The Affordable Care Act is prompting many employers to consider moving from fully insured plans to self-funding. The mandatory benefit structures and new taxes, added to an excess of 906 pages of mounting regulations, have sounded an alarm for employers to wake up to a changing health care landscape.

On the surface, this newly centralized control of health care makes the concept of self-funding very attractive. Self-funding provides employers the ability to develop a systemic process to managing health risks and the opportunity to control costs surrounding their members.  

There are, however, five areas typically overlooked by plan sponsors. Employers who master these areas increase their chances of lowering costs for high-quality health care, while positioning their plan members to lead healthier and more productive lives.

1. Use healthcare data

The majority of plan-design decisions are made with an absence of independent, patient-centric, aggregated health data. What’s baffling is that employers use intricate data with respect to every other aspect of business, although many ignore the value of data in health care.

Most manufacturers require data to identify goods and services by cost, location, date, and place in the manufacturing cycle. Yet many decision-makers in self-funded organizations cannot even break their health plan expenses into the simplest components. As a result, they have no knowledge of the precursors of certain high-cost diseases, which means they cannot align their wellness efforts to decrease health risks.

Health care analytics firms specializing in providing HIPAA-compliant data programs can cost as little as $1 per-employee-per-month. The programs provide concise reporting on the majority of financial and clinical aspects of a health plan.

Why go with a third party offering “big-data” solutions? Because we don’t let students report on their own grades, and managers shouldn’t solely rely on vendors to report on their own performance. Be skeptical of any administrator’s claim that they are unable to produce your data due to HIPAA concerns. Sophisticated data-mining programs ensure employers have access to meaningful data that is HIPAA compliant. 

Self-funded employers should also have a designated HIPAA-privacy officer, and remember that consultants have legal status to view PHI with properly executed business agreements.

2. Pay for performance

It’s imperative to align compensation in a manner in which vendors are paid when your plan succeeds. The entire health care provider universe is centered on a pay-for-performance scale.  How many firms pay their sales teams more money for failed sales efforts in place of successfully meeting goals? The answer should be close to zero. In turn, why are many health care vendors actually paid more money when their client spirals off the financial cliff due to increasing inflation? Think about it. If a vendor is paid a flat 10-percentage-points on stop-loss insurance, does it make sense to increase their dollar compensation when a 40% rate increase takes effect?

Plan managers should strive to align with vendors who have the same or similar long-term goals as the employer-plan sponsor. What do you think prevents your vendors from having a sound sleep at night? If the vendor was hired to provide health coaching or wellness, the answer should be that they worry about the health conditions of your members.

3. Comparison shop  

Is your plan purchasing health services on a best quality/best price basis? The provider-pricing differences around managed-care-organization networks resemble a “train wreck” more than a uniform structure. Network managers, as evidenced by employer-sponsor behavior, often feel they must have every provider within a network to compete. This creates a negotiation environment with minimal power for some providers and absolute power for others. The result is huge pricing differences. For example, the in-network allowable price for a colonoscopy from hospital “A” is $3,600, and the exact same colonoscopy from surgery center “B” is $750.    

Surprisingly, the better quality usually is delivered by the lowest price paid. Why? Because the lower-priced providers usually work in newer facilities, perform modern procedures, endure fewer complications, and are more profitable at lower pricing.

Network managers cannot overtly direct members to the lower priced/higher quality providers, as that action would rile the larger providers. Easy-to-use vendor solutions, however, do exist. Those simplified tools can help members make comparisons concerning cost and quality, while delivering a 10-to-1 return-on-investment.

4. Educate consumers

Many plan managers don’t realize that medical centers of excellence exist as in-network providers. If a member needs advanced open-heart surgery, quality providers among the Cleveland Clinic and Mayo Clinic are often available choices.  

There is a drastic difference in typical outcomes from centers of excellence compared to some of the close-to-home hospitals. There’s a one-third less chance of dying during the procedure, in addition to dramatically reduced chances of hospital-acquired infections and faster rehabilitation. Another plus for the plan sponsor is that it’s a reduced cost, sometimes equaling 50% of the cost paid to a community hospital.

Use of these centers of excellence is often low because a health care consumer approach is quite different from the informed-consumer approach, such as when purchasing automobiles or researching vacation destinations. Essentially, durable good purchases are typically voluntary versus the critical need for the purchase of open-heart surgery.

Plan managers need to help members receive the same quality of care that they would want for their own family. They could contract with physicians to serve the role of patient-care coordinators and advocates. Also, access to patient-centric data with which medical decisions can be analyzed for quality is a life-saver, while simultaneously a cost-saver for employers and employees. 

5. Understand health risks

A plan manager should understand health risk outside of industry-fed sources. This includes knowing your plan’s claims-expense distribution and percentage of members responsible for costs.  

Most self-funded groups align with the following scenario for 10,000 covered members spending a total of $43 million over a 12-month period:

  • The top 1% (100 members) account for $10.8 million, which is 25% of the total, averaging $108,000 each.
  • The next 4% (400 members) account for an additional $11.9 million, which is 27% of the total, averaging $30,800 each. 
  • The bottom 50% (5,000 members) account for only 4% of the total, averaging just $350 each.

This top-heavy distribution shows that a small number of members (the sickest) spend the most money. With this information, a high-deductible health plan based upon a $2,000 deductible seems foolish. It certainly won’t do much for the behavior of members in the top 5%. A high deductible would also deter the bottom 50% (spending a mere $350/year) from identifying and managing diseases in the earliest stages, which could then generate more sick members.
Smart benefits managers will seek advice from independent sources, negotiate directly with providers, study disease prevention, and hold vendor-failure accountable. Those acting outside the industry box can achieve dramatic savings, while sequentially improving employee health.

Daniel K. Ross is founder and president of Med-Vision LLC and Med-View LLC. With over 20 years’ experience in the employee benefits industry, Ross specializes in health-plan-risk management, health-data analysis, and wellness strategies to help self-funded employers.

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