Willis Towers Watson Public Limited Company (WTW) Earnings Call Transcript & Summary

Great. Good morning, everyone. It's Matt Borsch, BMO Capital Markets. Let me thank you again for joining us at the 2020 healthcare conference and this special session in particular. And then let me introduce our industry guest, Steve Lewis, who is a senior leader in Willis Towers Watson's Health and Benefits, brokerage and advisory business. And he's a veteran health and benefits consultant to groups in the dynamic middle market. Now through our discussion today, we're going to try to give you a snapshot of the health insurance market for employer-sponsored coverage at this time, as we work through the pandemic. We'll also touch on discussions with employers that are going on today as well as price products into the [indiscernible]. Now back to Steve for a moment, and I'll turn it over to him. But first, let me just highlight how, over the years, Steve has had a very close and accurate take on key industry trends all the way back in 2002 when I first met him, 22 erratic underwriting and servicing it at one of the national carriers, which is not yet apparent to investors. He subsequently offered similar insights on carrier disruption in 2004 and again in 2007. And in terms of the pricing environment, he's proactively called every major turn in the intensity of competition on commercial health insurance. So with that introduction, I have a series of questions to ask him, but I would first -- let me just first ask him to describe his role in working with employers, and maybe any introductory remarks you wanted to make.

Great. Thank you, Matt. Appreciate that introduction. As always, great to be with you again. As you know, Willis Towers Watson is a leading global advisory broking and solutions firm with over 45,000 employees in 140-plus countries. Personally, I spend most of my time working in our health investment benefits, brokerage and advisory team, where we primarily serve anywhere from 500 to 5,000 employees, helping them manage their [indiscernible] risks associated with their medical, dental, life and disability offerings primarily. Our team is based here in the Metro New York area. And although we work with clients across all 50 states and more than several foreign countries, my comments today will largely be based on the experiences of my team working with those employers.

That's great. Okay. Let me dive right in here and ask you from the standpoint of employee benefits and health coverage. How have your employer group clients been handling the COVID-19 pandemic? And within that, to the extent you can touch on, have they made changes to help employees access health care remotely during the shutdowns? And well I'll leave it at that, and then I've got a couple more.

Great. I think in general, employers have been looking at a range of options to assist their employees with their well-being, and that ranges from emotional to physical to social and financial. I don't think it will come as a surprise to anybody that the real focus has been on telemedicine solutions. Probably a distant second, I would say, is behavioral health services. If not previously included as part of the offering, employers are certainly looking at how to round out those services in support of their employees.

Great. And to the extent that you've had visibility on that, have some of your employer clients, to your knowledge, continue to cover workers who have been laid off or furloughed? And if that's the case, for how much longer do you think they would continue to do that, if necessary?

The short answer is yes, all of our clients have continued to provide benefits coverage for their furloughed employees. Given the cause of the shutdown is a health care event, it's our sense that employers have been very reluctant to take away that benefit and really view it as an absolute last resort. Additionally and more so than normal times, life and disability insurance have been incredibly important for our employers to continue to provide. The core benefit package has largely remained intact thus far with our marketplace. You asked a question about timing, and candidly that's a bit more difficult to pinpoint, right? I think it will vary by industry, by geography and the economic recovery in general. I will tell you that we're in conversations with clients now knowing that those evaluations are picking up momentum. And our sense is that many of these furloughed employees will become terminated employees, but we would expect a lot of those decisions to be made based on what we know now to be made by the end of this summer.

Great. That makes sense. And then maybe just next question, given your answer there is less relevant and -- but to the extent you have any thoughts here because you haven't seen it yet, but for those who do lose coverage whether because of layoffs presumably or layoffs, I would imagine, can you make any generalizations about what these workers will do for coverage when they lose employer coverage? Again, I take it from you, maybe I haven't seen much of that, but their options are, of course, they can be uninsured, that they can continue with the employer under COBRA. That's expensive right now unless Congress acts to subsidize it. Then you've got what you didn't have in the 2008 event, which is the ACA exchanges and subsidies there for people under 4% of the federal poverty level and finally, Medicaid if there [ were ].

