Note: CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on RESOURCE MAGAZINE.

A Look at an Evolving eBenX

This month, CyberTalk examines eBenX, a Minneapolis-based company that provides Internet-based and other group health benefits procurement and administrative services. Its story shows how a company that started out providing services linking employers and managed care plans is playing an increasing role in the distribution of health plans to employers. It is doing so by developing both B2B e-commerce capabilities and forming alliances with brokers (and in some cases acting very much like a broker itself).

The eBenX Story
eBenX’s story provides an indication of the way that the interests of some insurance/employee benefits administrative service providers are converging with the interests of employee benefits brokers. This convergence suggests that the Internet—rather than causing the disappearance of brokers—is leading to new business models that rely on both (a) the systems links and e-commerce capabilities of administrative services providers and (b) the sales skills of brokers and advisers.

Systems/e-commerce companies need intelligent salespeople to generate customers; the fact that a company’s technology is good does necessarily mean that employers will use it. By the same token, brokers and advisers need systems tools to show employers that they can hold employer health plan costs below what they would be if the employers shopped for health plans without their assistance.

According to eBenX, there are two major processes associated with health plan procurement and administration: a front-end process and a back-end process. These processes involve the following activities:

• The front-end process
• Health plan selection
• Communication of health plan information to employees
• Collection of enrollment and eligibility information
• Continuing member maintenance
• The back-end process
• Enrollment and eligibility data management
• Eligibility data distribution
• Billing, reconciliation, and settlement

Getting Started
EBenX got its start by focusing on the back-end process. EBenX was founded as Network Management Services in 1993, before the Internet attracted interest on the part of the insurance industry—but not before managed care began to have an impact. To serve the managed care industry, the company developed Ben-net®, a proprietary technology platform that provides the connective infrastructure and neutral exchange mechanism to receive and transmit complex dynamic data between employers and group health plans. Employers and group health plans can use the exchange to communicate with one another without having to make major changes in their internal systems.

The data submitted by employers to Ben-net are more current than the data held by the health plans, allowing eBenX to bill the appropriate parties accurately. The financial billing and reconciliation capability allows eBenX to consolidate invoices for the employer and generate payment records for the health plans; the payment records are linked directly to the eligibility data flowing through the system.

In 1998, Inc. magazine named eBenX the fastest growing administrative services provider and the 63^rd fastest growing company in America.

In its first six years of operation, eBenX focused on the large corporate market. It provided links between the employers and the U.S.’s largest health plans, which represented 85 percent of all managed care enrollments in the U.S. It established customized eligibility and financial data interfaces with Aetna, BlueCross/Blue Shield, CIGNA, Delta, Dental, Kaiser Foundation, Merck-Medco, PacifiCare, and UnitedHealth. In 1999, Bell Atlantic and PepsiCo each provided more than 10 percent of eBenX’s revenue. (Together they generated almost half of the company‘s revenue.) It retains a significantly large corporate presence to this day.

EBenX’s principal source of revenue comes from providing group health eligibility administration and premium billing and exchange services. It bills exchange services on a per employee per month basis, with discounts for volume. Most of its contracts with large employers are for three years.

Before There Was E-Commerce
As the above account suggests, eBenX’s traditional business model made little use of the Internet. For a software company, the key to operating profitably is to make something once and resell it over and over. Given the size of eBenX’s relationships with Bell Atlantic and PepsiCo, it is likely that eBenX developed its core set of functions to meet the needs of these two firms. Once it had developed those functions and established interfaces to multiple health plans, it could essentially resell the associated services over and over to different employers.

Not surprisingly, eBenX also saw that its core activities positioned it well to function as a de facto employee benefits broker. As a sideline to its chief activities, it began offering health plan procurement services to some of its large employer customers on a project basis. It assists and advises these companies on the selection of potential suppliers, preparation of requests for proposals, evaluation of proposals, and rate negotiations. It receives health plan procurement fees for these activities. EBenX is not currently regulated as an insurance broker but acknowledges that such regulation poses a threat.

Thus, for eBenX, the development of a system providing financial links between employers and health plans led very naturally to a sales role. In the pre-e-commerce world, EBenX was already doing commerce.

Then Came the Internet
What happened when Internet e-commerce activity exploded in the late 1990s?

