Human Capital

Beyond Discounts: A New Approach to Health Plan Financial Analysis

Traditional benefits financial analysis doesn't get the job done right in today's dynamic health marketplace.
David McCannSeptember 20, 2019
Beyond Discounts: A New Approach to Health Plan Financial Analysis

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.

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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:

  • To what degree is there existing or potential alignment of members with value-based providers? Can we run a match of provider-patient relationships against those providers engaged in value-based care delivery and/or participating in a high-performance network? Is there a significant opportunity to easily align members with more cost-effective and higher-quality providers?
  • Is there an opportunity to leverage a center of excellence based on member access to care providers by locale and the group’s top conditions?
  • What is the economic value of these opportunities and how can we best quantify them?
Discount Analysis: Strengths and Limitations

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): 

  1. Carriers submit their data based on three-digit zip code areas, not by specific provider. Those seeking that level of granularity would need to undertake a provider specific “repricing” (which is discussed below).
  2. The data also does not adjust for differences in utilization of provider services for a specific employer (such as the percentage of facility services vs. physician services), although the broker or consultant can establish a percentage distribution as they apply their analytical tools.
  3. Timing and the lag inherent in reporting creates a material delay in data available for analysis. For example, discount data used for a January 2021 effective date will reflect a full year of 2018 and an update to mid-year 2019. In today’s world of aggressive re-contracting, prospective discount improvements or soon-to-expire ones will not be captured.
  4. The database does not fully capture value-based approaches, high-performance networks, or centers of excellence, in terms of either alternative reimbursement arrangements or the potential for improved outcomes and more rapid return to work. Note that it’s not unusual for a third or more of a major carrier’s claim spend to flow through value-based arrangements in major markets.
  5. Many value-based contracting arrangements incorporate not only a discount but also various incentives, retrospective payouts, and risk-sharing arrangements. These features are not included in the core discount analyses.

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:

  • How current is the data being used for the discount analysis?
  • Are there major locations where re-contracting is affecting (or will affect) the discount arrangements but the locations are not included in the data base currently?
  • If a major location is influenced by a strong degree of value-based contracting, how does this potentially influence decisions?
  • Where value-based contracting is in place, are there fees or retrospective credits or payments that should be taken into account during the evaluation?
  • What discount margin of error is being used? Does it make sense? Should a further factor be introduced to include a variance for value-based efforts or other unrecognized elements?

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

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:

  • Does the cost management process focus on so-called high-cost claimants? What is the target threshold? What triggers care management activity?
  • To what degree does the carrier estimate that its care management efforts differentiate them in terms of the ultimate cost of care versus their competitors? How can this be quantified and underscored by performance guarantees?

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:

  • Beyond the specific ASO fee, what other services do you charge for or retain a percentage of savings? (For example, coordination of benefits, subrogation, non-network provider negotiations, savings from various fraud or bill audits, retention or offsets from any drug plan rebates.)
  • Are there retrospective charges that can emerge from any contracted arrangements such as provider incentive payments?
  • Are there charges beyond the administrative fee for any special networks or value-based participation?
  • How are these charges reported, and from what source are they captured? (Billed separately? Taken from claim fund/bank account?)

These fees vary substantially among the major carriers, and some are willing to negotiate or cap their charges.

Putting It All Together

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.

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