Health care represents one of a business’s largest, most unpredictable, and growing expenses. Employers’ benefits costs rose a staggering 24% between 2001 and 2017, and the cost of employee health benefits is projected to rise 5% in 2020, topping $15,000 per employee.
With proper knowledge, smart health care decisions, and awareness of cost-saving solutions, you can reign in these expenses while still providing quality benefits to employees. The key is to treat health care like you would any other business expense.
A pervasive lack of transparency into costs and significant variance of charges within markets make this difficult. CFOs and financial executives often have to approve and pay the bills without knowing exactly what they’re paying for.
As a previous CFO of a fast-growing midsize company, I learned this doesn’t have to be the case. Here are four things I discovered that can shape the future of your health plan.
The Details Matter
Like many employers seeking to lower costs, our business chose a self-funded health care solution and backed the plan with stop-loss insurance. Stop-loss is a policy designed to financially protect organizations from catastrophic claims. But as I found out, stop-loss insurance is not a catch-all; it has its limitations.
Near the end of a calendar year, one of our employees was facing a complex, high-cost health issue. Our stop-loss policy kicked in and covered the initial catastrophic claims. However, while renewing the policy for the following year, our provider created a “carve out” for any future care this employee needed. We unexpectedly were on the hook for the full cost of the employee’s ongoing care.
Costs Vary — Significantly
As financial executives, we understand all our organization’s costs. We can research and know in advance what it will cost to lease office space or buy data processing services. We can negotiate, comparison shop, and make informed decisions to ensure we get the best deal. We establish a process for purchasing the approved selection, and reject or require exceptions for other requests.
Not surprisingly, many CFOs assume the cost of a hip operation, for example, will be generally consistent, regardless of which hospital an employee selects. In fact, the cost of identical treatments can vary by as much as 1,000% among providers in a given region. And because you don’t know what you’re going to be charged until after care has been delivered to your employees, you don’t realize just how inflated these charges may be.
For instance, the average cost of a CT scan in the UnitedStates can vary by more than $4,000 among hospitals. For childbirth, costs range from $3,000 to $15,000. In a single competitive market, costs for the same procedure can vary as much as five-fold, with no correlation to the quality of care.
Had I known this, I could have designed our self-funded health plan to incentivize employees to select providers and facilities that charge lower rates.
Hospitals May Be Open to Negotiation
Within a self-insured health care model, employers essentially pay all of an employee’s health care costs, outside of employee deductibles and copays. That means when an employee receives treatment or undergoes a procedure, the hospital or physician will bill the plan for the remainder of the charges.
With little transparency into the true cost of treatment, businesses often blindly pay for medical services incurred by their employees. When the rates most hospitals charge generally include a markup of as much as 1,000%, these expenses can quickly mount.
Just because you’re billed for a certain amount doesn’t automatically mean that’s what you’ll have to pay. In some cases, hospitals may be flexible and accept a lower payment.
The Role of TPAs vs. Your Internal Team
Like many organizations, we used a third-party administrator (TPA) to process insurance claims. The TPA would send us a weekly funding request for costs incurred, we would pay them, and they would pay the claims received from our employees’ doctors, hospitals, and pharmacy benefit managers.
I assumed it was the TPA’s job to assess the appropriateness of the charges we were paying. In reality, while TPAs play a valuable role in the benefits administration process for self-insured companies, it’s not their responsibility to review charges. Rather, your finance department should be scrutinizing and understanding cost trends in health care claims just as they do any other business expenses.
With Knowledge Comes Great Power
Had I known any of this information at the time, I probably could have saved the organization hundreds of thousands of dollars on health care. I was confident that we were already saving money with a self-funded insurance model, but I didn’t know there was potential for even greater savings.
Reference-based pricing, for instance, allows a self-insured employer to set a fixed limit on the amount a plan will cover in expenses. Most reference-based pricing solutions use Medicare reimbursement rates as the benchmark, since Medicare is widely accepted among providers. This solution removes the wildly variable costs associated with other plans.
In my case, if we had a reference-based pricing solution in place at the time our employee required that expensive, high-risk procedure, the amount the plan was required to pay out would have been reasonable and fair.
As CFOs, we have a financial responsibility to our organization to understand everything about our health plan and to make no assumptions. We don’t have to sit idly and accept skyrocketing expenses.
Learn from my experience, and look into solutions like reference-based pricing that can yield significant savings. Ultimately, that’s money you can reinvest in your employees and your business for a more profitable future.
Mike Burnett is the CFO for ELAP Services, a health care solution for self-funded employers across the United States. He has 35 years of professional finance experience, including 17 years as a CFO.