Yes. I think it's too soon to say. Based on how I answered the last question, our general sense is for consumer-like businesses, cash is king. And so COBRA would seem like a last resort-type of option and maybe Medicaid or even uninsured.

That makes sense. Now do you see any lasting changes? And maybe it's too early to say, but any lasting changes in benefits that result from this pandemic experience?

I hope so. I think there's a potential in a very positive way for the industry to be a bit more remote like other industries have been, telemedicine. We certainly believe that is here to stay and will grow and expand. Behavioral health has come up with some excellent apps and some other solutions that create some remote access. So I certainly expect there will be some lasting changes in that regard, for sure.

And what's been your perspective on the responses that we've gotten from the insurance carrier so far, at least to the extent that you have seen actions that are noticeable to you and to your employer clients?

On the positive front, the insurance carriers have been extremely proactive with updates, enhanced coverage for pandemic-related services, ahead of and beyond governmental requirements in some instances, and increasingly appear, coming around to a limited extent on premium credits and financial flexibility. Unfortunately on the flip side, not only were most slow, still haven't fully gotten down to the financial relief aspect that employers so desperately need. I think they've shown some bad will in that regard, particularly for employers that are financially struggling. So it will be interesting to see how those conversations continue to emerge. I know we're into a into greater conversation on the financial aspect. I would add that the dental, life and disability insurers on the nonmedical side have been very aggressive with premium reduction, multiyear rate caps. Clearly, less dollars at risk, but it's been a very aggressive approach on those insurers.

Fantastic. Well that's very interesting. And let me shift over to the purchasing process and how do you think or know that the pandemic has changed the time line for the annual shopping renewal of health coverage? And what impact do you expect on the annual renewal process, at least for those employers, and not all of them are, but those employers who are on a calendar benefit here?

Yes. As you know, most employers do fall on that calendar year basis. And so it's been a bit of a mixed bag in terms of clients evaluating midyear plan and funding changes while others intending to stick to the normal path and plan. With respect to the impacts of the renewal process, I really hope to be wrong here, you were so nice and generous to say how I've made some good calls. I hope I'm wrong about this one. But we're anticipating a very, very challenging renewal cycle with a lot of marketing efforts to try and create competition to the extent we can on behalf of our clients. But insurance carriers are in a tough spot, given the lack of claims utilization in the second quarter, it's likely to be, in our view, a very contentious renewal process, with no clear view yet as to how the carriers intend to price renewals. So based on our experience and the way things have gone so far, we're not overly optimistic that the carriers will be taking a generous view. As I mentioned, they're in a tough spot, too. But our approach for self-funded clients is to evaluate what did not happen as a result of the deferred care, evaluate to the extent we can what may return as [Audio Gap] to reprice -- maybe I'm frozen here. Just a second. [Technical Difficulty] Can you hear me?

Still on. Hopefully, this will be a brief interruption. I think that Steve has a lot to say here and we're really anxious to get him back on, if possible. But let's just wait a minute here, and then I'll proceed with the questions. And by the way, again assuming we get back on, we will have an opportunity. If you use the app to ask questions, I can then pass them along to Steve Lewis. [Technical Difficulty] Hi. Thanks, everyone, and welcome back. We managed to get Steve Lewis live now. And thank you for bearing with us. It's a challenging environment to do these events virtually. We're doing our best here. So we're going to just continue here, and I want to ask Steve. I think we answered the question about how the pandemic has perhaps disrupted the time line, although a lot of that remains to be seen. I wanted to ask along with that whether your employer clients, are they seeing [indiscernible] start to drop off in health care utilization to the extent they have visibility on it during the second quarter? And does that awareness, to your knowledge, vary at all based on what they are, fully insured or self-insured?

