Larger employers that self-fund their group medical plans have historically selected their health plan administrators based on the available provider network, the discounts applied to in-network services, and the competitiveness of the administrative fee.
Access to in-network providers is evaluated based on proximity. Another important factor is continuity, which is analyzed by comparing networks to the providers currently used by plan members to determine the potential degree of disruption if a change were made.
But while these basics still apply, more is needed for sound financial analysis in today’s dynamic health marketplace. And the speed of change in many major markets poses challenges for the database commonly used for discount evaluation.
Three main factors combine to necessitate additional areas of examination: the growth of high-performance networks; new centers of excellence for high-cost procedures or those where outcomes are highly variable in quality and return to functionality; and the rapid movement to higher-value primary care relationships.
Naturally, a health plan that can offer sound access and minimal disruption plus more efficient, higher-quality care can lower costs and improve outcomes, resulting in both fewer claim dollars and less lost time.
Key questions to examine include:
The focal point of cost analysis has long been on discounts and has always been somewhat problematic. It’s important for finance leaders to understand both the strengths and limitations of discount analysis.
“Unit cost discounts” reflect the contractually agreed-upon reduction in billed charges that participating providers have committed to. While often referred to as a composite number such as “35%,” the actual value can be misleading without context.
A facility with a $1,000 billed charge may offer a discount of 40% resulting in a discounted charge of $600, while another charges $800 and discounts by 35%, resulting in a net charge of $520. The biggest discount doesn’t necessarily reflect the lowest net charge.
Value-based arrangements are not wholly reflected in discount data, nor are many rapidly paced network re-contracting efforts. That, coupled with the timing of the data reporting, have converged to create challenges for decision-makers. Given the importance that discount analysis continues to play in decision-making, it’s worth a deeper look.
Discount analyses undertaken by major consultants and brokers draw upon a discount database created through the Uniform Discount and Data Specification, or “UDS.” These specifications relate to the manner in which major health plans have agreed to uniformly report their discount data.
Here are some of the limitations inherent in the discount database (for ease of reference we will refer to carrier-provided health plans as “carriers,” although in most cases large employers self-fund claims):
A margin of error (MOE) factor is generally used when evaluating UDS results. (It reflects discount points, not percentage differences in unit cost.) A commonly used MOE is 2%, which equates to roughly a 4% to 5% unit cost difference. In reality, the variance can be more or less depending on the market.
Each consultant and broker has developed proprietary complements to the UDS process to better assess unit costs and the total cost of care. Finance leaders should be asking:
Here I want to discuss repricings. A repricing exercise complements discount analysis and provides carriers with a detailed claim data file that includes services (by procedure code) that were rendered by each provider during a prior defined time period, along with the billed charges for those services.
Carriers are then asked to “reprice” the claims on their current negotiated arrangement as well as any value-based agreements, resulting in a more granular analysis.
Advisers can have differing views on the value of repricing efforts. Repricing adds time and expense, and it risks being different from the discount study. Proponents value the ability to compare the two results. Those who prefer to rely on the discount database argue for the uniformity and “purity” of the database for comparative purposes and note that repricings often simply validate the database results.
Clinical care management is an important element to be considered in cost management. Effective clinical management can influence costs by anywhere from 2% to 5% of claims, and occasionally more.
All major health plans offer strong clinical management and emphasize aspects of helping to get patients the right care at the right time in the right treatment setting, balancing cost and quality.
Some questions include:
Administrative or “ASO” fees are commonly reviewed. However, other charges that may be referred to as “shared savings” fees or variable or non-network fees are often ignored. These have burgeoned recently to become material costs. While they’re not hidden, they often don’t receive the scrutiny they should.
It is not uncommon in contracts to see an average added fee equivalent to $10 to $15 per employee per month, with considerable variability based on the group’s circumstances.
Some additional questions for finance:
These fees vary substantially among the major carriers, and some are willing to negotiate or cap their charges.
The basics are still important, but the rapidly changing nature of the health care market creates the need to complement historical efforts with added analytics to better understand the total equation. Any decision is a moment in an ongoing process, but that decision should be grounded in the best possible foundation for an informed decision.
Randall Abbott has 43 years of experience as a consultant and strategist helping employers evaluate and select health benefit plan service providers. The discussion above is intended to be general in nature. Each employer should consider its own goals and priorities and when needed should seek the guidance of a qualified adviser.