EDS Combines Best Practices to Service Hybrid Product
The end of World War II ushered in a new era of prosperity in America. A record baby boom - 76 million babies were born between 1946 and 1964 - caused a need for new schools in the 1960's, more college dorms in the 1970's, and increased competition for management positions in the 1980's. Today, those baby boomers, graying and turning 65 at 8,500 a day, are worried about their healthcare needs in the final years.
One solution is a long-term care (LTC) insurance policy. This insurance product pays for nursing home expenses as well as home healthcare products and services that allow the elderly to maintain independence and the ability to continue to live in their own homes. A long-term care policy picks up where Social Security, Medicare and Medicaid leave off.
Nursing home care is expensive. A John Hancock Life Insurance Company/National Council on Aging study reports an average one-year stay costs between $45,000 and $60,000 a year. The report estimates only 42 percent of the American population can pay for a one-year stay at those prices. That number drops to 23 percent if the stay spans 24 months.
Baby boomers are correct to worry about that costly expense. In 1999 the federal government funded the lion's share of the bill, 54 percent of the LTC bill, according to Medicare and Medicaid Services' Office of the Actuary. But the government is cutting back on underwriting these costs, due to fiscal budgetary constraints and an exploding base of seniors, according to Faith Trapp, managing director, global insurance industry, for EDS, a Plano, Texas IT and BPO outsourcing supplier.
Using Insurance to Protect Financial Assets.
"Boomers are searching for ways to protect their financial assets," continues Trapp. "They want to get ahead of the curve. Long-term care insurance does that."
Moreover, medical advances are allowing Americans to live longer. "We used to think life insurance policies addressed the financial needs of the aging," notes Jan Tankersley, senior director of BPO portfolio management for EDS. "Today, people have to worry about chronic conditions that come with increased life expectancy." In 1987 about 6.5 million seniors had health problems, according to the John Hancock report. By 2040 that study predicts that number will jump to 19 million.
"Long-term care policies didn't exist 20 years ago because there wasn't a need for them," observes Trapp.
Both life and health insurance companies are selling these policies through their own sales teams. Employers are just now starting to include long-term care coverage in their group benefits and cafeteria plans. Financial institutions like banks and credit unions are also adding these policies to their product rosters. "It's a good way for banks to enter the insurance business," says Trapp.
Currently, purchasers do not receive a tax deduction for buying a long-term care policy. The underwriters, however, are betting the number of long-term policies will soar if the government creates a tax deduction for them. "Congress is looking at that. That will spur growth," predicts Trapp.
Outsourcing Allows Insurors to Get Their Feet Wet
Without a crystal ball, the insurance companies are caught in the horns of a dilemma. The odds are high they will sell a large number of these policies in the future. Now, however, they form an insignificant portion of their current total production. They don't want to invest in the major expense of establishing the IT infrastructure required to handle the processing and administrative functions of these policies. And they don't want to hire the staff for the third party administration (TPA) duties.
Outsourcing is the solution. The supplier provides the capital to build the IT infrastructure and has the expertise to handle the TPA work. The supplier has the IT systems to underwrite the product as well as the actuarial acuity to do that correctly. Outsourcing also provides speed to market, getting the product to market in the shortest time possible.
"Insurance companies know they have to get into this market," says Trapp. "Outsourcing allows them to enter this space with a low initial cost. Outsourcing gets their foot in the door so they're ready when demand grows."
EDS is one supplier who is working on offerings to fill this void. "We believe long-term care policies are a strategic product that is set to take off," says Trapp. "EDS wants to be ready."
While long-term care TPA is a new offering for EDS, it has already established best practices as a TPA in both the healthcare and insurance industries. Tankersley says adding long-term care policies to EDS' current TPA responsibilities is "a logical segue way for us." Expertise in both areas makes the supplier uniquely suited to handle this hybrid product.
In addition, EDS is setting up its offering to provide an end-to-end solution for its insurance company buyers. For example, they could provide a preferred service network for an insurance company. "EDS would serve as a services coordinator so the insurance provider could offer one-stop shopping," says Tankersley.
As the baby boomers grow older, EDS is ready to help the nation's insurers grow their business through the ability to introduce new products to market faster, (i.e. LTC products) in the short term.
Lessons from the Outsourcing Journal:
- Long-term care policies are a new offering uniquely suited to help baby boomers deal with the financial consequences of aging.
- Insurance companies want to sell this new product. But they don't want to invest in infrastructure or people to service them since these policies are such a small portion of their product line. Outsourcing allows them to enter the market quickly and be ready to expand as their popularity grows.
- EDS is combining best practices in two of its product areas - healthcare and insurance - to offer TPA outsourcing for these new policies.