Intro to SurgeryFutures? & SurgeryOptions? 3-minutes.

Read this if you're interested in learning new strategies for helping self-funded employers reduce gross healthcare expenses.

SurgeryFutures? and SurgeryOptions?are financial instruments in the derivatives market whose value is dependent on the price of an underlying asset. They are agreements between two parties to buy and sell an asset at a specific price by a predetermined date known as the expiration date. It’s common to buy and sell futures and options contracts on equities, currency, commodities, land, and other assets.  Why? There are, generally speaking, two different motives for engaging in the derivatives market - either to hedge against future price increases of an asset or to speculate about price fluctuations. Hedging is done to reduce the risk associated with uncertainty. Speculating is done in hopes of profiting from the price fluctuations of an asset. 

Medical treatments are expenses that every organization incurs through their employer-sponsored benefits plan. But could specific contracts for medical treatments be considered assets? If so, would it make sense to leverage those services as financial instruments? Self-funded employers can benefit from futures and options by hedging against price increases of some medical treatments- specifically laboratory tests, imaging services, and non-emergency outpatient procedures. 

Futures are contracts to purchase an asset and take delivery at a predetermined price by a specific date. Options work on a similar principle, giving the investor the opportunity, but not the obligation, to take delivery and pay for the asset.

How does this work when applied to health plan construction? The same way it works for other financial instruments used to hedge against price increases. When an organization examines claims data, the utilization review will identify the frequency and prices paid for medical treatments. The trend for nearly all procedures is upward, sometimes dramatically. Past performance doesn’t predict future prices, but in many cases, it would make sense to hedge the risk of price increases or inflation.

A basic strategy is to contract thirty- three percent of known medical treatment volume for the next 3 to 5 years via SurgeryFutures?, an additional thirty-three percent of procedure volume can contract as SurgeryOptions?.

Before the expiration date, the organization may decide to execute the contract at the agreed price or allow the agreement to expire.  This strategy protects the self-funded employer against price decreases in value. The final thirty-three percent of surgical volume can be purchased at the current market value each year.  

Let’s run through an example of how this looks in the real world:

• Company Alpha examines claims data and determines their employees have averaged 99 MRIs over the past five years. 
• Based on that average, it’s reasonable to predict similar utilization and leverage that predictability to purchase SurgeryFutures? & SurgeryOptions? contracts.
• Company A would generate SurgeryFutures? contract on 33 of those MRIs, SurgeryOptions? contracts on 33 MRIs, and go naked for the remaining thirty-three percent. 

What if the employer does not use all 33 of the MRIs they purchased? With a futures contract, they can opt to sell those contracts to another self-funded employer (known as a trade) or pay a fee to roll over the agreement into the next contract period. 

When an organization decides to self-fund their health plan, they have options for plan construction not available to those who fully insure through a commercial insurance carrier. SurgeryFutures? and SurgeryOptions? are a new approach to help businesses mitigate the financial risk associated with funding their benefits plan. With futures and options, an organization moves from a fully exposed risk posture to liability limited by fixing the prices on a portion of their surgical procedure volume. These financial instruments are currently available for any organization that self-funds their employer-sponsored healthcare plan.

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Sano Surgery provides bundled priced laboratory tests, imaging services, procedures and surgeries to self-funded employers. For more information send an email to [email protected].