Healthcare consumers and employers who sponsor plans continue to battle the rising cost of offering healthcare benefits. According to a March 2019 Peter G. Peterson Foundation article, the United States spent roughly $3.5 trillion, or more than $11,000 per person, annually. As a percent of GDP, we currently spend 17 percent on healthcare and most economists expect this number to be 25 percent or higher by 2025.
Between the mandates of the Affordable Care Act and the competitive talent market, employers are almost forced to be in the healthcare benefits game. To combat these trends, employers must look to new and creative cost containment strategies.
Cost containment is an important set of strategies and tools regardless of your organization’s size and health insurance plan funding type. The ultimate purpose of cost containment is to reduce costs incurred by both your organization and employees. Every action you take to reduce costs has tangible value for the plan participants (employees), and each may lead to higher-quality care at a lower cost. While other strategies, such as wellness programs, may indirectly result in cost reduction over time, cost containment tactics can have an immediate impact on your organization’s finances.
Cost containment levers your organization can use include eliminating unnecessary spending, optimizing a funding mechanism, and creating better clinical outcomes for your employees.
Your organization can reduce unnecessary costs in a couple ways.
Another key to cost containment is to optimize your funding mechanism. You have many choices in determining which plans are right for your employees, including fully insured plans, traditional self-funded plans, association plans, level-funded plans, and stop-loss captives, to name a few.
Flexible Options with Fully Insured vs. Self-Insured Plans
The main difference between fully insured and self-funded plans is who carries the risk. The insurance carrier assumes the risk in fully insured plans, while the organization bears the burden in a self-funded arrangement. In fully insured plans, employers pay monthly premiums to the insurance carrier for limited plan options. If your organization self-funds its healthcare plan, it would have much more freedom to design and administer the plan; however, your organization will pay the claims, fees, and stop-loss premiums on the plan.
Find Balance with Level-Funded Plans
Level-funded, or partially self-funded, plans combine the strengths of self-funded and more stable cash flow of a fully insured arrangement. Your organization can use a self-funded plan’s personalized healthcare choices and a fully insured plan’s stability to create level-funded plans for your employees. Level-funded plans use individual and aggregate stop-loss coverage to cap claims and control costs. This plan allows your organization to contain costs and customize plans for your employees. For many smaller employers (<100), this is a way to gain more control of their plan and costs.
Share Costs with Association Health Plans
Association health plans (AHPs) allow small businesses and entrepreneurs who are similar in geography or industry to act as a single larger employer to guarantee coverage for their employees. It is difficult for small businesses to find affordable plans for their employees, but when they come together with entrepreneurs and other small businesses, they can more easily obtain economical coverage that more closely aligns with their employees’ medical and financial needs.
The funding mechanism that you choose depends entirely on your organization’s unique needs and situation. While one organization may need a self-funded strategy to provide their employees flexibility in their healthcare choices, another may partner with an insurance carrier for a fully
By creating better care outcomes for employees, your organization can reduce costs. Help your employees obtain better outcomes at the hospital or a clinic by encouraging preventive health measures, introducing prescription programs, and implementing population health management strategies.
In addition to the aforementioned levers, there are a couple emerging trends that you should be aware of as you consider the healthcare plan that’s right for your organization.
PBMs are the middlemen between pharmaceutical companies and insurers. They determine how much insurance companies pay for drugs and if they are covered by the insurer’s health policies. They also negotiate prices and discounts from pharmaceutical companies and pass them on to patients and employees.
Carrier-associated PBMs either partner with insurance carriers or are owned by them. However, they still operate directly with the drug companies to negotiate prices. Recently, PBMs have come under scrutiny for their lack of transparency throughout the buying and selling processes, especially with rising drug prices and the opioid epidemic. Independent/transparent PBMs are considered a more reliable, trustworthy option compared to the larger, carrier-associated PBMs.
Increasing drug prices have forced many Americans to discontinue their medications because they cannot afford them. However, patient assistance programs like prescription help centers and nonprofit grants can help consumers access the drugs they need that may be out of their price range. Manufacturer copay assistance also gives consumers discounts on copays when purchasing their medications. Another cost containment strategy many organizations use is preventive prescription programs. These programs encourage chronic condition maintenance and help patients avoid medication spend while providing them with the information and access they need to improve their health.
