There are different types of arbitrage. Dictionary.com defines one form as the “the simultaneous purchase and sale of the same securities, commodities or foreign exchange in different markets to profit from unequal prices.” Imagine buying gold in Italy in euros and selling it at the same time in New York in dollars. Those differences are short-lived and have transaction costs. Millions of people doing this across different transactions every day are what drives efficiency and price discovery
Risk arbitrage is the process of investing (or speculating) on the successful completion of a merger or acquisition. A simple example: when CVS announced its intention to buy Aetna for $69 billion, you buy stock in Aetna, and can even short the CVS stock to protect your investment should CVS go down and wait for the deal to close. If it’s expected to close in 9 months, the target company will trade below the offer price, reflecting the time value of money, and risk of the deal not closing or the terms changing. Over many such deals, they typically return ~10% per year. I bought and sold Aetna last year on this premise.
For an employee, is there arbitrage, or a targeted analysis that can help capture differences in healthcare benefits? This can be helpful, especially for the 20-30 million new jobs people will start this year (new openings plus natural turnover).
Deloitte offers its employees five healthcare plan options, one that puts its healthcare benefits package in the top 15% of large financial services companies. This estimate requires some sexy actuarial adjustments (to take into account employee premiums, any health savings contributions, and to normalize differences in deductibles, copays, and out-of-pocket maximums), all stacked next to a benchmark of 60+ other similar companies. To move to the top 5% would only be a couple hundred dollars. This example, if you’re looking to land a job at Deloitte, doesn’t require much wiggle room for negotiating. They’re already near the top. But if you’re looking at a company that’s less generous, say the 25th percentile, to travel to the 75th percentile could be a $1,000-$2,000 difference for a single employee or more than $4,000 for family coverage. Benefits can’t be adjusted for one person but salary adjustments can be made to make up for gaps. That is a spot for arbitraging benefits.
The areas of value in healthcare in the US will be focused on the areas of arbitrage. It won’t come from wellness vendors, and it won’t come from disease management companies. Costs, employee turnover, and the tiny number of wellness-sensitive medical events ensure that. It’ll come from finding and eliminating areas of waste, changing contracts, rethinking broker relationships, etc.
Those in the individual ACA market paying the full sticker price seek value by choosing narrower networks and $5,000 deductibles; however imperfect the menu offered may be, they still need to order. For job seekers, it’ll be from having a better quantifiable view and industry ranking of how competitive benefits are. It would also be a signal that you’ve done your homework. If you’re looking at competing job offers, send me a note. I’m happy to help.
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