Health plan costs are a burden on employers and employees. Health insurance premiums and cost-sharing are increasing faster than the median employee wage, with no end in sight. And as PwC’s health cost trend finds, we are expecting health costs to double every 10 years.
With this environment, employers look to their benefits consultants for solutions to reduce their health plan spending and yet maintain or even improve benefits. With such a mandate, consultants have brought many tools to the table, some time-tested, others somewhat new. Which are here to stay, which are a flash in the pan?
Let’s touch on them at a high level, so you know what cost containment solutions exist and how they may factor in to your own health plan’s long-term startegy.
The number one topic in cost containment for health plans is Self-Funded Medical Benefits, a topic we have discussed in this space extensively:
- What is Self-Funding?
- What is a Medical Stop-Loss Captive?
- HSAs versus Self-Funding to Manage Healthcare Costs
- Managing self-funding with stop-loss insurance
- Self-funding and CA S161’s effect on stop-loss insurance
- Making Health Plans a Value Add for Private Equity Funds and Financial Managers
To summarize what we’ve discussed on this topic…
Self-funding puts employers in direct control of their healthcare spending. Through working with TPAs (third party administrators), PBMs (pharmacy benefit managers, more below), vendors, and stop-loss insurance, employers pay a variable healthcare cost that over time is typically less than a fully insured health plan.
Self Funded Health Plans are the platform upon which employers can transparently see their claim spending, adjust their plans as needed, and bring to the table transparent and aligned vendors in order to reduce health plan costs, increase benefits, and deliver a better overall benefits experience to employees. Employers can weed out the waste and profit margin for many middlemen and vendors that would otherwise lead to higher insurance premiums, as we discuss below.
Transparent Pharmacy Benefit Manager (PBM)
A major source of spending for health plans, and one growing very quickly today, is prescription drug spending. Prescription drugs are not used by every employee on a health plan, and spending is particularly high with a small subset of employees receiving prescriptions. When a small number of drugs account for the majority of overall drug spending, payers should be asking how their plan is best managing those costs and what could reduce both their payments and employees’ payments for those drugs.
A Transparent PBM provides payers the lowest possible drug prices and returns all manufacturer rebates directly to the plan. These rebates have gone to the PBM or carrier in the past, and this removes some waste in the prescription drug supply chain to employers’ benefit. Another strategy many PBMs employe is drug importation, whereby drugs are purchased from Canada and brought into the country. This is a complicated issue and on murky legal grounds, but with drug prices continuing to increase and strain employees, plans are considering these kinds of alternatives for relief.
Carriers have been designing narrow networks for years now in an attempt to provide a fee-for-service network that weeds out the highest cost providers. Narrow networks are strategies where employers narrow the list of providers who are in-network for employees. This has provided some good results depending on the market.
The dynamics of healthcare pricing and payment means that a provider is reimbursed for their services a set amount according to the negotiated rates in their contract with a particular payer and network. If a high-priced provider or medical group will consider joining the network, it’s likely they’ll negotiate higher rates, thus increasing the cost of the plan overall.
This will have varying results based on the dynamics of the local healthcare landscape. As long as healthcare remains a predominately physical service (looking at you, virtual care!), local systems and their pricing will drive what employees and employers spend on their healthcare. Some markets have a high-priced system with middling results, whose removal enhances the plan, others, not so much.
Carriers have had some success with narrow network plans in California, for example, such as Blue Shield’s Trio or Tandem networks. This is a strategy that can be employed by either fully insured or self-funded plans.
Centers of Excellence
Not every provider, medical group, or health system is the same. Healthcare exhibits an interesting pricing dynamic whereby low-priced providers frequently outperform high-cost providers on quality measures. If prices in healthcare are uncorrelated with quality, why should we pay more?
Enter Centers of Excellence or COEs. These are select providers or health systems in a network that are determined to deliver the highest quality care in a specific specialty or treatment and thus, the payer reduces employee cost-sharing for seeking care from these providers. For example, Walmart has tagged the Mayo Clinic as a Center of Excellence and makes a significant effort to push employees to receive care at the clinic. Why pay coinsurance and your deductible to go to a decent local provider when your plan pays for you to go to a COE?
The reason payers do this is their experience has shown good results by doing so. Payers would rather cover the cost of an employee to travel for a spinal surgery than pay a 2x, 3x, or higher multiple for them to have their surgery performed near their home, for example.
While a Center of Excellence is useful for a particular treatment or condition, what if employees are having good results with a particular local health system and you want to obtain the best rates for that system?
In that case, let’s approach that health system and offer to drive employee utilization to their providers in return for a lower negotiated rate, in part because a carrier network is removed from the equation.
Direct Contracting is a local arrangement with a quality health system whereby employees are driven to the system through plan design such as low or no deductibles, low coinsurance, and other considerations designed to incentivize them to seek care at this specific hospital.
Bundled payments are an alternative payment model or APM whereby a payer pays a set amount for a service or procedure, and the provider must deliver the outcome without charging for specific treatments in the case. Payers pay for an outcome, not for what is done to the patient.
One significant reason for adopting bundled payments, and some of the other strategies above, is the fact that payers find widely variable costs across various systems for similar or equivalent treatments.
Bundled payments are a form of risk-taking on behalf of providers, in their belief, they can deliver quality results over time and numerous patients in a profitable way that is less than their payments. If successful, this generates a profit for their practice. Providers will have a loss if they can’t deliver quality results for less than the predetermined price.
This practice started with CMS and Medicare beneficiaries, but it has now spread to the employer-sponsored health plan market. Companies such as Boeing, GE, Lowe’s, and Walmart are all engaging indirectly buying healthcare for certain episodes of care.
Healthcare Innovation for Employers to Reduce Healthcare Costs
These strategies are only scratching the surface of what can be done to reduce healthcare costs for employers and employees. The starting ingredient in this process is an employer who is open-minded and looking for solutions. Complacency has squashed innovation time and time again in this industry, and only by demanding better, can we deliver better. Employees and employers need this change or else healthcare will continue to be a burden and drag on household finances, American health, and our local businesses.