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!