Pharmaceutical companies make drugs in four tiers, ranging in price from low to high: generic, brand formulary, brand non-formulary, and specialty. Specialty medications are designed specifically to defend against a certain disease or condition, just like generic brand drugs, yet they are far more expensive. As an effective cost containment tactic, your organization can carve out specialty spend from your benefit plan. Your employees will be encouraged to purchase less expensive, generic brand medications, creating cost savings on premiums and health plans for the employee and your organization.
One key development is the emergence of so-called narrow network solutions, which drive members to use a smaller band of hospitals, facilities, physicians, and specialists as their in-network providers. In return, the providers agree to aggressive discounts based on the expected increase in consumers.
Until recently, these solutions were seen primarily on The Insurance Marketplace—or the Public Exchanges—and can be found at Healthcare.gov. IU Health Plans, an arm of IU Health, implemented an employer product aimed at employers who welcome the narrow network concept in exchange for deeper discounts and high-quality care. Anthem is rolling out HealthSync with an expectation of reducing costs by 10-15 percent and United allows self-funded plans to provide a tiered network (driven by benefit design and richness) as a way to reduce healthcare costs.
While there are some similarities to HMOs of the 90s, narrow networks still use a PPO with the ability to self-refer (without the restrictions of a gatekeeper doctor required by an HMO). So, it is like the PPO you have grown to love with a narrower in-network provider list.
Size-specific cost containment strategies are available to reduce and contain healthcare costs. Enterprise groups have the most options available to reduce costs, as many programs have minimum member thresholds. Mid-market groups (both self-funded and fully insured) and small groups can optimize their health spending as well.
As group insurance has evolved, more organizations have adopted self-funded insurance strategies to gain flexibility over their healthcare options and reduce costs. Self-funded groups enjoy more versatility, cash flow, and cost savings as they take on the risk of providing their employees with health insurance. Direct contracting, narrow networks, and reference-based pricing cost containment strategies can also be paired with self-funding strategies.
Reference-based pricing allows you to avoid the high costs associated with hospitals and set your own baseline prices for treatments and procedures. In traditional models, carriers negotiate discounts with hospitals and healthcare providers. In reference-based pricing models, plans negotiate up from the already low Medicare cost structure. Employers typically set a limit on how much they will pay for specific treatments based on what Medicare would pay (example 150 percent of Medicare). The major benefits of reference-based pricing are transparency and employee confidence in fair costs. This can reduce plan costs by 20-50 percent from traditional network solutions.
On the downside, consumers are potentially subject to balanced billing, which means they may get stuck with a bill after undergoing a procedure because the plan will only pay up to a certain point. This requires proactive education and claims support solutions be paired with referenced-based pricing solutions to reduce the number issues that could arise.
Organizations employing more than 500 workers are considered “enterprise” by our standards. Because large companies have so many employees, they have a diverse array of needs. Group health insurance is no exception. If your organization falls into the enterprise group, you have several cost containment strategies available when implementing health insurance plans for your employees. Among them, Grand Rounds stands out as a winning strategy. You may also opt for medical claims audits, dependent eligibility audits, or prior authorization/utilization management strategies to reduce overhead expenses.
It is common for a few employees to account for most of an organization’s annual health insurance costs (the Pareto principle applies here). To control these costs, while also caring for most employees at a company, employers can opt for a Grand Rounds strategy. Grand Rounds is a California-based third-party advisor that coordinates expert opinions, medical advice, and in-network treatment for employees around the United States, no matter their location. In addition to those services, Grand Rounds automatically matches patients with local providers and facilities to get them the best-quality care. Finally, it also provides extensive counseling services to help employees make sense of their plans, bills, and benefits.
By combining the data, analytics, and medical science fields, Grand Rounds has brought health insurance into the 21st century. All decisions by the physician-led healthcare experts are supported with analytics to prove that employees are getting the best local care possible. Grand Rounds bases its physician data points on associated institution (hospital or clinic), training, procedure volumes, research, and most importantly, actual patient outcomes. To illustrate this point, Grand Rounds saves organizations an average of almost $9,000 a year with its opinions and advice. In fact, it changes treatment recommendations 66 percent of the time and helps reverse doctors’ surgery decisions at a 45 percent rate, saving patients and employers potentially thousands of dollars each year. With nine billion clinical data points around the United States, the analytics from Grand Rounds help patients receive the best-quality care from qualified physicians and doctors.
