It’s one of the most thought-provoking, if under-reported, statistics about health-care coverage in this country: The vast majority of employees who receive coverage from their employers are in self-funded plans.
Specifically, this works out to 94 million employees — a staggering number of workers whose employers are bypassing conventional preferred provider organization (PPO) plans. By opting instead to directly pay for employee medical expenses rather than pay a premium to insurance companies, these employers are in a unique position to contain health-care costs for a majority of American workers.
The question is, what’s the best way to do so?
The answer: one that doesn’t overcharge the employer or underpay the provider. Striking this “fair price” balance is essential for sustainably reducing health-care prices, as opposed to steep, but short-term, discounts. The latter are typically a result of alienating area providers with scorched-earth price negotiation tactics.
Employees Have Reached the Tipping Point
Before delving more deeply into how employers can take an effective and lasting approach to health-care cost containment — reducing medical claims by up to 70% — let’s first do a recap on why cost containment is so essential. It’s not just because prices keep rising no matter what so-called “reforms” are put in a place on a national and state level.
The reality is employees can no longer shoulder most of the burden of these endless price increases. It’s well known by now that health plan deductions are a primary driver of wage stagnation. A widely cited study by Axios found that premium and deductible increases had effectively wiped out wage gains, with the cost of family health insurance shooting up from 14% of household income in 1999 to an astounding 31% by 2017.
Three Essential Cost Containment Strategies
Self-funded employers can buck these entrenched norms for their own employees through a combination of cost-containment strategies. The key to success is arriving at health-care pricing that is fair for employers, employees and providers.
- Medical bill reviews: Self-funded employers have insight into claim expenses that employers that pay for traditional insurance don’t have. With the ability to review every line item on a claim, the reviewer can spot any errors, of which there are sure to be some. It’s estimated that 90% of medical claims contain errors, including duplicate charges, services that weren’t rendered and unnecessary “upcoding.” Medical bill reviews alone can easily reduce over 10% of a medical claim’s price tag.
- Reference-based pricing: Truly massive discounts can be achieved — up to 70%, even on high-dollar hospital bills — when applying reference-based pricing. Although a technical-sounding term, reference-based pricing essentially means coming to the negotiating table highly informed on several important factors. These include knowledge of what providers have historically billed for different procedures; what they have accepted as payment; and importantly, what Medicare reimburses. Medicare rates are the de facto standard for setting a price benchmark. Reference-based pricing aims not necessarily to pay right at the Medicare rate, but to not pay too high a percentage over. In many markets, employers are being billed by providers at rates that exceed 500% or even 700% of what Medicare reimburses. That leaves a lot of room to negotiate downward.
- Employee care navigation: Employees should be encouraged to seek the care they need to stay well. At the same time, they should be educated to find providers that won’t send them a balance or out-of-network bill. This calls for a self-funded plan that provides better care navigation than that offered by traditional health insurance plans. In such conventional plans, employees may be given a website and a 1-800 number as “resources” for finding providers.
But what is really needed is an advocate who establishes direct communication with employees about the self-funded plan and which providers offer quality services at reasonable rates (and are amenable to reference-based pricing). In this scenario, employees are far less likely to knowingly go out-of-network.
What they aren’t deterred from doing is utilizing health care. This sounds counterintuitive from a cost-containment perspective given the drumbeat over the years that overutilization drives up costs, and that our sickest account for most of health care’s inflationary pricing trends. But more information is now coming to light that directly refutes this narrative.
One detailed Boston Review report found that a chief cause of unchecked health-care prices is that insurance companies simply aren’t doing much to check them — and instead, just pass the costs onto the insured. The report also noted, “As a nation, we actually do not use too much health care; if anything, we use fewer services than people in other high-income countries.” An additional observation was made that, “We spend more than $10,000 per capita on health care —approximately double that of Canada.”
In short, curbing use of health-care services doesn’t lower expenditures for anyone except for the insurance companies. Encouraging employees to seek care that could forestall or eliminate risk of more serious health problems down the road is both financially wise and ethically the right thing for self-funded employers to do.
Ultimately, the idea is to connect employees to long-term relationships with their local providers. By extension, this fosters strong ties with the provider and employer. So, too, will reimbursement rates that are promptly paid and based on an informed assessment of fair market value.
This relationship can extend to “direct provider” contracts, which are basically what they sound like — contracted rates that are based on direct negotiations with the provider without the insurance carrier as a middleperson. Also based on reference-based pricing, the contracts are negotiated in advance of scheduled care and cover all employees. By contrast, post-care negotiations typically focus on individual claims.
However, they each have their own value; some employers have more of a need for post-care repricing, while others opt for both pre-and post-care repricing.
Self-Funded Employers Are Flexing Their Might
Given how many employees are covered in self-funded plans, at first look it’s somewhat surprising that their employers haven’t made more of an impact on our national health-care bill. But that looks to be changing as more self-funded plans adopt the above cost-containment strategies. The math tells the story: If even a quarter of self-funded employers used these strategies to whittle 50% or 70% off their medical claims, our national health-care bill would take a noticeable dip.
In a real life example of how self-funded employers are realizing their market power, a Northern California health system recently settled (on undisclosed terms) with a group of self-funded employers who had charged the health system with engaging in anti-trust behavior. As a result, the self-funded employers said the health system was charging prices 20% to 30% higher than in other parts of the state.
Of course, not every self-funded employer can or wants to get embroiled in a lawsuit. But it gives us further insight into how self-funded employers are increasingly playing an outsized role in taking on our entrenched status quo of high health-care costs. In fact, it was only after the self-funded employers initiated the suit that California’s attorney general joined the state as a co-plaintiff.
Look for self-employers to further exert their influence in the coming months and years as more self-funded plans deploy cost-containment strategies that finally turn the tide on runaway health-care prices — and by doing so, lower the cost of health care for all of us.