Would you rather have 15% of $1,000 or 15% of $10,000? No-brainer, right? What if, that question was given to your health insurance company? Would that be good for you? Unfortunately, when Congress passed the Patient Protection & Affordable Care Act (ACA), the acceptable loss ratio - the ratio of expenses to premium – for health insurers was capped at 85% for the group market.
The loss ratio is effectively a measure of profitability and overhead for an insurer. The regulation was intended to prevent insurers from excessively loading profit margin in order to keep premiums affordable. Unfortunately, I believe that the unintended consequence of the law incentivizes insurers to let claim expenses get larger; thus, premiums get larger to cover those expenses. Insurers may have an 85% loss ratio, but by letting the pie get larger, the 15% margin became larger. I argue, along with Marshall Allen in his Propublica piece titled: “Why your health insurer doesn’t care about your big bills”, that insurers are only interested in predicting how much health care will cost, not cutting costs. If they missed their estimate, they simply increase rates upon renewal. As a result, the overall pie has gotten larger, thereby making their 15% margin cap bigger. Marshall outlines this unintended consequence of the law by chronicling Michael Frank’s experience with the excessive medical bill that his insurer approved, which left him with huge out of pocket costs.
The business of insurance is to accurately predict the cost of care and then add margin. Insurers aim to maximize their loss ratios by maximizing their premiums and containing costs (claims). In the group business (in this post, I am focusing on group business, but most of the same principles apply to individual business), competitive bidding keeps premiums increases at an “acceptable” range, which is still 2-5x higher than inflation. On the expense side, insurers squeezed providers down on pricing through negotiating steep discounts off billed charges. Thus, many employers were sold the “strength” in the insurer’s discounts as one of the main ways to keep costs in check. Insurance companies and brokers have created a false narrative around discounts maximizing savings and value in health insurance. You would not purchase a gallon of milk for $40 just because the store was promoting a 60% discount. You know that the fair value of a gallon of milk is $3. Why do we let this happen in healthcare where the stakes are a lot higher?
Before I proceed, I do not think that insurers are bad or are the sole problem with escalating costs in the US. They are not. In fact, the blame for high costs can be shared with all health care stakeholders. Even employers/members/patients share a portion of the blame because they have historically not held any market insiders - brokers, providers, insurers, TPAs, PBMs – accountable. In addition, I am not arguing that employers all go and drop their PPO networks. In this post, I am urging all employers, unions or any other purchaser of health care to stop believing that network discounts save them money. Most of these arrangements subsidize lower government reimbursements thru Medicare for the providers. Networks do provide employers and employees with piece of mind and convenience. However, convenience does not always save money. In fact, networks often leave employers and their members/patients staring down egregious out of pocket costs just like Michael Frank after his elective hip replacement surgery. As with most things in life, there is a major cost to convenience.
Marshall Allen’s piece is a must-read for all in employee benefits: consultants, benefit managers, HR executives and CFOs. Michael Frank is a former insurance actuary who knows how to read a hospital bill and has a nose for what is acceptable. Mr. Frank’s story serves as a warning to many employers, specifically self-insured employers, that network discounts do not always protect them and their members from huge hospital bills. Allen’s piece describes the situation well and I encourage everyone to read it.
In addition to insurers being capped at 85% loss ratios, many hospitals and providers have merged together over the last 5-10 years to form multi-billion-dollar health systems. By becoming a large integrated system, hospitals and providers argue that they can manage care more effectively and improve outcomes. This is another offshoot of the ACA where Accountable Care Organizations (ACO) were formed to manage Medicare populations and share in the risk/reward – i.e. if the population exceeds the estimated cost of care, then the ACO loses money; if it is below the cost of care, the ACO earns money. However, as these systems have gotten bigger, they have become monopolies in many markets. Thereby, they now dictate the costs in the negotiation with insurers. We now have a two-fold problem with the “discount” game: 1) insurers are only incentivized to accurately predict the cost of care, not push down the costs and 2) health systems are monopolizing markets and driving costs up. Per Marshall Allen’s Propublica piece:
“Turns out, insurers don’t have to decrease spending to make money. They just have to accurately predict how much the people they insure will cost. That way they can set premiums to cover those costs — adding about 20 percent for their administration and profit. If they’re right, they make money. If they’re wrong, they lose money. But they aren’t too worried if they guess wrong. They can usually cover losses by raising rates the following year…
To woo the self-funded plans, insurers need a strong network of medical providers. A brand-name system like NYU Langone can demand — and get — the highest payments, said Manuel Jimenez, a longtime negotiator for insurers including Aetna. ‘They tend to be very aggressive in their negotiations.’ On the flip side, insurers can dictate the terms to the smaller hospitals, Jimenez said. The little guys, “get the short end of the stick,” he said. That’s why they often merge with the bigger hospital chains, he said, so they can also increase their rates.” (Allen, 2018)
How do we start paying a fair price?
For starters, fully-insured employers have little options at their disposal to combat this problem other than to aggressively market their insurance year over year. That constant disruption on employees is exhausting and you cannot escape the underlying risk effecting the rates – i.e. claims. That is why we are seeing more employers exploring self-funding either through level-funding or traditional self-funding. Self-funded employers have the flexibility and claims data to implement valuable cost containment strategies beyond the discounts.
For self-funded employers, the first step is looking at pricing out of network claims at a percentage of Medicare, most often 140% of Medicare. This greatly reduces exposure to “shock” out of network claims where there is not much protection from the high provider charges. Many employers are shocked to see how much providers are charging over Medicare. It is common to see bills that are charged at 800% of Medicare. It begs the question, what good is a 45% discount if the starting point is 800% over Medicare?
The next step is to start steering members to more high-value centers of excellence where quality and price are aligned. Many large networks do not allow employers to steer to different providers, but some smaller national or regional networks do allow steerage. Yes, you are trading off for lesser discounts. But what good are discounts if your members are going to overpriced and inefficient providers?
More aggressive employers look to supplant the PPO network discounts with a full % of Medicare model. To do that successfully, employers need a very strong broker and TPA team that spearhead a clear communication campaign to employees well ahead of the switch to Reference Based Pricing (RBP) as a % of Medicare. After the implementation, the TPA must have a strong patient advocacy model to support employees with going to doctor, facing pushback from the provider and even balance billing. Once implemented, employers can review their claim data for quality and cost. At this point, the employer is in the driver-seat and can start incentivizing employees to utilize the high-value providers.
There are many cost containment strategies that employers should look to implement. The purpose of this post is to address the problems of the “discount game”. Healthcare is one of the only industries where the ‘same exact car’ has three drastically different prices and the buyer unknowingly purchases the highest priced option. We need to get away from our over-reliance on discounts, because they lock us in to overpriced deals and put handcuffs on where we want to send our care. Employers have tons of power to change the cost of their healthcare. Let’s stop looking at how much of a discount we can get and start looking at what is a fair price to pay for quality healthcare. The bottom lines of our companies and employees depend on it.
 Allen, M. (2018, May 25). ProPublica. Retrieved from https://www.propublica.org/article/why-your-health-insurer-does-not-care-about-your-big-bills