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Part I: Why they call it health plan not health insurance!
How employers handle the cost and risk of healthcare benefits
Thousand thanks to Rik Renard, Ben Lee, Kamran Khan, and Morgan Blumberg for their editorial input. And also, many thanks to all the people I spoke to before, during & after HLTH 2022 to put together this article series. You’re awesome!
Will you get cancer? Will you get into a car accident? Will your newborn need to be in the NICU? You can live a very healthy lifestyle and do all your annual preventative health exams, but there is always the chance you might need expensive treatment. When talking about healthcare finance, we will always need to consider the risk of unforeseen healthcare costs.
For many, risk management in health care can be a daunting topic: it involves statistics and abstract economic concepts, but I hope you bear with me here as it is also very fascinating. In particular, employer-sponsored health plans are unique in how they take and handle risk - this affects more than 170m people in the US, and a lot of innovation is happening in the space.
Today, I am kicking off a three-part series on risk-taking in employer-sponsored health plans: Part I will cover the different forms of risk-taking and how risk-taking can yield cost savings; part II will talk about approaches to manage and reduce risk, and part III will be about why many of the current systems to manage risk are failing.
Let's dive into it…
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Health plans: financing plan or insurance plan?
On a high level, health plans fulfill two roles: financing "predictable" care and insuring against unforeseen healthcare costs. In many other areas, we usually purchase these two functions separately. For example, when you own a house, you typically pay for expected maintenance costs out-of-pocket. Even if maintenance needs vary from year to year, responsible homeowners know that they need to put aside some money to upkeep their property. However, there are also high risks, such as storm damage or a fire that can destroy the whole property. For these high-risk "catastrophic" events, a homeowner must buy insurance, as the mortgage companies usually require it.
In healthcare, we don't differentiate between these two functions. Most regular and predictable care falls under the financing category; this includes annual wellness exams, vaccinations, cold visits, preventative exams, etc. In addition, a lot of chronic care also falls under predictable healthcare finance - if a chronic condition is well-managed, one can predict the costs quite well. However, the level of health care finance required differs for every individual. The average healthcare needs depend on a variety of factors: the apparent factors are age and preexisting chronic conditions. But there are lots of other influences. For example, on average, restaurant workers are more likely to be diabetic or suffer from substance use disorders, and truck drivers and office workers suffer more from MSK-related issues.
However, health care also has true, less predictable financial risks. Here are some high-cost examples that are particularly relevant to the commercial sector:
High-risk pregnancies and premature babies
Surgeries (organ transplants, back surgeries, etc.)
Of course, several "risk factors" contribute to the likelihood of these events occurring in a particular population, but these events are generally relatively infrequent.
It is worth differentiating between health financing and health insurance because there are different ways to address the associated costs. Payers can often optimize predictable healthcare spending through better primary and preventative care. However, this won't always help with unpredictable high-cost events like a car accident or certain types of cancer. Primary care can definitely reduce the overall likelihood of a catastrophic event occurring but won't prevent these from ever happening.
But I am getting ahead of myself. Before discussing how to manage and reduce risks, let's look at the different types of health (finance & risk) plans available in the commercial space.
The industry supporting this & the newer plans here
For most Americans, their employers are the primary risk bearers of their healthcare costs. Employers are obligated to offer health plans to their employees once they reach a certain size. They also cannot charge more than 9.12% of an employee’s wages in premiums for the lowest-cost plan. So employers have to bear at least some of the cost in most cases.
Employers have different options on how they can handle their responsibility to finance and manage risk:
Individual & small group marketplace: Employers with 50 or fewer employees are not required to offer health coverage. They are considered small groups, and their employees can obtain health coverage via the health exchanges. These health plans are "guaranteed issue, " meaning they cannot reject anyone from coverage. In addition, these health plans are also restricted in the risk factors they are allowed to use for quoting their insurance premium, i.e., only age and smoking/ non-smoking are permitted. Employers can either pay the premiums for an individual plan or purchase small-group insurance directly for their employees. Another option for employers are Professional Employer Organizations (PEOs), which co-employ the employees and offer them health insurance through their larger group plan. Employers, in general, can get cheaper rates through a PEO than through the individual marketplace.
Fully-insured group health plans: At 50+ employees, an employer can purchase a group health plan that is not part of the ACA exchanges. These large group plans allow insurers to consider the group's specific risk profile, i.e., look at preexisting conditions, lifestyle, and the employees' occupation. Because the insurer can better predict the health care costs of the group using these factors, many employers can get lower rates than on the exchanges and get better coverage by becoming fully-insured. In these arrangements, employers still move the entire risk of payments to the insurance plan.
