Last time we discussed the added complexity of health insurance: the administrative layers involved. At the end, we made the observation that any company purchasing health insurance from an insurance company is essentially pre-paying for health care: your health care premiums will always reflect your usage. Therefore, every company with a health benefit is, in essence, self-insured.
Once you accept this reality, you quickly recognize that the convenience of having an insurance company manage your health care expenditure comes with a mark-up. If there is a markup, there are also ways we could save money by simplifying the equation.
As an employer that provides health insurance, our companies pay 50% of the health care premiums. Our employees pay the other half. If I can find a way to deliver the same benefit that we have at a lower cost, not only does the company win, but so does the employee. So let’s look at some of the ways we might achieve some savings.
Our companies run pharmacies. We complain about Pharmacy Benefit Managers underpaying us for our products, and in turn, profiting from our work. In many instances, the PBM makes more than the pharmacy does! This is now well documented.
Yet, my own companies health benefit uses a PBM to process our pharmacy claims. This is an obvious opportunity to save money: why pay a middleman when we could CARVE OUT the pharmacy benefit and run it ourselves? In fact, many larger companies have started to recognize the potential to save money by carving the pharmacy benefit out of their health insurance. As it turns out, however, this is harder than it sounds.
The insurance companies and the PBMs have a complex relationship. This centers primarily around rebate dollars involved for putting certain (and primarily brand name) medications on formulary. These rebates enrich both the PBM and the Insurance company, and they are not necessarily passed to the insured (patient or company) as savings. For this reason, a lot of insurance companies will resist or refuse to allow you to carve out the pharmacy benefit — it is a revenue center for the insurance company. Such is the case of the insurance company we currently use.
Hope is not lost: there ARE insurance companies that will sell insurance plans that carve out the pharmacy benefit. The primary concern, however, is maintaining a benefit that is as good or better than what we currently have, and if we are looking at switching insurance companies, perhaps we should look to replace more than just the prescription benefit.
The process of self-insurance takes advantage of some of those same extra layers described in the last blog post, replacing the insurance company with our own company. Like the insurance company, we can also leverage the health care provider networks by choosing a TPA. For the pharmacy benefit, there are transparent PBMs that can be contracted–though there are potentially even better options for the pharmacy benefit (stay tuned for thoughts on direct pharmacy contracting).
By using the TPA as a resource, you achieve the same pricing advantages the insurance company leverages. Depending on the TPA choice, you can maintain similar or identical access to the doctors, labs, hospitals, and other providers. This allows you to mirror the existing benefit almost exactly.
A small company that self-insures using a TPA can eliminate the mark-up on health care costs imposed by the insurance company. The economic cost of eliminating the insurance company is purely administrative: the company now pays providers directly, based on the negotiated prices obtained through the TPA and the affiliated health network. The employee would still pay their coinsurance or copays, as defined by the plan. The additional work of managing the benefit can be done internally or farmed out to a third party.
Before we dive further into the details, we need to understand that there is an actual insurance component to health insurance. While most expenditures in health care are maintenance expenses and are readily estimated / predicted, there is a random, event-based, component as well. Examples include accidental injuries or the emergence of a previously unknown health concern. The unknown costs might be small, or very large. Just like life insurance or health insurance, the risk of the unknown events are low, but you must have a plan to deal with these events. The health insurance company allocates health insurance premiums to fund several contingency funds or “buckets”:
- Expected Expenditures (the maintenance expenses–based on actual historical usage)
- Reserve Expenses (for unanticipated healthcare expenses)
- catastrophic reserves (traditional event based insurance)
If one wanted to self-insure their company, they would have to do the same thing: assign the premium such that you can set aside these dollars for the benefit to cover expected and reserve needs. The amounts reserved for the first two buckets can be determined by historical usage and an estimated percentage to be held in reserve. The catastrophic reserve is different. An insurance company generally covers the third bucket themselves, by aggregating risk across multiple groups and tens of thousands of their insured. A smaller company cannot do this, as it lacks the ability to aggregate risk. Instead, a self-insured company would purchase stop-gap (catastrophic) insurance policy to cover these events. This works like a high deductible policy. The self-insured company funds the expected and reserve funds with premiums. The stop-gap policy will only pay out if expenses exceed a predetermined amount (the risk the company wants to take). The higher that number, the less expensive a stop-gap policy becomes.
The great part of thinking about insurance in this way is that it makes it easy to identify the potential savings. If you have year with lower than anticipated expenses, you will accumulate bucket two (the reserve). If you have a worse than expected year, you increase your premiums just like the insurance company would do to help replenish the buckets. If you have a horrific year, with catastrophic events costing far more than your anticipated reserve costs, the stop-gap prevents a catastrophic loss for the company.
It is not unusual for companies that have self-insured to quickly accumulate significant reserves. This should be no surprise: insurance companies make a profit doing this! When reserves accumulate significantly, the company has a lot of possible options:
- the company might decrease health insurance premiums
- the amount (fraction) of the premium paid by the employee might be reduced
- There might be additional benefits made available to employees
- the company might move some of the reserves back into operations (keep in mind that excess money in the reserve funds is still the company’s money — the profit as it were, of self-insuring).
Let’s look at a graphic of what this would look like. In my case, a self-insured pharmacy, I would provide my own pharmacy services. In a general case, one could use a transparent PBM and pay a markup on pharmacy services OR use a direct contract with a local pharmacy, having the pharmacy collect the copay / coinsurance and bill the company for the balance.
Self-Insured Pharmacy providing its own pharmacy benefit Yellow arrows are claims submissions, Green arrows are payments and Blue arrows represent self-referral services.
In both cases the company, not an insurance interest, is as the center of the process. There are no unnecessary layers adding cost. The TPA simply receives the claims, processes them, and passes them back to the company to pay. The TPA charges the company an administrative fee for this service.
A self-insured company still must define its coverage. This will often be modeled off the previous plan it replaced. Things like the deductible, co-insurance, covered and non-covered services are all defined. For those things that are not in place, there is still an opportunity to cover or not cover the request through the prior-authorization loop.
The self-insured plan does have some additional costs resulting from the administrative burden being picked up. Depending on the size of the company, and the number of insured, this may marginally decrease the potential savings. Even with the added administrative costs, the savings can be significant over time. The financial downside is kept in check by the stop-gap insurance.
You can bet that my companies will be working hard to implement a self-insured structure for our next health-care renewal. We are not going to miss an opportunity to Make this year’s Renewal Period Encounter Count.
