I promised we would delve further into health insurance, and like onions, there are lots of layers. A basic form of insurance, like Whole Life or Term Life insurance, involves a contract between the insured and the insurance company. There also exists a relationship between the insurance company and the insurance agent and possibly a relationship between the insured and the agent. That looks something like the illustration below (Green Arrows represent financial transactions, Blue Arrows represent trust / personal relationships):
Simple Insurance Relationship Graph.
As we alluded the last time, there are more layers involved in Health Insurance. Some of these layers are owned / operated by the insurance company, and others are contracted out. This type of insurance might look a something like this: (Green Arrows represent financial transactions, Blue Arrows represent trust / personal relationships. Yellow Arrows represent administrative relationships)
Typical Health Insurance Relationship Graph.
Here we add a TPA (Third Party Administrator), which may or may not be owned by the Insurance company. This company is responsible for processing medical claims. Likewise, the Pharmacy Benefit Manager (PBM) processes pharmacy claims. Both of these companies have created networks of contracted providers (hospitals, labs, doctors, pharmacies etc) that have agreed to accept negotiated price reductions for their service in exchange for inclusion in the network. The TPA and PBM pays the provider and, in turn, seeks reimbursement from the Insurance, including some form of transaction fee for its service.
The Prior Auth department or company (PA) decides what is covered and is not. They traditionally report directly to the insurance company. The TPA and PBM enforce the decisions made by the PA department.
Below the TPA and PBM is where the providers finally appear. Not only are there a lot more financial relationships (green arrows) and Administrative relationships (yellow arrows), but we have placed multiple entities between the providers and the insured.
Here is another way to look at this: the Insured is not purchasing healthcare from the providers, but instead from an insurance company. This is completely backwards! And whenever a group or company inserts itself into the equation, they will ultimately increase the costs passed on to the insured: there is no such thing as a philanthropic TPA or PBM — they are in the business to make money.
These added layers represent both increased costs, but also represent several different opportunities to providers. First, providers might find ways to directly contract with patients, or groups of patients. Concierge medical practices are a great example. A pharmacy directly contracting with an employer to provide service is another. Some pharmacies are eschewing insurance contracts completely, moving to a Cash Plus model. Direct Contracting and Cost Plus will be discussed here in the near future (stay tuned)
One other major implication of this model is recognizing that a company that pays for health insurance is in fact, self insured. They are purchasing health care from the insurance company at a mark-up (the insurance company will always make money), and if their business uses the insurance more than anticipated, the insurance company will front them the money for the expenses. When that happens, the insurance premiums will go up, and the insurance company will get their money back. This creates an opportunity to explore removing some or all of the middlemen from the equation and saving significant dollars on health care.
This final observation will be the focus of the next blog, where we look at what it takes to self-insure your business by removing some of the layers without actually changing your benefit. The result is a more streamlined benefit that saves both the employer and the employee money, Making Every Encounter with your health care insurancebenefit Count.
If you have followed the topics here over the years, you will undoubtedly know that we have spent a great deal of time discussing Pharmacy Benefit Managers. Today we are going to spend a few moments discussing the larger picture: Health Insurance. To do this, we need to describe insurance first, as Health Insurance is not pure insurance.
Insurance, in the dictionary sense, is nothing more than a guarantee for compensation for a specified loss. The most common example would be Life Insurance (compensation for the loss of life). Other losses that are insurable might be damage to your home or car. You can insure a lot of things. The policy requires a premium — the price paid for the insurance, and the premium is based on the assessment of risk. Using statistics, it is possible to ascertain the likelihood of the loss based on historical data and information provided by the insured. This is a key point: Insurance is EVENT BASED.
Another key point is that insurance is entirely funded by the insured. The insurance company is in business to make money — they are not altruistic. The premiums they collect cover the expected losses paid out for the year plus additional reserves, money to pay commissions to agents, and of course profit. If a large number of claims are filed, the insurance company guarantees payment: the additional reserves are there for a reason. But after a run on the reserve funds, the premiums for the customers will go up to compensate.
