Three Essential Elements of Health Plan Cost Management: A Practical Guide

Speaking at the Smart Business Dealmakers Conference, Mike Schroeder from Roundstone Insurance shared how companies can save millions on health plan costs while maintaining quality employee benefits. His approach, which he calls the "secret sauce," breaks down into three essential parts.

Understanding Your Data

Health plan cost management starts with data analysis. "You need to get the data around where your spend is going today," Schroeder emphasizes. Many employers don't know vital statistics about their health plan expenses—especially regarding pharmacy benefits, which are the fastest-growing portion. Industry averages show pharmacy expenses typically take up 30% of total healthcare spending, but some companies spend up to 50% of their healthcare budget on pharmaceuticals.

Knowing your data helps identify where the money goes and where to make improvements. Without detailed data analysis, companies can't make informed decisions about their health plan strategy.

Choosing the Right Funding Model

The second essential element is implementing a funding structure that lets companies keep their savings. In traditional fully-insured models, an employer pays a fixed premium to an insurance company to cover their employees' health care costs. The insurance company takes on all the risk and manages the plan. If the employer manages the plan well and employees use less healthcare than expected, the insurance company keeps the extra money. The employer doesn't see any direct financial benefit from their good plan management.

With self-insurance, on the other hand, costs can vary based on actual healthcare use. In this model, if the employer manages the health plan efficiently and employees use less healthcare, the employer gets to keep the savings. This creates a clear financial incentive for the employer. They have a direct stake in keeping costs down because they'll see the benefits of their efforts in their bottom line.

In simple terms, it's like the difference between renting a car with unlimited mileage (traditional model) versus renting one where you pay per mile (alternative model). In the second case, you have a reason to drive less because you'll save money, while in the first case, it doesn't matter how much you drive - the rental company gets the same amount either way.

As Schroeder notes, "If you do backward somersaults to better manage your plan, it shouldn't stay with the insurance company. It should stay with you, the employer."

Maintaining Program Control

The third element, according to Schroeder, is keeping control over key aspects of your health benefits program:

• Plan design decisions
• Pharmacy Benefit Manager selection
• Third-party Administrator choice
• Partner selection aligned with cost reduction goals

"If you forfeit to the insurance company your choice of a pharmacy benefit manager or who's going to adjudicate your claims or how the plan design is going to work, you're giving away money," Schroeder warns. Success depends on working with partners who share your goal of reducing costs while maintaining quality care.

Implementing All Three Elements

Effective health plan cost management requires:

1. Regular data analysis and monitoring
2. A funding model that rewards efficiency
3. Direct control of program elements and partnerships

Organizations using Roundstone's three-part approach often save millions while providing strong employee benefits.

Results That Matter

Managing health plan costs requires specific actions rather than complex solutions. By focusing on data, funding structure, and control, employers can reduce health plan spending while providing effective employee care. This approach isn't complicated—it just requires good information, proper structure, and reliable partners to execute a clear strategy.