Penetrating Healthcare Costs’ Dark Side
The days of passing the buck in healthcare just might be numbered. For years, employers have endured annual increases in the cost of medical benefits.
Now some of them are starting to say, “Enough!”
President Harry Truman famously kept a sign on his desk in the Oval Office that said, “The Buck Stops Here!” (The expression “pass the buck” is believed to have derived from poker, a reference to a player’s decision to pass to the next player the responsibility of dealing the next hand.) Self-insured employers are adopting Truman’s philosophy as they look at ways to get medical claim costs under control.
One way employers are starting to do that is through reference- or metric-based pricing strategies with hospitals, benefits experts say. Among larger, self-insured health plans, says Curt Howell, senior executive vice president for employee benefits at The Leavitt Group, “reference-based pricing is gaining a tremendous amount of traction. It’s fairly new to the industry, and it’s something we’re tracking closely.”
Craig Hasday, president of Frenkel Benefits in New York, says larger employers have taken the lead in reference-based pricing. Among smaller employers, Hasday says, “it’s something that’s being talked about,” though the practice varies according to region and marketplace. He says states in the Midwest and Southeast, as well as Texas, have embraced reference-based pricing most heartily.
William Slocum, director of business development at ELAP Services, likens hospital pricing to a game designed to account for the discounts that healthcare networks insist on. “It’s a game that the employers are losing,” Slocum says.
ELAP and other firms that negotiate hospital bills on behalf of employers tout reference-based pricing as a way to reduce premiums by 30% to 40%. “This could be a game-changer in healthcare,” Howell says.
How It Works
Under a reference-based pricing strategy, a plan sponsor generally contracts with a physician network and negotiates hospital claims as they occur, using Medicare as a reference instead of accepting charges as billed, Howell says. This can work to plan sponsors’ advantage because all hospitals accept Medicare as a reference for the price of healthcare services. For example, you might use a formula of cost plus 10% or Medicare’s reimbursement plus 20% to 50%.
Kristi Gjellum, practice leader for employee benefits at IMA, says reference-based pricing can take the form of a direct contract between employers and providers or work through other networks that are using reference-based approaches. In any case, Gjellum says, “More employers are writing plan documents to say, ‘We’ll pay 120% of Medicare or 112% of your cost.’ Some employers are turning to surgical centers of excellence. But in general they want to become more targeted in how they’re paying providers. An employer might have a plan that states, ‘We’ll pay $5,000 for a knee surgery in Colorado,’ and the plan participant will have to shop and figure out the rest.”
Plan sponsors have plenty of room to negotiate. Hospitals’ billed charges are vastly higher than their actual costs. Hospitals that accept Medicare reimbursement are required to report their cost-to-charge ratios annually to the Centers for Medicare & Medicaid Services. To illustrate, a cost-to-charge ratio of 10% on a hospital procedure charged at $10,000 means the actual cost of providing that service is only $1,000—a markup of 1,000%.
In contrast to negotiating hospital claims individually, insured health plans tend to use hospital networks that have agreed to discounts with the healthcare insurer. As a result, hospitals can and do increase bill amounts to account for the negotiated discount—for example, reducing a $10,000 bill by half—but still pocket a high markup.
ELAP is helping its employer clients apply reference-based pricing, a rate based on the Medicare reference price plus a percentage increase. “When you average out across our book, we’re paying Medicare plus 48%,” Slocum says. “Medicare plus 35% or 40% is still a really good deal. Carriers are paying Medicare plus 200% to 300%, or maybe higher depending on the service.”
“At this point,” Gjellum says, “it is the mad buyer going to reference-based pricing or the one that is trying a last-ditch effort to keep an employer-sponsored health plan because they’re not ready to send their employees out to the exchanges. But more and more are interested in the approach.”
Regardless of an employer’s underlying motivation for its pricing strategy, Gjellum says, “they are questioning. There’s a lot more questioning in the last two to three years than there has ever been.”
For self-insured plans that confront hospitals with reference-based pricing, the Employee Retirement Income Security Act is a muscular ally: Hospitals cannot complain to their state’s insurance department because ERISA preempts the regulation of benefits.
“Will it be contentious? Yeah, and it will be,” Gjellum says, until hospitals and employer-sponsored plans “figure out the dance.”
“I’d buy a lawn chair and a six-pack and watch the fireworks,” Howell says. “Hospitals aren’t going to take this standing still. This method reduces cost-shifting, and there will be some interesting legal battles to come from this.”
One of the elements of the Affordable Care Act that has captured employers’ attention is the so-called Cadillac tax, which in 2018 will impose a 40% excise tax on plans whose cost of coverage exceeds a predetermined annual limit. For 2018, the limit is $10,200 for individuals and $27,500 for families. The tax will apply to health insurance issuers and self-funded group benefit plans—on each covered employee.
Benefits brokers such as Mike Barone, national president of employee benefits at Chicago-based Hub International, say employers are already taking steps to mitigate the impact of the tax. “The Cadillac tax is not new to us or our clients,” Barone says. “We’ve been in discussions for several years to help those employer clients that could be in the crosshairs of the Cadillac tax.”
Barone says Hub advises clients to avoid the “episodic” purchase of benefits in favor of a multiyear strategy. He says such an approach “will help employers mollify or eliminate the Cadillac tax while remaining competitive in attracting and retaining talent with their benefit programs.”
Hasday says employers’ embrace of healthcare consumerism is reducing benefit levels as plans shift to consumer-driven approaches with health savings accounts or health reimbursement accounts. That shift is mitigating the cost of health plans, which helps employers avoid the tax.
