Once again, benefit advisors will be delivering the bad news about rate increases on the group health plans for their clients this fall. To mitigate this, many advisors will share rate reduction strategies with those clients. Aside from continuing to increase deductibles, copayments and out-of-pocket limits on their traditional fully insured plans (what I refer to as cost shifting to the member), benefit advisors can explore the root of the problem—continued increase in healthcare costs.
We all know that the cost of health insurance is in direct proportion to the cost of healthcare. If your health plan is a well-managed plan that restricts the use of non-network providers, the chances are good that your premium is going to be lower than a plan that uses any provider. Since the enactment of the Affordable Care Act (ACA), most carriers now offer better managed plans with smaller provider networks where they are paying less for healthcare services than in a traditional plan. That is a good thing in many cases.
On the other hand, providers continue to play games with billing practices that border on the absurd, with charges for routine services sometimes two to three times what they were just a few years ago. Between the strategies employed by hospitals using the “chargemaster” and billing practices of some medical groups and facilities, the total cost of healthcare continues to skyrocket. And this problem won’t be fixed by simply shifting costs to the backs of members in the form of deductibles and copayments.
Which brings us to the subject of the pricing of healthcare services and supplies. For years insurance carriers paid the “reasonable and customary” fee for services. Then it changed to “usual reasonable and customary” (URC). Then came “discounted” fees for service as negotiated by a PPO or HMO. The HMOs introduced “capitated risk” strategies which work for many medical groups, but are difficult for independent practitioners.
Many things changed after the passage of the Medicare Modernization Act of 2004, in which the federal government Medicare program began to change how providers are reimbursed. This was based on a number of factors including geographic location, severity of the condition and the use of a “reference point” that related to the providers cost of doing business.
Today, the federal government contracts with third party consultants who are constantly monitoring charges, payments and utilization. This resulted in participation of more than 90% of healthcare providers in the Medicare program.
So how does that help private insurers or self-funded employers?
Many private insurers or self-funded employers are now negotiating to pay providers a percentage of the Medicare payment instead of a UCR/Discounted Fee arrangement. The results are that employers are seeing their claim costs reduced substantially.
I’m not claiming that healthcare providers like this, but I think many see the writing on the wall. They either change the way they charge for services or expect a wholesale government takeover of the system (i.e. single payer) where there will be mandated charges for services. I think this is definitely a bigger consideration for hospitals, medical device manufacturers and big pharma.
What we are seeing today is that carriers and self funded insurers are seeing enough of a cost difference between a traditional PPO product and a reference based pricing program that the rates they are charging reflect this savings.
Here is an example of one employer who has a self-funded plan and has an aggregate stop loss policy which reflects these cost differences.
- They offered a “Bronze” benefit which featured exclusive use of a Reference Based Pricing arrangement (150% of Medicare for doctors and 175% for hospitals). The pricing for that plan had a baseline cost of 1.00.
- They then offered a “Silver” upgrade plan that also used a 150/175% Reference Based Pricing program and the baseline cost was 1.15 above the “Bronze” plan.
- The employer also offered a “Silver” plan that used a well-known PPO network and that plan had a baseline cost factor of 1.30.
- And finally, they offered a fourth plan which had “Gold” benefits, using a PPO, which priced out at 1.45.
At the end of the day the employer gave his employees a choice of these four plans. They subsidized 100% of the “Bronze” plan and required any upgrades to be paid by the employee. The majority of the group—52%—enrolled in the “Silver” plan with Reference Based Pricing. The stop loss carrier priced their aggregate stop loss out reflecting on claim history of the group which was using both PPO and Reference Based pricing programs.
In conclusion, benefit advisors need to share this data with employers and then design a strategy that introduces the Reference Based Pricing option to their employees as an option and let them choose what is best for them. Having a Reference Based Pricing plan alongside a PPO plan is a good way to get on the long term savings path that employers are asking for.
Cal Broker editorial advisory board member David L. Fear, Sr. RHU is managing partner of Shepler & Fear General Agency and a 40-year veteran of the employee benefits industry. He is a past-President of CAHU and NAHU and 2015 recipient of the NAHU Harold R. Gordon Memorial Award as ‘Health Insurance Person of the Year’.