Yes. We think that it's going to be a very challenging renewal cycle as I mentioned before we got disconnected, right? And so it's been -- the short answer is we do expect more employers to move to self-funded arrangements. And based on the emerging claims data, we've seen a sharp drop off in utilization, upwards of 60% in some cases for April or May, so pretty significant. However, given the lag in claims, its difficult at this stage to confirm which services have experienced the greatest drop. And that's going to be really important to evaluate which services were dropped versus which services might come back. Until we get more of that data in the next few months, we won't be able to conduct that evaluation just yet.

Let me just come back to a point you made there, very interesting. So you predict that we'll see some switching from some of your fully insured groups into self-insuring at this point?

We do. And back to my earlier point that cash is king for consumers, it's also very much the case for businesses, right? And so for those employers that are fully insured, to be able to get that lag, if you will, in the cash payments could be the difference between survival and not for some of their businesses. So look, I think the answer is a little more nuanced, that if carriers who ensure renewals are more reasonable than many were anticipating, and they're willing to offer grace periods or premium credits that go out 60 to 90 days, I think that could help certainly minimize that for smaller employers. So it's -- there's a lot to play out here, but I think if things remain as they are, then yes, we would expect a bit more transition so far.

That might be a good point for me just to jump forward to a point that I was going to ask you about later. But that is another factor in the mix here is the permanent repeal of the Obamacare health insurance fee. And that's going to help on the fully insured side to some degree, maybe not a lot, but 2% to 3% perhaps, taking off instead of a 9% increase, maybe it's a 7% increase or something like that might be the order of magnitude. What are your thoughts on that?

Initially, we saw the direct impact on employers when the industry fees were rolled out. As years went forward, it became a point in negotiations. And insurers began to realize that, frankly, they were going to have to find it in other expense areas, whether it was the increase of their own expense factors but as a separate line item. It became a negotiable point to the point where in 2020, it had little to no impact on employer pricing from our view.

Okay. Okay. Great. And in terms of the possibility of structural changes coming out of this, and again it may be too early, but have you had discussions with any of your employer clients about the idea of maybe they're getting out of the coverage game? And I know this has been a topic that goes back a long way a few years, I should say, with private exchanges and all that kind of innovation that hasn't necessarily come through. But one of the ideas that's out there today, I don't know that it's getting a lot of traction, but it's the idea that you give workers pretax funds through health reimbursement arrangements, which you can now do and that they pick up coverage on their own exchanges. Is that something you see anyone doing? Or is it something that comes on discussions?

Yes. So we haven't seen it yet, but the interest and level of activity has definitely picked up. And while we don't expect a great deal of conversion for 1/1/21, we do think it's going to be part and parcel to the process going forward, most specifically that individual top reimbursement accounts that I think you may be alluding to here, right, is the ability for employers to make that shift and transition. And we do expect that to be a part of the conversation going forward as we're -- we've done that analysis for a number of clients already this year for what it might look like for 1/1/21. Again I'm not anticipating big movement for this cycle, but I do think it's part and parcel to the go-forward conversation.

Sorry, if I could just ask a little bit more on that. As you do that analysis, what parts of the outcome don't look good or maybe problematic from an employer standpoint in taking that step?

Yes. The geography of the pricing, right, so where there are robust, competitive markets, you're going to see better pricing. But many of our clients tend to be spread throughout the country, have some rural locations. I think without real competition on the local level, it's going to be harder to have that financial impact that employers see from that alternative.

Oh, that's very interesting. That makes sense. And maybe you could just comment on the broad topic of competition. And I think I know where you're going to come out on this, but it's important obviously. What are you seeing or anticipating in terms of the intensity of competition as you see it today, versus what you've seen in recent years, versus maybe much longer ago and back when we used to talk in the 2000s?

Yes. As we've talked, you won't be surprised about this answer because we stay in pretty close contact. But there's nobody out there aggressively buying market share and bringing market down, right? So while that may be good news for your investors, not necessarily great news for our clients that as we talked about are looking to squeeze every dollar. So there are again local markets where occasionally, insurance carrier may be looking to grow market share, increase their presence in a particular market. And so we'll see something happen there. But as a broad general theme, price intensity remains pretty muted.

