Overcoming Misconceptions About Health Benefits: Part 1

Over this past weekend, I decided to dig in to the 2019/2020, 600 page budget for the City of Amarillo, and specifically focus on the health benefits and risk management portions of the budget. I wanted to see if there was anything in the budget language that would help me understand the thought process or the philosophy behind their health plan strategies and processes. That led me into analyzing past budgets from prior years, and identifying trends, things that I see as problems, etc.

Healthcare costs are a concern for most employers and employees, yet too many are doubling-down on strategies that simply haven’t worked. I believe this starts with “mindset” and perceptions. In order to experience the mindset shift necessary for improvement, we first have to address misconceptions we have about healthcare, health insurance, risk management, and many other things we’ve been conditioned to believe about healthcare/benefits over the past 50 years.

I’m going to do my best to address these misconceptions and mindsets, and offer an alternative view point, using the City of Amarillo’s budgets (past and present), and current healthcare strategies as real-life and local examples. I want to help our community address the issues hard-working Amarilloans face in our current healthcare system.

Core Values

One of the City’s Core Values is “Forward Thinking”. From the current budget proposal: Identify trends, anticipate problems and develop innovative and cost-effective solutions; recognize that today’s public policy decisions will determine tomorrow’s community.

I want to begin with something in this statement, “Identify Trends”. Trends are things we focus on when looking at the health plan, and there are many trends we establish, but for the purposes of this post, I’ll focus on the City’s trend in overall plan spend. This Core Value really stands out to me, because more than any other sector of the City’s business, the health plan can benefit the most from innovative and cost-effective solutions. I believe our City wants to be innovative, and I believe they want to lower healthcare costs. I just think they haven’t been exposed to alternative strategies, namely, the Health Rosetta model for designing community-based, high performing health plans. Let’s get into it…..

According to the latest budget, “the City continued to see increasing claims and cost in the Employee Insurance Fund with the claims increasing by 10% for the last four years“. The increase this year was 13%. It’s a fairly common trend we see in plans this size. So much so, we’ve coined a phrase in our industry, although it’s an entirely bogus phrase…”10% increases are the new normal in healthcare.” To put this into perspective, the City currently spends more than $20 Million per year covering health claims for employees, so a 10% average increase is more than $2M per year.

This is the first “misconception” I want to address. Many employers have simply stopped believing that healthcare costs can be maintained, and that they simply just go up this much each and every year. It is arguably the most common misconception we face, and it’s one of the most dangerous.

This mindset suggests that nothing much can be done about healthcare costs, and no strategy or solution can really have much of an effect on this “trend”. Therefore, most employers choose to double-down with what “they’ve always done” when it comes to procuring employee benefits, or funding their own claims, like the City of Amarillo does primarily. Here are a couple of illustrations from the budget:

“Nevertheless, the total claims are increasing year-over-year, with the ever-increasing cost of healthcare“. But healthcare “costs” are not increasing 10% per year. Not even 5% per year. The only thing increasing by that much per year is healthcare PRICING. Cost and price are two different things, and the City’s current contract through Aetna is a contract based on prices, not costs. We illustrate this for clients and prospects by showing employers hospital financial statements. Why hospitals? Because that’s where a huge chunk of the money gets spent, in the facilities. They are even more shocked when we show them the actual COST TO CHARGE ratios their health plans are paying in these facilities.

One example: One facility we’ve analyzed has a cost to charge ratio for CT Scans of $.02. For every dollar the hospital charges for a CT Scan, its’ COST is two cents. That is a SELF-REPORTED figure to the Centers of Medicare and Medicaid (CMS), which requires hospitals to report data from their facility, including data on COSTS. This means that when that particular hospital charges the City’s health plan $5000 for a CT Scan, their cost is approximately $100. But the City’s health plan is likely paying a “discount” off of the actual PRICE, or Chargemaster rate ($5000). Let’s say the City gets a fantastic discount, which they claim they do, and let’s pretend it’s 60% off billed charges. The City’s plan, and/or the employee is still paying $2000 for that CT Scan that COSTS the facility $100.

Instead of negotiating reimbursement agreements based on COST, the City is entering into a contract (via Aetna) where reimbursements are based on PRICE. When this happens, “network discounts” appear very valuable! From the budget: “The City anticipates that a national carrier will have more favorable discounts with network providers.” Discounts. Discounts off what? BILLED CHARGES. In the example given above, what is better, a 60% discount off billed charges, or paying the facility 300% over cost for the CT Scan?

When prices are marked up this high, of course it makes “discounts” appear valuable. The questions then become, what if the services weren’t marked up this much? What if I really didn’t need to purchase insurance to hedge my risk for this service? What if I really don’t need insurance…..period? You see what happens when you take away this billing scheme? It makes insurance less necessary, and believe me, insurance companies do NOT want you feeling that way, so they are happy to perpetuate the status quo, because as the PRICE of healthcare goes up every year, they get to remind you just how much you “need” them.

Employers, and the City, need to know that there are alternative methods for reimbursing care providers, including hospitals. Reference-based Pricing has become one of those alternative methodologies that determine reimbursements based on COSTS, and not the provider’s list price, or CHARGEMASTER price. Many hospitals are opposed to this methodology, and it’s clear why. Many larger health systems want no part of change either, and why would they? If they are currently being reimbursed 60% of their billed charges under these proprietary, secret contracts with insurers, why on Earth would they ever want to change THAT model?

On the other hand, there are also many high-quality facilities out there that are willing to work with employers on these types of reimbursement models. These facilities understand that the status quo is unsustainable, and they are eager to work directly with the REAL PAYORS of healthcare in this country…..the employers and employees. Many providers are fed up with the status quo games too since some facilities report that 30% of their overall operational costs are due to insurance related activities like filing claims, appealing claims, verifying reimbursement rates, auditing reimbursements, and other administrative requirements they have with insurance companies.

This is one example of just thinking differently, and looking at a particular challenge from another perspective. Instead of negotiating discounts off billed charges, employers should be finding ways to contract directly with providers and negotiate payments based off costs. But the City says they do this. The City has a “direct contract” with a hospital system. That may be true, but when I see their data, and know they are paying north of $12,000 per year per employee (PEPY) on medical claims, I immediately question just how solid that contract really is.

In Part 2 of this series, I’m going to answer the question, “Why don’t the insurance companies negotiate this way?” and many others. We’ll also get back into the City of Amarillo’s budget analysis I’ve been doing and address other issues our City could be handling differently to lower costs and improve outcomes for employees.

PERCEPTION: THAT “NETWORK DISCOUNTS” REDUCE HEALTHCARE COSTS AND THAT A 10% AVERAGE ANNUAL INCREASE IS GOOD TREND

I give these perceptions 5 Pinocchios…….stay tuned for Part 2