There are three segments of our society that need help –
a. Those with Major Medical Insurance who need to get control of programs
b. Those without any Major Medical Insurance who desperately need help
c. Those with Medicare and Medicaid, who have few options
This paper raises questions impacting the first segment; those with Employer provided Major Medical Insurance. The other segments will be covered later this month.
Those with employer provided medical insurance comprise the fortunate community who for the most part has a roof over their heads, heating in their homes, food on their table, and the prized Major Medical Insurance and Prescription Drugs card.
However, the cost of the insurance increases every year. Every employer believes that this is a benefit provided to employees, and it is okay for the employee to bear an increasing cost for the benefit. Every employee feels that this is an entitlement, and it is okay for the employer to incur the increasing costs of insurance.
How naïve! There is only one pot of gold, from which these costs are paid. In many parts of the world, that is called "total cost of employee to the company", or "cost to company – ctc for short".
It is in the interest of every employer to keep the total cost of providing health care "benefits" to employees as low as possible, so other components like wages and bonuses can be increased. It is in the interest of every employee to keep the total cost of incurring health care "benefits" as low as possible, so other components like wages and bonuses may be increased.
Why don’t people get it? Because no one thinks about it. For most employers, providing major medical insurance coverage is a necessary evil. For most employees, major medical insurance coverage provided by the employer is an entitlement.
Sadly, the world does not work that way.
The United States is probably the world’s most sick nation, if the money we spend on health care is any indication - $2.1 trillion in 2006 and probably at least $2.4 trillion in 2008. The US Federal government in 2007 spent $2.7 trillion, of which a whopping $700 billion was on health care. 15% of the US population does not have health insurance – that is about one in 7 citizens! Health spending is going up each year by 6 to 7 percent.
Administrative costs account for about 7% of total health care costs. This does not include the cost of administering Major Medical Insurance Plans, and the profit that Insurance companies make every year. There does not appear to be any published data for this basically clerical Accounts Payable service provided by Insurance Companies. Emergency Room Care costs about $75 billion, about 3.5% of total health care spending- a lot of this is for routine services not available to families without insurance.
The following data shows the increase in the price of major medical insurance during the last decade – 127% for single coverage and 132% for family coverage.
In 1999 annual single and family insurance cost $2,196 & $5,791
In 2004 this increased to $3,695 & $9,950
By 2007 this more than doubled to $4,479 & $12,106
Projections for 2009 are $4,993 & $13,462
It is estimated that more than half the increase in health care spending is a direct result of the growth of comprehensive health insurance programs. It is reported that in 2006 consumer’ out of pocket spending represented only 13% of total health spending, down from more than 50% in the 1950s. Since the majority of any individual’s medical costs (to the individual) are paid involuntarily and the discretionary payments are marginal (13%, capped at about $1,500), utilization of healthcare services has become akin to entitlements and they are invariably used without any significant care or concern.
There is no consistent process to control healthcare expenses, and there is no reliable program of wellness. Chronic diseases management is pathetic, preventive efforts are almost non-existent. Patients with insurance do not care, because healthcare is dispensed like a buffet or all-you-can-eat program. When is the last time you went to a buffet all you can eat meal and came home hungry?
There is neither audit of bills, nor any comparative shopping for efficient purchasing. A very learned group of consumers told me that more than 50% of them were unhappy with their primary care provider – but they did nothing about changing the provider! The apathy and indifference are major causes for this runaway cost situation. ALL service providers have no interest in controlling or reducing costs – these "runaway costs" are their incomes!
All efforts by the Government to control healthcare costs have been futile, and there is no reason to expect any significant improvement in the near future – unless thinking changes dramatically. The only way to see improvement is for companies and individuals to gain control of healthcare costs, and by promoting wellness programs to optimize utilization
There is a changing trend in the kind of health care insurance plans that are used by employers:
In 1988, 73% of us had Conventional plans, 16% had HMO Plans, 11% had PPO Plans, and there were no POS Plans or HSA Plans.
By 1993, these numbers changed to 46%, 21%, and 26%, and POS plans covered 7%
In 1999 Conventional plans declined to 10%, HMO grew to 28%, PPO exploded to cover 39% and POS Plans grew to 24%
2004 saw Conventional plans becoming insignificant at 5%, and HMO declined to 25%, PPO grew to 55% and POS declined to 15%
2006 demonstrated further erosion of Conventional plans to 3%, HMO Plans to 20%, while PPO plans dominated at 60% while POS further declined to 13% and for the first time, HSA Plans became a player at 4%
2008 marked Conventional Plans becoming irrelevant at 2%, HMO staying at the 20% level, PPO slightly eroding to 58%, POS further losing popularity to become 12%, and HSA Plans gaining 100% to become 8%
In 2009, there will be further growth of HSA Plans, should grow to about 40% by 2011.