Self-insured & Level-funded: Pushing risk to someone else always comes at a price - so if you're able to bear the risk financially, it's always cheaper not to pay for insurance. (yes - this is also true for individuals. That's why you usually get insurance for catastrophic risks like fire and not for general maintenance issues such as a broken gutter). Employers with enough employees can decide to self-insure and take responsibility for financing medical bills themselves. However, there is still the risk of catastrophic claims, as discussed earlier. That's why self-insured or self-funded employers usually purchase stop-loss insurance, which covers very high-cost claims. Companies have different risk tolerance levels, and they decide how much risk they actually want to take and how much they want to offload. In general, self-funded arrangements only make sense for employers of a certain size; only for a larger population will, stop-loss carriers be able to underwrite the group at a reasonable premium. However, there are ways also for smaller employers to become self-insured. They often opt for so-called level-funded plans, which are a special type of self-funded plans that have very tight stop-loss levels. In level-funded plans, the stop loss kicks in after the employer has paid the expected amount of claims during a year. This gives the employer more piece of mind in case a large claim hits.
Recently self-funding has become more and more popular among smaller employers. In particular, employers with attractive risk pools, for example, white-collar groups, are opting to bear their own risk. Going self-funded has various advantages: health plans are not bound by state regulations, and ERISA exempts self-funded plans from most state regulations. Also, they are not subject to state insurance tax premiums, and employers have much greater flexibility in their benefit design.
The industry behind self-funding: build your health plan
Self-funding basically means you have to run your own health insurance company. It is inefficient if every company has to figure this out for itself. Thus, a whole industry helps self-funded employers design and run their health plans. Every health plan needs a mix of different core functions. Here are some of the main activities:
Claim administration & Payments: The most apparent activity of a health plan is to adjudicate and pay out claims whenever a provider renders a service. This function is usually performed by a third-party administrator (TPA), and they generally get a $20-$40 PEPM fee and a fee based on the volume of claims processed.
Member Services: In addition to handling claims, a health plan also has to deal with member requests and needs - these can range from finding an in-network doctor to handling denied claims, sending out member cards, and answering coverage questions. This task is usually also performed by the TPA.
Stop-loss: As discussed earlier, health plans usually buy reinsurance in case catastrophic claims occur. Depending on how much risk is offloaded to the reinsurer, stop loss can make up 10-40% of the overall health plan cost - depending on the population's risk profile and size.
PBM: Drugs make up about 30% of medical spending in the US, and special companies handle drug coverage called PBMs. They help with formulary design, i.e., which drugs are covered, utilization management, pharmacy claim administration, and negotiating drug prices with the drug manufacturers- for better or worse.
Contracted Rates: Most health plans leverage a network of providers where they have preferred contracted rates. As provider contracting is a huge undertaking, this is often not feasible to do for employers. Several large carriers, however, rent out their provider contracts so that self-funded employers can access their rates for a monthly fee. Examples here include Cigna, Multiplan, and FirstHealth. The rates here can range between $5-$20 PEPM (per employee per month). There are a lot of exciting trends here in this space - I will cover more of this in my next article.
Point-solutions: If you have ever attended HLTH, you will know what I am talking about. Hundreds of vendors are addressing smaller and larger buckets of healthcare spending and offering different approaches to reduce or avoid healthcare spending. These solutions range from online physical therapy to travel agencies that organize elective surgeries in Mexico and Europe.
Each of these health plan components has an established ecosystem of vendors, but combing those and picking the right solutions can still be daunting for an employer. Every population is different and has different needs. But don't worry - American health care has another set of useful middlemen that can help out: benefits brokers and consultants.
HR leaders rely heavily on the network and expertise of brokers, and benefit consultants leaders lean when they make decisions around health plan structure and implementation.
On a high level, benefits brokers usually recommend one of two things: (1) go with a large ASO carrier or (2) build a customized health plan using independent modules. United Health Group, Cigna, Aetna, and the Blues offer employers to administer their self-funded health plan using their infrastructure. These ASOs (administrative services only) often come as packaged deals where employers can choose from a few plan packages. The carriers will select their preferred stop-loss partners and PBMs (which they often own). The second option is to choose a more customized approach and pick and choose different vendors. For example, use an independent TPA, send out an RFP to get the most favorable stop-loss rate, and pick and choose a set of point solutions that exactly match the needs of the employer's population.
Innovators disrupting traditional self-funded health plans
The current model of delivering self-funded health plans has plenty of opportunity to be disrupted: It is loaded with misaligned incentives (I will write more about this in part III), ASOs and TPAs do not always efficiently utilize cost containment solutions, and customization of plans can be very consulting intense.
