The immediate effect of the higher insurance charges, says Sarvadi, was a dramatic impact on Administaff’s profitability and growth. Administaff lacked the information it needed to make sound pricing judgments and customers, when their contracts came up for renewal, were faced with increases of between 20 percent to 50 percent in their health care costs. Administaff’s salespeople, who had been focused on finding new client companies and spurring growth, now found themselves working on retention, as some clients were hesitant to renew in the face of such higher costs.
The consequences of focusing on retention rather than on growth were significant. Historically, Administaff had grown at a double-digit annual rate, as much as 20 percent, 30 percent or more, year-over-year. In 2002, with the company focused on damage control, unit growth fell to minus 3 percent. It was the one and only year in the company’s history when the number of employees covered fell, and profitability evaporated.
Sarvadi and his management team knew something had to change, and they created a strategy to turn the company around and make it better than ever.
“Generally, what doesn’t kill you usually makes you a whole lot better,” Sarvadi says.
The result was several systemic improvements in the company’s strategy. First, Sarvadi and his team decided that the company would never again rely on just one supplier for a service as important as health care insurance.
“We didn’t just move from one carrier to another,” says Sarvadi. “We now have a national network of eight different carriers.”
Next, they reorganized part of the business. The pricing group, which typically was in the sales area, and the cost-management group, which was in a separate area, were brought together.
“We put these two together so they would have direct and timely throughput between cost data coming in and pricing going out,” says Sarvadi. “We have to estimate what the health care costs are going to be per year, then we have to manage those expenses. And at the end of the year, you see how well you did between estimating costs that you built into the price and the actual costs as they turn out a year later.”
The net effect of bringing these two functions together is more timely information and more accurate pricing.
Doing this meant bringing in-house actuarial capabilities that previously were provided by the insurance provider. As another part of the company’s reorganization, expertise in benefit plan management has now been developed within the company.
“We actually triangulate on an ongoing basis between our internal staff, the carrier’s staff and an independent third-party actuary to make sure that we’re paying for what we bought and to make sure that our customers are getting the most value out of the dollars that are allocated for benefit costs,” says Sarvadi.
The benefit of developing this in-house expertise is to ensure that Administaff provides its customers with the best value. In addition, says Sarvadi, “For us internally, it helps us to manage in a way that we make sure we have a match in how we price to our customers and what our costs turn out to be, which means we have a more stable, reliable earnings model.”
The reorganization wasn’t the only thing Sarvadi was focused on. At the same time, the company sued its insurance carrier. A jury found in favor of Administaff and awarded it $8.25 million, but that was much less than the losses it incurred and was not much more than the $6 million the company spent on legal fees.
“But much more important to us was to be vindicated in terms of our reputation,” says Sarvadi.
