Carving Out the Fat in Your Healthcare Plan
As healthcare costs have seen double digit increases for nearly three decades, we’ve noticed something very unfortunate: Everyone that is involved with healthcare has attached themselves to this double digit trend line. From insurance carrier profits, to broker commissions, to federal and state tax revenues, the unfortunate reality is that rather than curtailing costs, they’ve all been contributing to increased costs. By extension, they’re adding to the trend rather than decreasing it.
So where does a healthcare dollar go? When you follow your insurance dollar, you’ll notice that there is an exorbitant amount of waste. Your spend goes into three areas: administrative services, insurance or risk premiums and claims.
Administrative costs go to things like processing claims, network access (i.e. getting into your Aetna or Blue Cross network), and paying broker commissions, state/federal taxes and fees. The claim processing and network access fees typically constitute 10% of your costs. That should strike you instantly as being ironic. While those costs have nothing to do with “Healthcare Costs” or “Healthcare Inflation,” it’s nevertheless pegged as a percentage so that the administrative revenues grow at the same rate as healthcare costs.
Broker commissions are typically between 4.5% and 6.5%. Again, that should strike you as odd. So the worse job my broker does at controlling costs, the more he gets paid? Unfortunately, yes! That is the ironic position of the industry. Why? Because brokers were created and exist as the Sales & Marketing arm of insurance companies, not as client advocates.
Finally, state and federal insurance taxes can add up to 4.5% to 5.5% of your costs. Again, as a percentage of premium, they are riding the coattails of healthcare inflation.
Insurance Premium Waste
The larger an employer is, the less insurance they actually need. Additionally, the more healthy the employers’ cash position, the less insurance they need. Most employers buy entirely too much insurance and protection on their businesses. When you add up all of the administrative costs that are pegged to these premiums, you end up with a substantial amount of waste.
Insurance companies typically skim from claims in order to make your costs seem higher, which they can then charge more in premiums to cover. The textbook way they do this is by keeping pharmacy rebates (i.e. payments from drug manufacturers that are given to companies that incentivize their use) and by not passing on 100% of the discounts they receive. These skimming practices can amount to anywhere from 10% to 30% of your pharmacy spend, which should be anywhere from 2.5% to 6.5% of your total spend.
Finally, how good of a job is that insurance company doing analyzing claims and ensuring they are paid properly? You might think their incentive is to control claims because it is their money, but you’d be wrong. That is their short-term interest. In the long-run, they want to see healthcare costs increase so that they can increase premiums. Insurance companies set aside large sums of money, called reserves, that they use to pay claims in bad years. They earn interest and investment returns on this money which is actually a large percentage of their overall revenues.
How could they do a better job?
Most insurance carriers receive what’s called a “Uniform Bill” from a medical provider and reimburse the provider based on that bill. A “Uniform Bill” is the equivalent of the first page of your credit card statement. They typically do not dig any further than that. An “Itemized bill” has a listing of each code, which occasionally has things like “Oral Cleansing Device…..$1,050”. That’s a $1,050 toothbrush!
Ultimately, by reviewing claims more thoroughly, employers can achieve an additional 3-6% in savings.