From Soviet-like Health Benefit Choices to Liberation and Self-determination

Confessions from the journey of a fully insured to self-insured employer

While this piece is written by an ERISA attorney, he writes from the perspective of an employer and the struggles and successes they went through. It joins the examples from Orlando, Kirkland, Milwaukee, Tulsa and Pittsburgh where employers are showing the number one ingredient for health benefits purchasing success is having the will to ignore so-called experts. These organizations are applying common sense fixes to healthcare...and it's working.

Written by Adam Russo

As an employer and founder of a business, I will never forget my first experience purchasing health insurance for my employees at The Phia Group.  It was 2002 and I was so excited that the company I co-founded in my mother’s basement with my best friend from college was successful enough to actually need health care coverage because we finally had employees.  Excitement turned to frustration, and that experience with the health insurance market opened my eyes and sparked within me a new level of passion for revolutionary change; to change how health insurance should look and feel.

How could purchasing health coverage be so different than every other thing that we purchased for the office?  I'm not talking about pens, desks, or paper; I’m talking about other employee benefit options such as life insurance, 401k plans, and our firm’s errors and omissions coverage.  In every other purchase we made, there was transparency, there was true competition, and there was actual and meaningful discussion.  When it came to buying health insurance there was...well, nothing.  

The insurance broker walked into my office and after exchanging pleasantries she showed me three options for health insurance.  The first option was with a certain insurance company that the broker clearly wanted us to use. There were color brochures for this carrier with great family photos; broad smiles and even bigger fonts. The other proposals didn't come with the fancy colorful brochures (or even brochures at all for that matter).  It was clear that the broker wasn't being transparent and had her own agenda to pursue.  The broker was getting great commissions from this one particular carrier and that was it.  I asked basic questions that in any other industry would be easy and obvious to answer or research.  She just smiled.

I was told what the premiums would be and how there were basically two options available to my employees.  They could have a $20 or $50 co-payment coupled with a few deductible options.  So (basically), the “actual” consumers of the health services (a.k.a. the employees), would believe that the cost of the services are either $20 or $50 - in their minds this is the total bill.  There was no skin in the game for my employees.  

Made to feel helpless...like the old Soviet Union

There was nothing that my employees could do to lower the overall cost of the plan.  If every single one of my employees was in perfect health and never even saw a doctor, my plan's rates would be guaranteed to increase over 10% a year.  So what is the incentive?  For me to be creative?  For my employees to care?  There was nothing we or anyone else could do about the cost.  We were helpless and that's how it must feel for every employer or insured group that pays insurance premiums to a fully insured carrier or exchange marketplace policy.  

Like you, I figured that maybe this was just my experience and that this one broker was an anomaly, but I have since realized that this is the norm.  The broker who actually offers expertise, consults with their clients and focuses on data and plan design is the anomaly.  For most of us, we are at the whim of the carriers.

There is no shopping for rates unless you want to strip down or increase the contributions of your employees.   

Imagine buying a car and being told every year that you will pay more for the same car (that you hardly used), or you can strip it down in an effort to maintain the payment level and keep the same monthly rates.  Next year you will only have a 10% increase if you agree to remove the leather interior!  That is exactly what happens with healthcare.  The reason “why” is because nobody expects or demands anything different. The options available via the exchanges, for many, are even worse.  Many people only have one option - like in the old Soviet Union where the select few who could afford it had the choice of buying a Russian Lada in black or white; the rest get what they’re given.

Think about this for a second.  People spend more time choosing the big screen for their living room than they do where and how they get their health care.  New parents spend more time researching the day care center for their children than the hospital or pediatrician that treat the same children.  CFOs across the country spend so much of their time trying to find ways to increase profit and reduce expenses yet rarely think about health care costs. They look at the revenue stream and the expense lines to see what they can do to cut costs and increase profitability. Most CFOs just assume that their health insurance will go up, and compare it to the cost (penalty) of offering nothing; that the expenditures are essentially a fixed cost that grows each year.  There is hardly any discussion relating to how to lower it since these individuals feel powerless to do anything about it.  

Taking control back

As someone who risked it all and started my own business, there was no way I was going to adopt this approach with my health care spend.  This was the moment I realized that I needed control over my healthcare dollars and looked at self-funding my employee benefit plan for the first time, almost a decade ago, and we have never looked back.  The beauty of self-funding is that you can lay your own path.  You are in total control of your health plan and you can design the features to meet the needs of your employee population.  

The reality is this – a health plan design for a tire manufacturer should not be the same as for a chain of yoga studios.  Unfortunately in today’s fully insured market – where a carrier sells you a cookie cutter policy, it is. By having access to the claims data, a self-insured employer can actually see how and where your employees are spending the plan's health care dollars.  Using the data analytics readily available only to a self-insured plan, you can then design a plan that meets your needs.

Incentivizing Our Employees through Unique Plan Design

Medical service providers are businesses.  They service customers who pick what to buy, but don’t pay the fee directly.  A kid at a baseball game with dad’s credit card will buy more hot dogs, regardless of the price, and the vendor knows it.  When the price isn’t something the consumer considers, the supplier has no reason to cap it.  

If your employees do not care about the cost of health care, then costs will never decrease.  Step one then, is to care.  With fully funded insurance, savings belong to the insurance carrier.  I understand not caring about that!  But with self-funding, most employees (wrongfully) feel that if a self-funded plan saves money then the money just goes into the CEO’s pocket.  This is not true, as every dollar recouped or not spent goes back into the general assets of the plan, which is a combination of employee and employer contributions.  To combat this incorrect perception, we have educated our employees about who pays for the plan (they do), and incentivized our employees to actually care about the cost of the care they get – not just their co-pays, deductibles and out-of-pockets.

