyzing a less than two percent change to the health care spend. Is this effective use of resources?

Here is an example of an actual employer account presented by one of our top advisors. Assuming a $3,000,000 spend, this employer would previously negotiate their fully insured renewal increases of 10 percent, 15 percent, and sometimes as high as 20 percent. These increases could significantly impact operating cost by $300,000 to $600,000 annually. Now that this employer is in the Roundstone captive, their fixed cost is only 15% of their total spend. A 10 percent renewal only impacts the bottom line by $45,000!

As they say, “do the math”:

$3,000,000 x 15% = $450,000 x 10% = $45,000. This negotiation begins from a much better position wouldn’t you agree?