Heading into 2021, many companies are looking for ways to trim their budgets. Employee benefits are not usually one of the first places on the P&L that CFOs look to for savings. It’s somewhat of a black box: There is typically a great deal that companies don’t know about how their own health care benefits are priced or the incentives of the companies involved in delivering them. If you are part of a self-insured employer — or even a fully insured small business — digging into the hidden mechanisms of your organization’s health care coverage can present opportunities for savings. It starts with asking your broker the right questions.
This is a simple enough question, but when it comes to your health insurance broker, you likely don’t know the answer. We wouldn’t settle for this in other industries. Wealth advisers, for example, typically disclose if they are receiving commissions on the products they recommend or reveal how their fees are structured. Most health insurance brokers are paid by the plans they represent on a per member per month (PMPM) basis. These fees range from about $15 to $30 and can add up quickly with a large headcount. What a chief financial officer would hope to learn by asking this question is if the broker has enrolled the company in the most cost-effective plan or the one with the highest PMPM. Often, they are not the same plan.
The pharmaceutical side of health care benefits represent about 30% of the total cost. Drug pricing is determined by pharmacy benefit managers (PBMs) and often includes rebates from the drug manufacturer for favorable inclusion on the formulary — the list of medications that are covered. CFOs are in a much stronger position if they know what portion of those rebates, if any, is being passed on to their company. Finding a broker or PBM who is willing to be transparent about these rebates can help companies make good decisions about health care costs. Once you determine how much you are getting, the next question is how quickly you get paid. You deserve to know this information.
Surprisingly, the cash price for many drugs — the price paid by individuals without insurance — is sometimes far lower than the total cost to a health plan, and in some cases, even lower than the copay. Here’s a real-world example. The cash price of the drug Lipitor is $8.25. Meanwhile, a typical health plan might pay $155 for Lipitor in addition to a $25 copay paid by the patient. (These are, of course, rough numbers, since health plans vary and drug prices change frequently.) Why this occurs is a subject for another article. But what CFOs need to know is if their health plan includes a mechanism for obtaining the cash price when it is the cheapest option. If it doesn’t, knowing cash prices can still help self-insured companies negotiate more effectively. Even if you end up paying $100 for Lipitor with a $0 copay for your employees, the cost is less than the current rate.
On the medical side of benefits, billing for procedures can be quite complicated. Providers frequently miscategorize their services, resulting in billing errors. Companies that specialize in auditing to catch and correct the errors are paid by the volume of mistakes they fix. There is usually no mechanism in place to prevent the same mistakes from recurring, which drives up the cost of care. If services your employees routinely use are being repeatedly miscategorized and then corrected, it can increase your overall plan costs. Ask your broker how billing mistakes are handled and if you can see a list of what was corrected over the previous year.
This is the biggest question and the hardest to answer. Self-insured companies certainly have some idea about this, but can’t have an accurate picture without complete rebate information and answers to the other questions above. Fully insured companies are essentially out of luck on this one. If you ask your broker to tell you the total cost of care over the past 12 months, they will not provide it. But you can approximate. A company with 100 people on their plan might expect to pay $1.2 million annually, or $12,000 per person. On average, the cost of care is likely much less. Why should you not know the actual cost of health care for your employees and their dependents?
As we go into 2021, businesses are going to be faced with many tough health questions: Should people work from home? Is business travel safe? How do we get the vaccine for our employees? These questions seem more complicated than the ones outlined in this article, yet they must and will be answered. Why then should CFOs not know more about the mechanics of one of their top expenses year after year?
Michael Waterbury is a 25-year healthcare industry veteran and CEO of Goodroot, a group of companies reinventing healthcare one system at a time.