Heath insurance shares some of the historical attributes of traditional insurance. For example, it would cover medical expenses from an accidental injury. But the business of health is not entirely event based. While there are events that influence the need for health care, health care in general is a maintenance function. Even the healthiest individuals, with no major events, consume health care. As our bodies mature and age, they need more and more general maintenance to keep things operational.
Health insurance, like any insurance, is a net win for the insurance company. They charge premiums based on usage of heath care. If you use more than they expect, your premium will go up. This is a key point: the covered person, family, company, or group is, essentially, self insured. They are just pre-paying for their health insurance PLUS the reserve, PLUS the profit to the insurance company. If the aforementioned covered entity uses more than anticipated (or costs simply rise), their premiums will go up to compensate the increase. The insurance company simply advanced you the money, and like a bank, you will repay them.
Now let’s reconsider healthcare insurance. If I offer healthcare as a benefit to my employees, the premiums being paid are just pre-payment for what is going to be spent. If there is extra, the insurance company does better. If we use more, my premiums go up (and the insurance company still wins). I am self-insure, but paying another company for the privilege. Why would I do this? Convenience and the status quo are the two biggest reasons. But could I use this knowledge to save my company money? The answer is a resounding YES.
In the coming weeks we will discuss the economics of taking the insurance company out the equation. More and more companies are looking to do accomplish this, and it isn’t as far-fetched as it sounds. So until next time, be sure you Make Every Encounter in your business Count!
In pharmacy, there are a few different ways that drug product is organized on the shelves. This organization is important because there are thousands of different combinations of drug and strength. Efficiently in finding the correct product on the shelf is important. The two systems that are used in our stores are alphabetizing drugs on their name (brands by brand name, generic by generic name) and having two sections, one for brand and one for generic, both alphabetized.
The brand section for oral solids at one of our stores once spanned an equal number of bays as the generic drugs. Over the years, with brands going generic and fewer new brands being released, the shelving space relegated to the brand name drugs has diminished. Significantly. Currently we have about twelve 4-foot shelves tasked to organizing our brand name medications: about a quarter of the size it was back in 2003 when I began my ownership journey.
Bulk medications, like inhalers, for example, have maintained a higher percentage of brand name product over the years. This has to do with the specialization required to create generics of these dosage forms. Here, our brand and generic products are stored side-by-side. We have about 36 feet of shelving dedicated for this section.
So, why am I describing my shelves to you? In the last months, we have made the decision to significantly cut back on our inventory of brand name medications in order to increase turns and to free up cash flow. For faster-moving products like Eliquis, we are maintaining a 2-3 day supply on the shelf. For slower moving items, we would typically have just a partial bottle or even no stock. For bulk items, the number carried is often zero.
As I pursued my shelves the other day, I was struck by how bare certain areas of the shelves were. The inhaler section, which normally was stacked 1-3 units deep and covered most of the available space was almost bare. The oral solid brand shelves were also very spare. We were approaching zero stock on most of these expensive items.
The question, therefore, is what impact is this having on the practice. And because we are approaching the end of the year, our inventory crew just happened to be scheduled for a visit. The result? Our inventory turns have improved, and are >14, and our overall inventory was down by $90,000.
This transition was not made in isolation. We have worked hard to use MedSync to ensure that patients have their medications on time. We have socialized these changes to our patients, asking them to give us a day or more notice on certain refills if they are not in MedSync. And while there are always outliers, this has worked well.
Our purchases went down for a short time as we burned through excess inventory, but now that we are back at equilibrium, we are still spending the same amount with the wholesalers. The differences are two fold: we don’t have the extra inventory on our shelves and we have more cash on hand if needed.
Given the challenging situations that have been thrust upon pharmacy, with brand name medications often being paid below our costs, this was a logical first step. If legislators don’t take action to reign in the anti-competitive practices of the pharmacy benefit managers, the next steps will be to start paring our brand offerings or shifting those prescriptions to mail order as perviously described.
Pharmacy owners need to be nimble today. Make changes quickly, responding before the crisis occurs. Make Every inventory Encounter Count.