There are a few innovative solutions that are trying to change this and offer a new way how self-insured health plans are being constructed and delivered:
Modern TPAs & Point solution navigators: Building customized self-funded health plans is a labor and consulting-intensive process. Traditionally only large employers would choose this option, as the additional cost of customizing the health plan can yield significant cost savings by integrating specific point solutions such as surgery bundles or onsite primary care clinics into the plan. For smaller employers, this often requires expensive administrative effort to set up. However, modern TPAs and plenty of point solutions now target smaller employer groups to customize their health plan and point solutions. Examples here include Bennie, Flume, Collective Health, and Aither.
Virtual-first & PCP-first health plans: Since COVID, probably everyone has tried virtual care - and even the large carriers have understood the potential of virtual care. Leveraging virtual care visits as the first touch point in a person's care journey can significantly reduce utilization (avoid urgent care and ER visits) and the overall cost of care (refer to cost-efficient providers). Thus more and more virtual-first health plans are serving the employer market. United Health Group, for example, partnered with Galileo to deliver their virtual-first health plans, and Firefly Health is now offering virtual-first plans (under the Firefly brand powered by Flume or in partnership with BCBS in Massachusetts). Crossover Health, a direct primary care group selling to employers, has already made the move to offer a health plan. I expect more provider groups, such as Hint Health, Eden Health, Carbon Health, or Everside will take a similar step.
New health-plan platforms: A whole array of younger health plan platforms are building new-age health plans for self-insured employers. Some are based on new provider payment models (Arlo Health), some leverage dynamic co-pays that offer price transparency for every visit (Bind, now Surest after United Health Group acquired them), or they are starting by building strong and cost-efficient local provider networks (Centivo). Other players include Angle Health and Gravie - a lot of exciting innovation is happening here. It remains to be seen if any of these players can reach escape velocity. These players will most likely get more competition in the next few years. I predict we will see more companies entering the self-funded health plan space from the care navigation side. Transcarent could be in an interesting position to launch a plan, and other care navigators, such as Included Health or Rightway are probably thinking about this as well.
As always, here are some additional of my thoughts on this topic:
How much are employers actually insured?: Fully-insured health plans, in general, mean that employers can offload their risk to an insurance carrier, but not their responsibility of health care financing, and in most cases, if a bad event happens, the carrier will claw back the money through higher renewal rates. Let's say an employer has a bad year, and two of their employees incur several hundred thousand dollars in claims because they have cancer; this will impact the MLR of the health insurer. The health insurer will then use this as an argument to increase the health premiums for the employer in the following year. The same is true for stop-loss carriers. If the cancer episode is going on, they might even choose to "laser" these two high-cost individuals, i.e., exclude them from the stop-loss coverage, and the employer ultimately has to foot the bill. The moral of this story is that in many cases, insurance can smooth out payments for high-cost bills, but in the end, the employer has to bear the cost anyways in the long run. Employers can offload the volatility risk of healthcare costs, but they cannot avoid financing them.
State of denial: From my conversations with brokers, I learned that many employers don’t understand that they are finally responsible for financing their employee’s healthcare costs. But many employees are not thinking about it that way, and many are unwilling to make small changes to their benefit plans that could yield in significant cost savings. Most probably spend more time on optimizing their travel expense policies than designing more efficient benefits. Pundits have long predicted the upcoming “breaking point”, when employers can no longer bear the 10-20% annual rate increases, and they will be forced to make more significant changes to health benefit finance. But so far, employers have found ways to move costs around (reducing formulary coverage or increasing deductible for employees, etc.). But maybe, in a post-COVID world combined with a bad economic climate, we might finally see some more fundamental shifts.
Lack of risk transparency: A key piece for taking on more responsibility for efficiently covering health care expenses, employers will need more visibility into their employee's risk pool. This is particularly true for smaller employers that are fully insured or insure their employees via the marketplace. To accurately predict the claim costs for a group, you will need to get as much data about the employees as possible. This is an essential condition to make an informed decision about whether self-funding would make sense, and it is vital information for getting favorable stop-loss rates. However, the fully-insured carriers often don't share claims data with the employers, so they often fly blind. In many cases, they don't even share information about high-cost claim events, and employers need more information about why their rates got increased by 20-40%. Because the carriers don’t have incentives to share the data, this might be an issue where the regulator needs to become active.
This concludes my high-level overview of employers' different options for handling healthcare expenses and benefits. But there is so much more to talk about. Subscribe if you want to get Part II (How employers manage risk & cost) and Part III (Why risk and cost management is hard) directly to your inbox.
If you made it until here and you liked the article maybe you are or know a benefits broker/ consultant, a new health plan or an employer who is doing innovative things in the space. Please don’t hesitate to reach out - I would love to talk.
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