4 Reasons Employer Health Insurance Costs Keep Rising

I have a confession to make. And trust me, it irks me as much as it will irk you.

Here it is: If you are my client, and your average cost of employee health insurance goes up, I as your broker make a greater profit. The only incentive for me to lower a client’s healthcare costs is to keep their business, which typically comes from getting a plan that works best for them.

This is the line of business and the system I’m operating in.

It’s a delicate dance between delivering the greatest amount of value to my customers while also capturing the greatest amount of value to continue building my company. I am the first one to admit that these incentives are misaligned.

And the kicker?

The broker/client relationship is not the only one in the healthcare system with misaligned interests. I would argue that the underlying issue that needs to be addressed before we see meaningful cost-cutting is to solve the problems related to this.

Later in this post, I will share about the most important misaligned interests, and when possible, the alternative options I’m aware of that can align them. But first, let’s look at the commonly circulated reasons for rising costs in healthcare.

Why is healthcare so expensive?

If you’re tasked with making business decisions about employee healthcare, it will not be long before you are throwing your hands up in frustration, demanding to know “why are costs so damn high?”

You should demand to know this. After all, your average cost of employee benefits determines whether your business is thriving, or surviving.

There are different ways to approach answering this question, but the conversation often begins here:

The reality is there are many reasons for the high costs of US healthcare, such as:

• High prices for medical services and the complex system of payments

• A lack of well-kept data and standardization of processes

• Provider Mergers

Other reasons include high administrative and drug costs, the use of defensive medicine, and treatment of chronic diseases like diabetes.

To build up a truly accurate picture of our healthcare system, and why costs are so high, you have to be aware of the stakeholders and “big players.”

Setting the Scene: The Stakeholders in US Healthcare

Consider these stats reported by Regina E. Herzlinger, Professor of Business Administration at Harvard Business School:

• More than half of U.S. physicians work in practices of three or fewer doctors

• A quarter of the nation’s 5,000 community hospitals and nearly half of its 17,000 nursing homes are independent

• The medical device and biotechnology sectors are made up of thousands of small firms.

If your eyes are widening and you’re already shaking your head, hang with me.

These stats showcase the incredibly fragmented nature of just two stakeholders in the system: healthcare providers and technology companies.

Other relevant stakeholders include patients, provider networks (PPO’s, HMO’s, etc.), insurance companies, pharmacy benefit managers, insurance brokers (that’s us!), politicians, and businesses like yours who need a lower average cost of employee health insurance.

If the conflicting interests that exist for stakeholders are not solved for, it’s hard to imagine costs coming down. Let’s go over the big ones, shall we?

Conflicting Interests in US Healthcare: The Big 4

1. Insurance Brokers

Conflicting Interest: Brokers typically make about 5% commission on a company’s healthcare spend. As I explained already, when you pay more, we earn more.

Note: the following possible solution is only currently relevant to companies with custom healthcare plans, such as self-funded health insurance plans.

Workaround: Instead of charging a commission based on a client’s percent of the premium, charge a nominal per employee per month fee (PEPM). For example, $35 per month per employee. This removes the incentive from higher premiums.

A step further: By switching to a PEPM fee alone, brokers are still not incentivized to lower costs. So instead of charging $35 PEPM, we could charge $25 and collect 10% of the savings at end of the year which would mean the more a company saves, the more a broker gets paid. Interests, aligned.

2. Insurance Companies

Conflicting interest: The Affordable Care Act (ACA) mandated that health insurance companies pay out 80-85% of dollars received on claims. This is called the medical loss ratio. In other words, the profit margin is locked in and they cannot improve margins while negotiating with providers to lower costs.

The only way to make more revenue is to allow providers to raise prices.

3. PPO Networks

Conflicting interest: PPO networks pre-negotiate with all providers what they’ll be paid when services are rendered. You’ll often hear of “discounts” for visiting providers that are in-network, but what’s really happening is prices are being overinflated (often 3-5x), and discounted from an artificially high number to some other high number that looks better but is still outrageous.

And you guessed it, PPO networks make more money when prices of health services are higher.

Workaround: One alternative to a PPO network is to set up a reference-based pricing plan. This option is also specific to companies with self-funded health insurance plans. The strategy is to cut costs by avoiding the traditional contracts that PPO networks and providers agree on (the ones with 3-5x over-inflated prices).

Services like MAP provide pricing transparency for employees that show what providers are actually charging, give quality scores to providers in your area, and allow you to select providers that are both quality and cost-effective.

4. Pharmacy Benefit Managers

Conflicting interest: Pharmacy benefit managers (PBM) are an entities within a plan that manage prescription drugs (one of most significant portions of healthcare spending). Because companies like CVS Caremark are publicly traded with a fiduciary responsibility to increase revenue for shareholder profits, they have no fiduciary responsibility to take care of your employees. The result?

You end up with PBM’s who don’t care when your employees are taking a very expensive med when they don’t need to be. For example, taking a name brand drug when a generic one is available.

Workaround: There are fiduciary PBM’s willing to sign a contract that makes them legally obligated to act in best interest of the health and financial benefit of a company and it’s employees. They do not make more money when more is spent.

There Are No Easy Decisions in Healthcare

Some of the most challenging and costly decisions your business makes every year are related to healthcare. And it’s no wonder.

The system, as you can see, is rigged to be expensive. It’s as infuriating for me as it is for you.

But if you’re CEO, CFO, or a leader in HR, it’s up to you to make the hard decisions within the system that’s available to you.

Now that you have more context, I hope you’ll feel better prepared to select a healthcare plan that works for you.