Does this reveal something?
Financial incentives are the most effective way to influence human behavior, and increasing participation in health related programs is no exception. Most individuals respond positively to financial incentives that are targeted to their needs by demographic, job type or condition.
Consumer-Directed Health Plans with a broad range of programs designed to challenge individuals to stay healthy are always effective. When individuals choose, and pay for their choices, they become smart shoppers. Health care is not entitlement; it is a service that should be purchased like any other product or service that our people pay for.
The Components:
The cost of Health Care and Major Medical Insurance has multiple components and one needs to optimize each, in order to develop a sustainable solution. The goal should be to understand what drives the cost of Health Care and Major Medical Insurance, and to develop sustainable solutions to not just reduce costs today by negotiation, but to ensure that over several years, costs remain stable. There is a desperate need for process change, total Business Process Reorganization is essential to contain costs. The costs broadly include the following components:
• Administrative: This is a component that keeps the machine rolling. Individuals need to be brought on to the plan, and they need to be removed when required. When medical expenses are incurred, approved amounts need to be paid to service providers; patients need to be informed of status of claims etc. These are mostly clerical functions that need to be executed efficiently at lowest possible cost. Most of these services are web enabled and automated in an efficient system.
• Risk mitigation: This is a critical component and the primary purpose of Major Medical Insurance. Most people can afford the occasional visit to the Doctor’s office, and payment of prescription drugs. They are not a major problem. However when there is a catastrophic claim, requiring payment of thousands of dollars, it is imperative that there is reliable insurance that will take care of medical bills that individuals can not afford to pay. This is the real "insurance" part of Major Medical Insurance – largely lost to most people who pass through life and die without incurring any significant medical expenses.
• Claims Pricing: Over the years, the medical service industry has sunk to pathetic lows – it is almost impossible to buy services or products at full price! This is the twist brought about by Medical Insurance Companies – they tout their contracts and negotiated prices as a reason why their services are better than the next company’s program. What is not commonly known is that most medical insurance companies use comparable "networks" where pricing is generally comparable. Pricing always varies by service provider – the same service or prescription from different providers is not paid at the same rate! Optimization of service provider makes a difference, and many of these discounts may be negotiated by employers directly with service providers. However, pricing of claims is critical to ensure that total cost of Major Medical Insurance program is contained.
• Funding claims: This is the simple Accounts Payable function served by the program. Bills are received from service providers, they are re-priced based on contracts, and approved amounts are paid periodically. These payments are usually done on a weekly, biweekly, or monthly basis.
• Profit to Insurance Company: This is the big unknown element that employers should tap into. There is profit at every level, and quite often this is at unreasonable amounts. Most Major Medical Insurance programs provide significant profits upfront, in the administrative and risk mitigation components. Sales commissions are significant as all sales are made by brokers and agents, sometimes through a consolidator or wholesaler who adds a second level of commissions. Claims pricing is the unknown element as underwriters estimate the incidence of claims, based on demographic and historical data. Needless to say, this is always over-estimated and pricing is usually at 125% of estimated claims. To get an understanding of how the industry works, do a quick check on your own experience over the years – how much you have paid into the insurance program (including company contributions) and how much you have availed in benefits. Keep in mind that there is no free lunch, and so every group consistently pays significantly more than the benefits availed. Ignore the catastrophic claims; those are covered by the insurance component. Needless to say, maximum profit to insurance companies is from unpaid claims (resulting from over-estimation of potential claims to start with, negotiating low prices for services, and denying claims for arbitrary reasons).
Is there a Solution?
The smartest employers seldom understand major medical insurance. This is an industry driven by conditioning. Employers are conditioned to expect standard rates, and annual increases ranging from 8% to 35% depending on claims experience in the previous year. No employer will consistently experience claims at 125% of expected claims, so there is no doubt that there is room for cost containment in this area. Similarly, there is scope for cost containment in other areas as well.
Chronic disease management is critical, be it High Blood Pressure, Cholesterol, or Diabetes. Active management and treatment of these silent killers will go a long way in reducing unhappy events in the company. Smoking cessation programs add great value. NY makes great strides through heart wrenching advertisements.
Yes, there are great solutions. Begin by taking charge of the program, like any other component of business procurement. Purchasing Major Medical Insurance does not stop when the annual contract is signed with an insurance company that provides health care coverage. Just like how every ounce of materials and every hour of service is inspected in the manufacturing and service industries, every instance of medical services utilization needs to be independently evaluated. There is software in the market, and services that provide this to employers and those employers are usually less adversely impacted when it comes to the average cost of major medical insurance for their employees. However, even in those cases, there is a lot of improvement possible.