Having worked as an employee benefits consultant for nearly 20 years, I’ve had the opportunity to advise clients on how to get the most out of their benefit spend year over year. Some years the benefits plan worked better than average and the client received a 5% rate increase at renewal time. Other times the plan didn’t work as well and the client received the maximum 35% increase allowed by the insurance carrier. In both cases, and in all cases in between, two things became clear: 1.) the trend in healthcare benefits is for rates to increase each year, whether 5%, 35%, or by some other number(statistically speaking, shouldn’t there be even a small number of employer plans performing so well that they receive rate reductions some years?). 2.) There is little transparency on the part of insurers on how they allocate premiums billed to their insureds (i.e. high dollar claims, prescription costs, excess profits, etc.).
As a result, clients, and their consultants alike, have been trained to make benefit decisions in “one year” increments. A typical process in deciding what benefits to use for the upcoming year may include a consultant “shopping” plans with various insurers and with varying benefit levels, the client choosing the plan that most closely fits their budget and gives employees reasonably good benefits. The consultant goes back to the various carriers to “negotiate” the best price possible by sharing competitive data from other insurers. The insurer will yield to a concession, often making it clear they are taking a risk by doing so, the employer hesitantly agrees to those rates and marks their calendar to go through the same process again in 12 months. The hope is that, one year later, the renewal they receive will be more favorable than the current renewal. The reality is that nothing has been accomplished through this process to take control of the organizations’ healthcare costs, and the vicious cycle of increased premiums will continue for the foreseeable future.
At the heart of it, a company has to make a paradigm shift in order to truly bend the cost curve of their benefits budget and change the long-term outlook of how much they spend in employee benefits, which is often an organizations’ second largest expense, only surpassed by employee payroll.
I often find myself sitting across from C-Suite Executives hearing them express their frustration on how their benefit premiums are outpacing the financial growth of their company, and they feel like they have no choice but to “trust” that their insurer is giving them fair pricing because they are not given any data to substantiate the premiums they are paying. Few consumers would ever do business with an organization that could/would not tell them exactly what product or service they are providing in exchange for the financial cost. Healthcare in the U.S., however, has over the years set a precedent to do just that.
The option of hiring a third party administrator to pay claims on an employer’s behalf, and provide the employer with as much data transparency as they want has always been a way for employers to address this issue. The problem historically has been that option generally requires employers to take on the risk of being self-insured (i.e. pay your own claims as you go). For mid-sized companies, this tends to be risky and it causes too much expense volatility from one month to the next.
There are ways for mid-sized employers to get the data they need by using a third party administrator, and still have expense stability from month to month. The keys to balancing these two objectives are 1.) For the employer to self-insure their plan, whereby creating a way to receive the data they need from their third party administrator 2.) They must find a way to come together with similar-minded employers and pool their risks together; in essence creating a large employer group that has premium stability from month-to-month.
There are various ways to do this, some of which have been in existence for a while, such as level funded or graded funded plans. However, because the “third party administrator” of those plans is usually one of the big insurance carriers and they see themselves as providing a key component to this process, they are able to set up their contracts to share in any savings that the employer incurs. Additionally, there is little flexibility in the benefits the employer can choose.
As of February 2018, three of the most successful companies in the U.S. announced their intention to band their employees to try to change the way healthcare is being approached in this country. Amazon, Berkshire Hathaway and JP Morgan essentially plan to join forces to create more predictability in the claims utilization and leverage the buying power of their 1.1 million employees to negotiate the best deals on healthcare from healthcare providers and prescription drugs from drug manufacturers. The preliminary vision of this project is to someday be able to extend this model to include other employers, and eventually create enough buying power that the healthcare system adopts a mentality of transparency and fairness of pricing.
Through a unique approach our firm has been implementing for clients in recent years, we’ve been able to create a model that achieves many of the benefits that these three large companies are hoping to achieve by coming together. Through the use of independent third party administrators, clients gain the advantage of full data transparency so they can make informed decisions. By pooling resources with similar minded employers, we create stability of premiums from month to month for clients. By giving each client their very own plan, they are also able to tailor benefits to meet the needs of their employee population. Employers who are using this approach are seeing an average cost reduction of 14% of premium, compared to their fully insured plan, in just the very first year and can expect compounded savings thereafter!
This is not a short term “quick fix”, but a long term approach. As appealing as a 14% premium savings may be, our focus remains on bending the cost curve for clients by creating a 5 year plan for clients. By using the data that employers never had access to previously, we are able to set in motion a predictable plan to help clients take control of their healthcare costs.
Information about the Author: Jon Rivera is a Benefits Consultant outside of Washington, D.C. and has worked in various capacities within the industry of employee benefits for the past 20 years. For questions, he may be reached at firstname.lastname@example.org or 301-838-3024.