Yes. Okay, that is what I expected, but thank you for fleshing that out. And apart from the intensity of price competition, can you offer any view on -- yes, I know it's early for 2021, it's too early, but -- or maybe midyear renewals, what level of price increase are you -- if there's any generalization you can make for fully insured clients? And how does that compare with maybe what you saw last year?

Look, I think pandemic aside, we wouldn't expect much of a change in that sort of settled-down, post-buy-down negotiation on average. That 5% to 6% range where I think we've been stuck the last couple of years, as we talk about, averages are always tough. I don't want a client to hear me say, "Why is the average 5% to 6%? We're at 15 to 20." But as you all know, it's very employer-specific and claims-dependent. So as we talked about a little earlier before my technology glitches, it's very difficult to make predictions on where this is going to come out, and we're preparing for some difficult challenging conversations in that regard.

So would it be your impression that the way insurers are pricing is sort of taking normal trends, if you will, and just assuming a continuation of that?

I don't know, okay? I think you can take normal trend off the claim base for second quarter, which is what you're going to use to price -- typically use second quarter. It's a critical quarter to price the January 1 renewals, right? And that data is really needed in projecting the future, right? So the nuance to that is what services have been foregone and what are likely to come back. We have a slide we use in conversations with clients that I refer to as the toilet paper stock. It's different consumer purchases, right? At the beginning of the pandemic, everyone stocked up on toilet paper and the health care [indiscernible] people stocked up on maintenance during the supply chain disruption, not being able to get their drugs, right? They couldn't stock up on preventive dental services. They couldn't -- you can't reschedule multiple MRIs, right? So there's things that we do as consumers in our everyday life that are very parallel to do in the health care sector. And understanding how those puts and pulls play out during this time is really going to forecast how we think. Look, some employers are going to have claims experience directly from the pandemic, right? And so insurers are absolutely taking very hard stance, although they didn't get the 60% drop in utilization that most employers experience.

Right. Right. I wouldn't expect a price off of that, although -- yes, it's going to be interesting, no question about that. And I'm sure your services are going to be in great demand as people seek to work through that. Let me ask you, Steve, as you think about -- sort of back up and think about what drives the intensity of price competition as compared to maybe earlier years, what do you feel? We've been locked into this sort of pricing dynamics. It's been generally disciplined, frustrating for you, I know, over recent years that you complained with some [indiscernible] it's been hard for you to drive meaningful negotiation out of this environment. And to what do you attribute the change versus the more volatile ebb and flow that I think we used to see in early 2000s?

Right. I think it's a combination of factors. You and I have talked about this in the past, right? To some extent, you've got the consolidation in the industry. You've got a lot of political activity or threats of political activity, which tends to make underwriters conservative. I get that, right? And the business cycle has been an interesting one as well, right? We're coming out of a very long bull market and relatively steady, healthy economy. So I think all of those things have played a factor. We talked about this in the past. Just seemingly the only industry where advances in technology don't drive costs down but jack costs up. And innovation in whether it's MRI-type imaging solutions or specialty pharma or what have you, it brings additional costs into the system that are life-saving, life-changing for so many individuals, but they come at a cost.

Well that's interesting. And in fact, that gets to my next question really, which is when you work with employers today on the drivers of health care cost inflation, what are some of the focus areas? And I mean there's the new biotech drugs and specialty drugs. There's obviously the traditional hospital utilization. And I'm not really referring to the second quarter because I know everything's thrown off right now. But what are the areas that get attention? And what are some of the thoughts on how to handle those amongst your employer clients?