“Long gone are the days of the broker sitting down with the CFO and head of HR and determining how to control the costs of healthcare for a group of employees,” Barone says. “There is a massive shift going on. Employers need to incorporate the insured into the conversation and align the incentives to give themselves the best chance for optimizing their healthcare spend going forward.”
“One thing that’s terrifying for benefit plan sponsors is the Department of Labor right now,” Howell says. “The ACA legislation has been passed, and nothing’s going to happen” to repeal the legislation before 2017. But the administration can regulate, and the Labor Department is focusing on auditing employers for compliance with ACA requirements, he says.
“We’re helping our clients much more with compliance,” Howell says. “As true benefit consultants, we have to help direct our clients to get the help and services they need to be in compliance.”
For example, an employer must deliver certain plan documents, such as summary plan descriptions and summaries of benefits and coverage, to plan members within a specified period after enrollment—often within 30 days. What notifications, when and to whom vary, and an employer has to comply with the rules enforced by the labor agency’s Employee Benefit Security Administration.
Hasday says Frenkel Benefits is preparing clients for Department of Labor plan audits. “Brokers historically haven’t been the main line in HR compliance,” he says, “but we’ve quickly assumed the main defensive posture for our clients with respect to compliance and compliance audits. That is a subtle shift that has taken on a life of its own throughout the country.
“Many clients are seeing the Department of Labor letters about plan compliance. It’s more than I’ve ever seen in my professional career. There’s no question that the DOL is ramping up enforcement efforts.”
Barone says he doesn’t know how much the Labor Department might have expanded its enforcement staff, but an increase in enforcement resources would be a logical outgrowth of the healthcare reform law. “The regulations and compliance requirements in the ACA have more than doubled the complexity for employers,” Barone says, though he has not heard of any cases in which the department penalized an employer.
“If you have clients in a really good position, with t’s crossed and i’s dotted with regard to their plans, if the DOL walks in and sees they’re complying, there is not much left to audit,” Barone says. “We make sure our clients are aware of their requirements and that our clients’ staffs have training” to administer compliant programs.
Howell says The Leavitt Group believes “the brokerage of the future will look very different from the brokerage of the past.”
“It’s going to be a full-service consulting business” focused on benefits. “For a small broker, how much can they negotiate on a community-rated product? They can’t. The rate is the rate, but they can still talk about strategy and types of plans. Now we have to be strategic in our offering and provide value-added services.”
Consumerism Cost Controls
A continuing shift by middle-market and large employers to consumerism is also a big trend among employer-sponsored healthcare plans.
“In general, there is a significant deterioration of benefits and a flight to high-deductible plans,” Hasday says.
Bob Reiff, president of Lockton Benefit Group, says cost is still a primary consideration. Consumer-directed and high-deductible health plans are becoming more common, he says, along with outcomes-based wellness programs.
Lockton also is seeing clients implement plan designs that shift more costs relating to dependents onto employees. “In the past, employers would contribute 75%-plus toward dependent care,” Reiff says. “Now it might be as low as 25% or even 0%. The ACA allows that, and it’s another way for employers to save.
“2014 was a year of kicking tires, which has allowed us to have great conversations with our clients. It has been really good for our business.”
Among plans with fewer than 100 lives, The Leavitt Group is seeing a trend in level-funding or partially self-funding under the ACA. Normally, self-funding is not cost-effective for small health plans. But, Howell says, “some carriers have a product that lets plans as low as 15 lives partly self-fund. You’re really betting against yourself and your pool of lives. Level-funding lets you get out from under community rating and fund up to a certain level, above which the stop-loss piece kicks in.”
Employers are talking about plan designs and moving toward total replacement high-deductible health plans. “I’m seeing a return to value-based plans, putting in road bumps to stop employees from going for low-value things,” Gjellum says. “As a result, more employers are looking to create surgical centers of excellence around heart and orthopedic medicine. It’s not just a cost play. It’s a quality play. Quality is probably more important than costs.”
“We’re seeing increased use of healthcare transparency tools,” Reiff says. When it comes to providing employees with tools to make choices, he says, “Technology is playing a hand in employers’ business. We’ve seen this shift toward consumerism over the last number of years, and it goes hand in hand with this trend.
Employers are being less directive. Instead, they’re setting the table and placing more of the decision on the employees to direct their own care. Several carriers have developed mobile apps that estimate cost of care by zip code and show how cost of care can vary by provider.”
The focus on technology stems from the ACA placing responsibility on employers for reporting and tracking benefit programs. “Technology is the buzz,” Reiff says. “We’re talking to clients about the technology platform they have in place—or don’t have in place. Our teams are having a lot of conversations about using technology to better manage and communicate benefits.”
Lockton has found that employers with 4,000 or more employees “usually have something in place but are looking to make enhancements,” Reiff says. “In the middle market—about 500 to 5,000 employees—many do not have a good solution in place. There is high interest in making investments in technology in the middle-market area.”
A year ago, a burning question about the Affordable Care Act was how many employers would get out of sponsoring healthcare benefits and send employees to health exchanges. Anticipating an exodus, brokers and benefits consultants set up private exchanges to provide options for their clients. For now, though, there is no massive shift.
“I believe employers with 50 or fewer employees are going to start opting out of providing coverage or providing coverage that’s unaffordable,” Hasday says. “Smaller employers are on the verge of not offering coverage, but it hasn’t happened yet.”
IMA’s experience with clients and exchanges has been similar to Lockton’s. “In the middle-market space, we’re not seeing a move into exchanges. Not at all,” Gjellum says. The one client she says she has seen take the jump was in financial distress.
“Will this conversation be different in two years?” she says. “Probably.”