Independent medical claims audits can also help large enterprise groups find and weed out inaccurate claims made by employees. By reducing the number of false claims, you can reduce costs and, eventually, premiums in your group health insurance policies. You then only pay for what is necessary for your employees. Typically, large carriers only audit claims higher than $20,000. When negotiating the contract with a large carrier, bringing the audit threshold down to a lower minimum (e.g., $1,000) opens the door for a much bigger cost containment impact.
Additionally, employees can cheat the system and increase their family health insurance benefits by falsely claiming dependents in their plan. With a dependent-eligibility audit, third-party organizations help you confirm your employees’ true dependents with extensive screening abilities. Then, you only pay for those on the plan, rather than falsely claimed dependents who may increase group risk and premiums for everyone in the group.
Preauthorization and utilization management allow you to screen high-cost claims and treatments before they are carried out and charged to the organization’s group health insurance plan. By permitting you to pre-approve services for your employees, you can cut costs on your health insurance plan. Examples of preauthorization and utilization management include mental health reviews, avoidance of long hospital stays, and gathering multiple surgical opinions to ensure employees get the best medical advice.
Mid-size groups with 100 to 500 employees are increasingly self-funding their group health insurance plans to administer their own medical benefits and cut costs.
As a mid-market group, you can transfer your health plan risk by using a fully insured arrangement and allowing insurance companies to take on the risk or by self-funding your own health insurance plans with traditional or captive stop-loss coverage. The historical default for health insurance plans is fully insured policies where carriers deliver medical benefits directly to employees. However, self-funded plans have dominated recent conversation as a way for organizations to save money while administering and controlling their employees’ policies. Stop-loss coverage then transfers the risk from the self-funded employer back to an insurance company when individual or aggregate deductibles are met.
Security with Stop-Loss Captives
For mid-market organizations that self-fund their health insurance, captives are an option for stop-loss insurance. Traditional stop-loss insurance is unpredictable and volatile, meaning that the insurance company may raise or lower premiums month-to-month and eliminate (“laser out”) high claimants from the group plan. However, by applying the law of large numbers, captives offer level-risk stop-loss insurance to a large group of organizations and their employees. Captive stop-loss insurance provides more stable, consistent premiums and does not eliminate any high claimants. Pareto is a captive services organization that trades predictable costs to organizations for the risk of catastrophically high claims. They offer a community of self-funded organizations a strong stop-loss policy, plus many data-backed cost containment strategies.
Telemedicine and the Future of Healthcare
The introduction of telemedicine has allowed mid-market group employees to access medical advice from professional doctors and nurses regardless of their location. As a symbol of the future of healthcare, most insurance plans now offer some type of telemedicine feature where patients can gather multiple opinions before receiving expensive surgeries and treatments. Artificial intelligence is another element of telemedicine that is sure to have a significant impact on healthcare in the next few years. Insurance companies have launched several mobile applications and software to help patients receive the best possible diagnoses, opinions, and suggestions in real-time. So, you can contain costs by ensuring your employees receive expert advice before paying top-dollar for claims.
Price Transparency and Cost Comparison Tools
Consider containing costs by introducing price transparency and cost comparison tools. In early 2019, the Department of Health and Human Services passed a price disclosure requirement that mandates drug companies list their drug prices in their television
commercials. Third-party administrators of health plans and insurance companies offer cost calculators to their prospective and current members to track drug and plan prices. In addition to these insurance companies offering cost estimators, Healthcare Bluebook and HealthAdvocate offer health plan cost assessments, while GoodRx and OneRx offer the same resource for medications. While these are all steps in the right direction for the consumer, there is still much work to be done to make the health insurance industry
Some mid-market organizations invest in fully insured healthcare plans for their employees despite the self-funding trend. These organizations use several strategies to cut costs at the source, while still providing high-quality care to their workers. These cost containment strategies include changing carriers, subscribing to association plans or narrow network plans, and devoting time and effort to intentionally designing plans.
