Health care costs are now about 17.9% of GDP in the U.S. These rising costs have legislators, policymakers, and employers in a quandary—both on the public and private side of the equation.
While we see major headlines about Medicare and Medicaid policy changes to control costs, about 49% of the population is covered by employer-sponsored health plans and costs are a challenge for them as well (see Health Insurance Coverage of the Total Population). Employer-sponsored insurance costs are rising for both employers and employees. In 2018, insurance cost large employers about $10,000 per year per employee and employees about $4,200 annually—that is about a 5% increase from 2017 (see Employers To Spend About $10,000 On Health Care For Each Worker).
The question is what to do about these rising costs? One option we’ve heard more about in recent years is employers moving away from traditional health plan coverage to a self-insured model of coverage. Currently 61% of covered workers (including 13% of covered workers in small firms and 81% in large firms) are enrolled in plans that are either partially or completely self-funded (see 2018 Employer Health Benefits Survey). Is increasing the number of small employers moving to self-insured models of coverage a possible solution to address rising costs? What are the options for more self-funding? And, what are the implications for employers, for consumers, and for provider organizations?
To answer these questions, I turned to Bill Green, Chief Executive Officer of Homestead Smart Health Plans, who will deliver the keynote, “Building A New System For Private Insurance: Innovations & Emerging Models For Employer-Sponsored Health Plans,” at this week’s OPEN MINDS Performance Management Institute. Homestead Smart Health Plans is part of a growing movement to ‘rethink’ employer-sponsored health insurance. Their particular model allows employers to be self-insured – combining a benefits administrative system, a proprietary provider pricing/claims monitoring system, and stop-loss insurance for catastrophic claims. How does the Homestead model differ from the traditional employer-sponsored health plan model? Mr. Green noted:
Essentially, we start at a different place than the major health insurance carriers, that are entering into contracts to increase their own profitability, as opposed to a “win-win” for the health plan and the consumers. Our approach is holistic. We only work with self-insured groups. We help with a plan design that is going to lower costs for the employees and employers. Instead of increasing costs to maintain the same level of service, we use reference-based pricing to reverse that and have lowered costs by 10 to 35%, meeting that trend year-over-year. We do that with no limitations on what providers employees can see and without the need for referrals.
Under the Homestead reference-based pricing model, provider organizations receive a rate based on Medicare reimbursement or the Centers for Medicare & Medicaid Services (CMS) cost-to-charge ratio plus a fair mark-up – which ever is greater. While Mr. Green was adamant that this approach is one of the solutions to U.S. health care care costs, he doesn’t suggest that it’s a replacement for current public sector models. Instead, it relies on those public programs to set reference prices. He noted:
Without the public sector, our model would not be possible because we wouldn’t have Medicare to use as a reference price. So, in that sense, our model is working in the public sector. Montana and California, for their own state health plans, have said they won’t pay more than, say, 160% of Medicare, and that’s what they pay every provider in the state. We will see that approach spread, and the long-term trend will be this direction.
The future of employer-sponsored health benefits will see reference-based pricing increase from 8% today, to over half of the market in five years. We will go back to the future so to speak. Provider organizations were far happier in a non-PPO/HMO world. They had their costs, and they charged a fair profit, and they got paid. That’s the way it worked in the 70s and 80s. I think we are going back to a rational pricing model over time. The current model isn’t sustainable. Major carriers are trying to use their power to reduce cost, but it’s still arbitrary…
And it’s important to note we are attacking the system, not the individual players. The whole thing is broken and once you know that, you have two choices. Sit tight until someone else comes along or be the someone else. It is employers, as health plan sponsors, that have to band together to fix this and stop relying on health insurance companies motivated by profit to do it for them – that won’t happen.
The implication for stakeholders, according to Mr. Green, is to reduce the very high cost of providing health benefits to human services staff, and thus positively impacting profit margin, by bringing a level of fairness to the negotiating table. He explained:
We are building a win-win all around through collaborative efforts. We are not locked into restrictive five-year contracts, so we can innovate every year. What we do is pay a fair and transparent price that is based on Medicare and a fair mark-up or the CMS cost-to-charge ratio and a fair mark-up-whichever is greater.
For example, think of buying a car. I can go to Consumer Reports and I get a fax of the cost and I then go to different dealers and negotiate what I know about the cost. We are doing the same for our members and plan sponsors. If you didn’t have that information, you only know the sticker price and are guessing at the reasonable and fair price. Essentially, that’s what employers are doing when they allow a major carrier to negotiate rates that they sign up to pay. As the employer, you are essentially relying on a third party with no reference as to whether that is fair to you. Employers have been put in the position of leaving what they pay health care providers up to insurers, who are out for their own profit. We approach it very differently.
Whether or not self-insured employer health plans based on reference pricing will make a dent in the continued increase in health care costs and for employers remains to be seen. But I’m certain we’ll be seeing more innovation by employers as they focus on maximizing the value of their health care spend.
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