The first time an employee gets money in exchange for creating plan savings, word spreads like wildfire throughout the organization.

It all starts with your health insurance employee plan document.  When you open The Phia Group plan document, the first thing you see is a section titled “cost containment incentives.” It truly is an actual page in the document that tells employees how they can make money and put cash in their pocket by looking at the whole bill and not just their co-pay.  The first time an employee gets money in exchange for creating plan savings, word spreads like wildfire throughout the organization.  People talk about it at the water cooler; and whether it’s $100 in savings or $30,000, every bit counts and adds up.

As mentioned, our plan document features numerous provisions enabling participants to enjoy substantial savings and benefits when they take proactive measures to contain overall plan expenditures.  We address the various instances where responsible, cost-containment behavior is incentivized.  

One employee received a check for over $10,000 for identifying $40,000 in claims we didn’t have to pay.

For instance, we created a claim audit review program designed to reward employees for identifying erroneous charges on bills recoverable by the plan.  Simply put, if the patient identifies something questionable in their “bill” (actually, the explanation of benefits or “EOB” since participants rarely see the provider bill itself), and the plan doesn’t have to pay it or is able to recoup the payment, the patient gets 25% of the savings in their pocket, regardless of the amount.  Trust me; we only pay for services that actually occurred and are valid!  One employee received a check for over $10,000 for identifying $40,000 in claims we didn’t have to pay.  This is promoted across our entire organization.

This next one has likely saved us many thousands in potential claim costs.  Participants who preemptively consult with our human resources department regarding non-emergency “to-be-scheduled” medical procedures, to discuss options available to the participant, can receive a financial reward. We had a recent situation where one of our employees needed a medically necessary surgery.  The employee’s surgeon could have performed the operation at two different facilities.  The employee met with our HR team and after reviewing the claims data available to us we realized that the higher quality facility would have a total cost of $7,000 to perform the operation, while the other facility, using the same surgeon, would cost $40,000.  We saved $33,000 and our employee received 25% of this amount in a check payable to them!  That’s called having skin in the game.  

At any other self-funded plan, employees would just go to the place that may be closer to their home, or maybe they know a friend who works at the hospital, or they pick one over the other for any other reason ... perhaps they choose a location with better parking because at the end of the day, they have the same co-pay and deductible regardless of where they go.  They have no idea that one facility will cost the plan tens of thousands of additional dollars for the same exact procedure.  However, at our company they do know and they do care ... and that’s a real difference maker.

We have another provision stating that there is no co-pay for the use of urgent care facilities in lieu of a hospital’s emergency room.  Think about how much time and money this saves the patient and the large bill that doesn’t exist for the plan.  We took it a step further by stating that the co-pay (normally applicable to diagnostic services if performed at a hospital) is waived if the service is sought at any self-standing non-hospital facility.  What this provision has done is change the behavior of our employees. When they need testing done, they ask if it can be done at a non-hospital facility.  In addition, in order to encourage the use of generic medication whenever possible, we waived any co-pay.

The cultural change affects every aspect of our health plan and the reduction of overall plan spending.  Under our current network, you can purchase a nebulizer after the network discount for a total plan cost of $200.  If you go to Amazon.com, you can purchase that same nebulizer for $118 with free two day shipping on Amazon Prime. It’s a savings of $82 and the employee receives a check for 25% of that amount.  While it’s a small amount compared to the overall plan expense, it’s a huge change in our employees’ behavior. They look for ways to reduce the cost, whether it’s big or small, because that $20.50 is added to their paycheck.  

The Future is Now

Instead of telling their employer plan sponsor clients to pay more in premium, deductibles, out of pockets and co-pays, brokers should be telling their clients and employees the real reason behind the high cost of health insurance – the unjustifiable facility charges.    Facilities are taking advantage of the fact that most employees only care about their out of pocket, co-pays and deductibles – not the entire bill.  This is in essence the best thing about networks and the worst thing about networks.  There is no patient noise because they don’t care.  If they only have to pay $20, the fact that it costs the employer $20,000 or $200,000 doesn’t matter.  So how do we get the employees to care?  Easy.  Self-fund your health plan, teach the participants how it’s funded, instill an appreciation for the fact that the medical bills are being paid with their money, and give them cash – incentivize savings.  

At the day of the day, what really matters to employers?  Do they care what the network is, what the logo looks like, what the overall discount is, how many free tickets to the ballgame they receive or how fancy the website looks?  I would argue no.  As an employer myself, I feel that I have the right to answer this question with some level of authority.  I want my employees to be happy.  I want my employees to feel secure and that security includes a respectable paycheck for a hard week’s work and health insurance coverage that will be there for them and their loved ones when they need it most.  

The only way to ensure there is reliable health coverage for my employees in the future is to innovate and get everyone to care.  When an insurance carrier collects premium, takes all the risk associated with paying medical bills, and none of us know (or have a reason to know) what things cost, we don’t care.  If we don’t care, we don’t innovate. The simplest ways to innovate right now and get the most bang for our buck is to put ourselves and our employees in a position of financial risk and reward, tied to healthcare spending, focus less on discounts off of arbitrary prices and focus more on what is actually being charged.

We can revolutionize health care and insurance in this country.  Self-funding is the first step towards offering the innovation, technology, plan design, and customization tied to having skin in the game, and that is what this country needs.

For more on what should be in a Plan document, read the ERISA Plan Checklist portion of the Health Rosetta.