In the large corporate market, a number of strong competitors began offering Internet-based front-end services, including services designed to facilitate online selling of employee benefits plans—in effect, employee benefits e-commerce. These firms included providers of human resource information systems, record-keeping service companies, payroll companies, and enrollment software companies. Many of these firms were large and better financed than eBenX, which remained privately held. At the same time, eBenX saw Internet start-ups raising billions of dollars from initial public offerings (IPOs) on the strength of business plans alone. Unlike many of these firms, eBenX already had a viable business that was generating real and growing revenue (although it was not profitable).

Not surprisingly, the leaders of eBenX decided they wanted to take the company public. However, they faced a problem because the company’s existing system and services were not Internet-based. Therefore, they needed to transform it into an Internet company. The most logical way to do it was by offering Internet-based front-end services, but they were afraid competition in the large corporate market was so strong, that they could not be successful there.

Different Markets, Different Strategies
Therefore, they decided on dual strategies, one for the large corporate market and one for the middle market. In the large corporate market, they decided to specialize in providing back-end services translating eligibility and financing information between trading partners and executing payment transactions among all parties. They would establish alliances with operators of front-end services. Thus, eBenX now has links with front-end services offered by Healtheon (now WebMD), Pricewaterhouse Coopers, Watson Wyatt, and Peoplesoft.

For the middle market, eBenX’s leaders decided to offer a full suite of Internet front-end services linked to its back-end exchange services. The entire suite of services is called the eBenX Benefit Exchange. The front-end services include bid and quote systems that allow employers to present requests for bids to health plans and allow health plans to respond with proposals and rates. They also permit annual and ongoing enrollment update in multiple health plans and offer information on various plans, provider networks and rates. Together with its back-end services, eBenX has a full-fledged employee benefits e-commerce service. However, it had no existing sales operation targeted at middle market corporations, which are significantly more numerous than large firms. Therefore, in addition to building the service, it needed allies. Its leaders, therefore, decided to seek relationships with brokers and employee benefits advisers who specialize in the middle market.

In July 1999, eBenX obtained a $10.5 million new round of venture capital to finance its transition to Web applications. The investors included CB Health Ventures, JMI, New Enterprise Associates, North Bridge Venture Partners, and Trellis Health Ventures. In September 1999, it changed its name from Network Management Services to eBenX, Inc. On December 10, 1999, it had an initial public offering (IPO) that generated about $100 million. EBenX currently reports that its customers include 20 of the approximately 1,500 U.S. employers with more than 5,000 employees. Its customers include Northwest Airlines, Eastman Kodak, Chevron, Target, and Georgia-Pacific as well as PepsiCo and Bell Atlantic.

Changes in 2000
In 2000, the company is focusing on building an Internet tool that will allow employers, brokers, and advisers to make employee coverage changes via the Internet. In addition, it is creating an Internet-based census acquisition and proposal request tool to support the employer’s competitive bidding process. In April 2000, it announced availability of its Internet-based online procurement tool.

In January 2000, eBenX signed an agreement to provide Employer Benefit Services (EBS) with an EBS-branded version of its exchange. EBS provides value-added services to employee benefits brokers and consultants.

In July 2000, eBenX announced an agreement to provide eBenX Benefit Exchange Services to the managed care organizations participating in the PlanLink Network. PlanLink is a network of local and regional plans that have joined together to provided national coverage for mid-size employer groups. The eBenX Exchange will provide online procurement, enrollment, billing and data access services for PlanLink and participating managed care organizations. Allianz Life of North America, which provides complementary PPO and indemnity coverage to PlanLink, has also become a member of the eBenX Exchange.

During the first half of 2000, eBenX signed up 15 brokers and employee benefits advisers.

In September 2000, eBenX put some of the cash generated through its IPO to work by buying Arbor Administrative Serves, Inc. d/b/a Arbor Associates, a privately held, Web-based benefits administrator and application service provider targeting middle market corporations. Arbor shareholders received $17 million in cash plus stock in eBenX.

In October 2000, eBenX added consolidated health plan bill presentment and payment capability to the exchange.

For the six months ending June 30, 2000, eBenX reported revenue of $12 million, up 68 percent for the comparable period of 1999. Enrollment increased from 345,000 to 585,000 during the same period.

Thus, the world of managed care administrative services providers has converged with the employee benefits e-commerce world and both have converged with the world of brokers and employee benefits advisers.