Your organization can often cut major costs by re-evaluating which carriers you partner with. Throughout the process of exploring, you may find more transparent and higher-quality options with less costly premiums. Your organization should re-evaluate its options regularly to ensure you are receiving the best care for the best price possible and share that information with your employees to keep them informed.
Association plans allow employers to combine under a single umbrella plan to help lower costs and premiums for each organization. These plans naturally generate larger risk pools and offset the impact of a single, high-cost individual. To unite under an association plan, organizations must belong to a similar industry or geographic region. Association plans are even available to the self-employed, making it more affordable than ever for entrepreneurs to gain health insurance.
By more easily predicting costs and negotiating major discounts, your organization can contain health insurance costs with narrow network plans for your employees. Narrow networks allow you to create a relationship with a single healthcare provider and negotiate exclusive discounts to save money for your organization and employees. Therefore, you does not pay for your employees’ treatments or procedures if they go out-of-network.
By intentionally designing your health plans to include necessary options and features, but exclude unnecessary and extraneous benefits, your organization removes features that your employees do not use, saving the organization on costs and premiums.
Finally, your organization can save on health insurance costs by changing your funding mechanism. Whether your organization transforms from a fully insured plan to a level-funded or a self-funded plan, you will experience more control and flexibility with your healthcare options for your employees as you venture through the funding spectrum.
Community-rated groups have fewer than 50 employees. Because these organizations typically do not have the resources that mid-market and enterprise groups have, they are often left with little choice in health insurance policies. New federal legislation in mid-2019 created two new options for small employers offering Health Reimbursement Arrangements (HRAs) to their employees: The individual coverage HRA (ICHRA) and the excepted benefit HRA (EBHRA).
The ICHRA reimburses premiums and medical/ancillary expenses, given you do not also offer a group health insurance plan. While reimbursements vary based on age and number of dependents, the policy has no maximum annual limits. ICHRAs allow you to avoid ACA penalties for not abiding by the employer mandate as well.
In contrast, the expanded EHBRA is much simpler. It can be used for COBRA and ancillary premiums and unreimbursed medical/ancillary expenses. However, it cannot be used to cover individual or group medical premiums. EHBRAs must be offered alongside a group health insurance plan and contain a maximum annual reimbursement limit of $1,800.
Another cost containment option is to adopt a level-funded plan instead of transitioning directly to a self-insured plan. In the medical insurance funding spectrum, level-funded plans lie in the middle of fully insured and self-insured and combine elements of both plans. Some benefits of level-funded plans include annual refunds for benefits not used and stop-loss insurance that reimburses you if you exceed the deductible. Altogether, level-funded plans can save your organization up to 30 percent when you switch from a fully insured policy.
Professional employer organizations (PEOs) offer community-rated groups outsourced HR solutions, including payroll, benefits, compensation, and compliance. If your organization does not have the resources for a full-time, HR-dedicated employee, PEOs can serve as your back-end people solutions. In exchange for a percentage of payroll, the PEO takes on most of the risk and control associated with human resources administration. Typically, organizations join PEOs if they have a complex HR process where they cannot necessarily dedicate time, resources, and a full-time employee to the duties.
Lastly, community-rated groups pay premiums in two ways: age-banded and composite rates. In age-banded rating, individuals pay premiums for their individual risk level based on their own age and location. In composite rating, each individual pays premiums based on the average group risk level of all employees on their plan. Composite rates are further broken down for which plan individuals require, including employee only, employee plus spouse, employee plus dependent, or family options. Composite rates are less predictable as estimates and premiums are always changing, while the overall health of the group changes.
As demonstrated by the vast array of cost containment strategies explored, there are countless ways your organization can cut healthplan costs. Still, more tactics exist. As the benefits industry shifts with political and economic changes, many solutions are yet to be discovered. What currently works for your organization may not work five years down the road, or even for a similarly sized company today. At FirstPerson, we have extensive experience in cost containment strategies to help your organization engage its people and care for their health. No two organizations are the same, just as no two FirstPerson solutions are identical. We are here to work diligently alongside you in solving your organization’s individual needs and discovering the best tactics and solutions for your unique situation.
If you’re interested in building a cost containment strategy, contact us today by clicking the button below. Current clients, please reach out to your advisor to start the conversation.