Occasionally a question is posed by a client, “What is a reasonable administrative fee for our self-insured health plan.” Another question occasionally posed is, “What is a reasonable benefit consulting fee for a group our size?” These questions go on… “What is a reasonable stop-loss premium?” “What are reasonable contract terms for prescription drug rebates?”
Of course, the answer to all of these questions is, “it depends!” However, that response can also constitute somewhat of a cop-out. In this brief post, we will offer some preliminary thoughts.
Administrative Fees for Self-Funded Cases
Generally, self-funded cases have costs that are made up of fixed and variable costs. Within the fixed-cost bucket are:
- Administrative fees charged by the third-party administrator for general services (e.g. claims adjudication, reporting, etc.)
- Fees for “network access” which enables the repricing of claims based upon levels negotiated by the contracted network (e.g. Blues, Aetna, Cigna, etc.)
- Medical stop-loss which is a form of insurance for self-funded plans which transfers catastrophic specific losses (i.e. specific stop-loss) and plan-level aggregate claims (i.e. aggregate stop loss)
Each of these areas can be broken down further and can be packaged in different ways. For example, many Blues providers will not separate the administrative fees from network access. Furthermore, a substantial cash-flow impacting self-funded health plans is the return of prescription drug expense in the form of rebates; While there are “pass through” contracts which enable full realization of those cash flows quarterly, some health plans offer a credit against administrative expense in exchange for their retention of the prescription drug rebates (oftentimes referred to as an “administrative credit in lieu of prescription drug rebates.”)
A common order of magnitude is to estimate drug rebates at 20-30% of the cost of an employer’s prescription drug program.
So, is an administrative/network access expense of $30 per contract per month competitive for a group of 750 participating employees? Well, it depends on a number of things, including the treatment of drug rebates…
Discounts on Claims
Given that costs for single coverage averages ~$7,700 per year and family coverage averages ~$22k per year, noting the administrative expense previously described, it should be clear that the bulk of healthcare cost is related to claims. But, what determines the cost of a claim?
The answer to this question can be quite complicated. A primary determinant of the cost of claims to a self-insured health plan is the network discounts afforded by the chosen network relationship. For example, the Blues negotiate Allowed Amounts, which are some “net” value typically below the Gross Charge, which hospitals oftentimes list within a schedule they refer to as their Charge Master. These discounts have historically been frustratingly opaque, masked by various non-disclosure agreements between healthcare providers and insurers, but in 2019 rules were created to attempt to force transparency:
Make public their “standard charges” (defined as two types of charges: gross charges and payer-specific negotiated charges) for all items and services provided by the hospital.
Make public standard charges on the Internet in a machine-readable file that includes additional information such as common billing or accounting codes used by the hospital (such as Healthcare Common Procedure Coding System (HCPCS) codes) and a description of the item or service. This provides a common framework for comparing standard charges from hospital to hospital.
Make public payer-specific negotiated charges for common shoppable services in a manner that is consumer-friendly.
As a consequence, it is possible to evaluate the relative discounts at providers. Here is an example we created for two providers within a short distance of one another. Note that the allowed amounts are actually higher at the hospital with the lower gross charges!
In the meantime, additional investment has been made by organizations, such as the Employers’ Forum of Indiana, to contextualize these data and connect them to other data-sets; this creates great opportunity for advisors to identify sources of future financial impact!
There are many “levers” that plan sponsors can pull to create financial impact on their plans. In addition to administrative expense and discount arrangements, there are also opportunities to consider contribution strategy, benefit levels, and direct contracting strategies to save money; There are opportunities to optimize risk transfer strategies involving captive financing; There are employers partnering with medical technology providers on a direct basis to benefit employees and their families. Helping guide the process of prioritizing, evaluating, and executing on these types of strategies is what the team at Valhalla lives for! (And we will touch on the consulting commissions/fees topic in another post…)
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