Yes. The 3 biggest, you hit on number one, which is on everybody's radar screens: the specialty drugs, right? Those costs are significant and way more than what the medical savings they're producing in many instances, right? So strategies on that front include carving out the pharmacy, going to specialty solutions, much more stricter controls around utilization and access points of that. Second probably biggest spike we've seen is individual large claimant costs. Just sick people tend to be getting a lot more care, and those costs for those individuals have been skyrocketing. And we talked a little bit about on our last conversation that for self-insured employers, stop-loss costs have really risen, and that's because of these large claimants. I'd say the third area that goes a little unnoticed but not an insignificant one is out-of-network utilization for mental health and substance abuse care. And so employers are again driving down access to high-performance networks, centers of excellence, eliminating out-of-network services where they can and are able to do so. I think there's also been some more aggressive alternative options emerging in the marketplace. Years ago, I remember saying that I thought the third-party administrative market was basically dead, the TPAs had come and gone. And there's a reemergence of TPAs with far greater technology solutions that are bringing a little more aggressive in to the high-performing networks. And we've talked a little bit about reference-based pricing, which tie to third-party administrators. So there are some more extreme aggressive options that are taking place. So I think as we've talked about what have happened, even without the pandemic because of the increasing cost in health care.

Right. Right. So some -- where the main line carriers are seeking to aggregate everything under their umbrella and preaching the virtues of managing everything together to have these new solutions coming up, which are arguing for a different approach which is, "Let us focus on this one particular area, and we'll get a better outcome." Is that -- do I have that about right?

You do. That's a nice summation.

Okay. Not that I'm qualified to answer your questions. Okay, so that's fantastic. I guess this question I wanted to know, we're actually getting pretty close to being through this, so interruption was okay.

Sorry about that.

Now that we could have thrown an additional question. Actually, I do want to remind people that I have the portal open here. [Operator Instructions] I always ask you this question. Are there any of the carriers -- and I know we don't want to get into naming names, but in -- further long-ago years, you typically had a -- one of the major carriers are suffering through some problems whether it's because of a systems conversion or the amount and intensity of acquisition activity and some examples, they ran into difficulty. That hasn't happened in a while. What do you see from the landscape today?

Yes. Knock wood, but we haven't seen that on a pervasive basis. So of course there are spots here and there. And there are some clients who say, "Well, what about this carrier? They did that to me." So we always unfortunately have issues here and there, but I can't point to any particular outlier that is significantly underperforming our own. And fortunately, we've been outperforming their peers. You might have thought that the big mergers that are going on now might create greater disruption, but that's not presently visible to us. On the flip side, we haven't yet seen the promises of those mergers. They're big mergers and [indiscernible].

You haven't yet seen, for example, CVS move forward with a health-covered product that's closely tied to their health clubs. We're just not there yet.

It's -- we're having conversations about it. We're seeing some emergence of it, but I wouldn't say it's been delivered at the moment in our experience.

Right. Okay. And if I could just while we've got a few minutes remaining here, Steve, let me cycle back to a point you made on the drivers of health care cost inflation. To the extent you see these individual claimants that are significantly higher in cost than maybe it was true a few years ago and emerging in the stop-loss coverage for self-employed. Maybe you don't have the answer to this, but is there -- do you think or have you gotten any consensus from others on whether these people are getting better care or they're just getting more cost for health care?

That's a -- it's a loaded question.

It is. That's why I saved it for [indiscernible] actually.

I generally believe that the innovation that is emerging in health care is helping with better outcomes, longer lives, more quality lifestyles for individuals through disease states. I think the cost/benefit analysis is just impossible to prove out, and that's the real struggle, right?

Right. Right.

Who's going to pay for this?

Yes, that is indeed a complicated mission. You really need to have the population data, I guess, to do that. I guess I'm just a little bit surprised that on the specialty drugs side that you see companies emerging that really carve that out and do that separately. Isn't that challenging from the standpoint of marrying that with the mainstream medical benefits that they're getting?

Well, the pharmacy benefit management carve-out includes the specialty drugs. So I didn't mean to suggest they're just carving out the [ spectrum ], if that's what came across.

Okay. Fantastic. Thank you for clarifying that point. All right. Well, we've gotten through an awful lot here, Steve. And technology challenges aside, we got through our major questions. And again, it's a delight to host you. Thank you very much, and we'll follow up soon.

Thank you, Matt. Appreciate it.