Financing of the health care benefits paid by employers comes in many forms.
The simplest form of this is the fully insured product. Most small employers understand that this is their only option. In the small group market, the employer looks to the insurance company for “off the shelf” products and chooses the plan or plans that best meet the objectives and costs for the specific group. In the far Northstate these products are delivered primarily by Anthem Blue Cross and Blue Shield of CA.
When choosing from those plans, the employer has the option of choosing different network options from the carrier. For example, Anthem small group offers plans with the full PPO network or a smaller network (called Select). In the smaller network plans the insurer has typically negotiated lower payments to the providers and is able to pass the savings on to the group in the form of lower rates. Premiums are highly regulated and are based on the experience of the entire pool for the geographic region.
Fully insured plans are similar to renting a home; i.e. you have a roof over your head, you don’t build equity, but if anything fails, the landlord pays the bills (and may raise your rent to cover it later).
Larger employers have more options. They may consider partial self-funding. In this case the multiple components of the plan are purchased separately and are combined to provide funding and administration of the plan. These include:
- TPA (third party administrator)-the entity that adjudicates and pays claims
- Stop-loss carrier- the insurance company that assumes the risks for the plan over a certain threshold per individual and/or aggregate for the entire group
- RX: The PBM (Pharmacy Benefit Manager) provides negotiated prices and network for pharmacy benefits as well as negotiates rebates that can be returned to the employer
- Network: The plan will often rent a PPO (Preferred Provider Organization) network from an insurance carrier such as the Blues, Cigna etc.
- Utilization review: This service reviews procedures and hospitalizations for medical necessity. This may be provided by the TPA or outsourced to a separate vendor.
All these moving parts make the plan more complicated to administer, but also give the employer a clear understanding of how the plans’ funds are spent because detailed claims information is available. If the group is more healthy that the average, the firm can save money on the premiums. Partial Self-funding is similar to owning the home: you get the benefit of appreciation and the risk of depreciation of value if the neighborhood changes. The risk and rewards are yours.
A new variation on the partial self-funding scheme is structured in what is known as Captive Insurance Groups. They could be compared to the condo concept. You share the bigger risks with your neighbors and can access some economies of scale with larger purchases. Several employer join together to purchase and partially self-fund benefits.
Both forms of partial self-funding may use a combination of Reference Based Pricing and PPO for claims pricing.
With Referenced Based Pricing, the third party administrator sets benefit reimbursement levels based on a multiple of the Medicare reimbursement rate. Typically claims payment allowances are set at 125-150% of the Medicare reimbursement rate. This can be a challenge for employees as there is no pre-negotiated contract with the vendors and the insured can be left to negotiate with the provider for charges in excess of the allowed amount.
A PPO contract sets reimbursement rates with the provider and they may not balance bill the insured above the allowed amounts. Self-funded plans “rent” PPO networks for their plans. The Blues are the most expensive to rent, but provide the deepest discounts and greatest provider penetration.
I find it intriguing that the employer sponsored group market is getting more interested in Reference Based Pricing. At the same time, the insurance industry is also discouraging the public from considering any of the public option or “Medicare for All” proposals.
Clearly, there are multiple version of “Medicare for all” and public options, and as they say, “the devil is in the details”. But make no mistake, the insurance industry uses the Medicare reimbursement rate as a threshold for reimbursement as well as Medicare rules for allowed procedures and services. They are even returning to RVS (Relative Value Schedules) which were the standard when I started in the business 40+ years ago. In those contracts every procedure is assigned a flat dollar value and that is the limit of allowed reimbursement.
As the health care debate evolves, keep in mind Medicare’s rules and payment schedules are often the basis for the plans in which you are insured.