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.
