Understanding Basic Concepts of Self-Funding

Transparency

Self-funding is the first step for employers who want to control health care costs.  Gaining access to claims data arms the employer/plan with information necessary to manage costs.  As Peter Drucker once said, “If you can’t measure it, you can’t improve it.”

It doesn’t take much time to realize how true this quote is.  One of the main reasons organizations become self-funded is to gain access to claims data.  Today, data analytic systems capture utilization data on every medical encounter employees receive, whether it be a routine primary care visit, a filled prescription, or an inpatient surgery.  Just getting this information is the first step in managing risk (costs).

More and more data analytic systems are also aggregating data on quality metrics, not just pricing.  For example, wouldn’t you like to know who the top orthopedic surgeon is in your area?  Now, employers can gain access to quality information on things like infection rates, complication rates, hospitalization rates, and even mortality rates.

This is priceless information because whenever an employee needs a surgery, they can be educated on quality, right along with price.  This allows the employer to begin customizing their self-funded plan to steer/incentivize employees to receive high-quality/lower-cost care.  This is one of the fundamental reasons employers self-fund, yet so many are not proactively managing risk in this way, and it is hurting their businesses.  They are simply overpaying for care.

There is also another angle when it comes to “transparency” that employers must consider, and it is the level of transparency your plan’s vendor partners exercise.  How transparent are your contracts?  How transparent are your vendor’s compensation models and sources of revenue?  Do you know how TPA’s make money off your company?  Do you know how PBM’s make money off your company?  Do they disclose everything to you?

I recently consulted with a self-funded prospect who insisted they were receiving 100% of their pharmacy formulary rebates.  Turns out, they were getting MOST of their rebates.  However, upon further analysis, we discovered the PBM was making an undisclosed $1.2 Million on generic spread pricing alone.  “Spread” is the difference between what the PBM acquires medication from the manufacturer for vs. what it sells it back to your plan for.  IE:  They buy a generic med for $1 from the manufacturer and resell it back to your plan for $3……and they keep the $2 as revenue.  So, for that particular employer, transparency meant a lot.  They weren’t getting it, and they needed help discovering that money that was hiding in broad daylight.

Transparency gives companies the ability to see where every dollar is getting spent, how it is spent, and how much is spent.  It also empowers employees to be true consumers of health care.  In every real-life scenario, consumers are able to compare prices for goods and services BEFORE they purchase them.  This hasn’t been the case in health care, as prices and reimbursement amounts are commonly hidden from the true payors of health care, employers and their employees.  The result is a lack of competition to keep prices reasonable.  When prices are hidden from consumers, it’s easy to just keep allowing prices to rise year over year, enriching everyone in the supply chain except those who pay, like self-funded employers and their employees.

Leveraging transparency starts with simply getting the data.  If you don’t know what you’re spending on pharmacy, how can you improve it?  If you don’t know what you’re spending on outpatient surgical procedures, how can you improve it?

First, you must BELIEVE that you can better manage costs.  Don’t just automatically believe that your TPA, or your “carrier” has negotiated the best pricing for your company.  I can assure you, they haven’t.  I gained a new client last year after analyzing their claims data and discovering their TPA had processed, adjudicated, and paid $14,500 for a single abdominal CT scan, a test we get for $475.  No one was paying attention, no one was monitoring the claims.  Just got paid.  When we were successfully able to recoup much of that money for the employer, they hired us, and now we help them manage their claims, and the owner frequently calls me to ask questions about questionable claims that come in.  He’s watching!!!  That’s a win!

Secondly, if you are self-funding and relying on “network discounts”, the TPA or the carrier will not disclose those contractual discounts to you, even though they are paying those discounted prices with YOUR money!  Just keep that in mind, and it’s perfectly reasonable to ask, “Are you negotiating in my company’s best interest, or in your best interest?”

Transparency is needed across the entire health care industry, and without it, you simply have no chance in managing risk (costs).  Self-funding is the beginning, now make sure you are taking advantage of increased transparency into claims, contracts, utilization, and compensation.  It’s the key to successfully controlling health care costs.