Did you ever wonder why cost containment is one of our core differentiators at ParetoHealth? Do you want to know what ideas and beliefs fuel our passion for this important part of our mission?

In this ongoing series, I’m going to break down a few fundamental concepts related to the U.S. healthcare delivery system and the associated impact to how we consume and pay for care. Since it’s such a relevant and intricate topic, it’s going to take more than one article.

By the way, if you’re interested in the historical context – how we came to be a nation that spends more per capita on healthcare than any other industrialized country while ranking poorly in quality, access, and outcomes – I recommend this article from the Kaiser Family Foundation, as well as this CNBC treatment. They aren’t strictly necessary to understand the ideas I am going to put forward here, but they do provide a nice amount of context.

One of the most important aspects of the healthcare market is that it doesn’t function the way other markets do. Notably, it lacks price transparency.

What is price transparency? You may have heard about it on the news or during a Presidential debate in the last few years, but it is just a fancy way of talking about something that we do everywhere else for goods or services we consume — shopping around, or “consumer choice.” I’m going to use a simplified series of examples to demonstrate why such a simple idea is so powerful.

To put this into some perspective: let’s say you want to get an oil change for your car. At one place it costs $185, and at another one just down the street the same oil change costs $30.

Not exactly a difficult choice, right? But it’s a choice that most traditional health plans actively discourage people from making.

Think about it: you go to the pharmacy, provide your last name and date of birth, pay your $10 co-pay, and walk out with a tiny bottle of pills in a giant paper sack. What nobody has told you is that not only does the actual cost of the drug exceed the $10 you’ve paid, but it also costs $185 to fill the script at this pharmacy while down the street the exact same drug costs $30. Without actively seeking out this information (which by the way, is no small feat either), you would never know this variance exists.

Now, I can already hear the cynics reading this asking: why should I care if someone soaks my insurance for an extra $155? Isn’t that why I have insurance? Don’t they already make enough money?

A fair question. Also, one with varying answers based on who is footing the bill for that $155 difference. Let me explain.

Let’s assume you are covered by a plan that is financed through a traditional “fully insured” arrangement.  This means that your employer has entered into a contract with an insurance carrier whereby they pay a specific amount in premium each month (some of that premium is passed along to employees) and in exchange, that insurer will pick up the costs for all covered services, even if they exceed the amount of premium received. Now let’s go back to the prescription example. Do you think the insurance carrier won’t find a way to make that $155 back? Do you think they won’t find a way to pass those costs along to you, or to someone else?

Do you think they aren’t already passing on someone else’s costs to you?

As most of you probably know, insurance is risk-sharing. Everyone who takes out a policy from a particular insurer shares risks with every other person who has a policy. With most commercial health plans, policyholders don’t know the names, risk profiles, or buying behaviors of the other policyholders with whom they are sharing risk.

But you share risk anyway. It doesn’t matter how responsible you are individually – whether as a single employer offering a benefit plan to their employees or an individual covered under a group or individual policy – you are swimming in a risk pool with a bunch of unknowns compounded by a perverse incentive system for providers that rewards the wrong behavior.

Let’s go back to our example of the $155 dollar difference. Multiply it over millions of people sharing risk with you – meaning the anonymous sea of other policyholders – and you’ll begin to understand why this lack of transparency in pricing is such a massive problem.

Price transparency leads to market competition which ultimately leads to lower prices. If one provider is selling a product for $185 and the other is selling an identical product for $30, the first provider has a choice between lowering it and going out of business.

But that only works if the consumer knows this difference exists and they are compelled to care.

Now, from the perspective of pure risk management, wouldn’t it be great if you knew something about the pool of other people whose risk you’re sharing? Wouldn’t it be great to know that they’re doing something to stop spending $185 when they had the opportunity to pay only $30?

That’s another one of those easy questions.

I mentioned that there were varying answers to the “why should I care” question posed earlier. Well, let’s consider an employer who has chosen to self-insure their benefits.  In this model, the $155 overspend would be at the cost of the employer, not the insurance carrier.  It’s human nature to care a lot more when we have more skin in the game, right? Let’s also consider that said employer is an equity owner of their own insurance company, where they are sharing risk with hundreds of other employers who have also elected to take on the risk of their health plan. Like-mindedness just got a bit more important, right?

Employers who choose to self-fund their benefits with ParetoHealth have access to a suite of tools and solutions, including those in the area of price transparency and patient advocacy, to ensure that their health care dollars are being spent wisely and effectively by informed consumers. They are joined by a group of peers who have the same approach to managing costs. And all of this is protected by a risk financing vehicle that makes it all possible.

Stay tuned for upcoming articles in our series on cost containment where we share additional strategies and solutions that members of our community are using to preserve and improve benefits while also controlling costs.

If you haven’t yet, please use the form below to subscribe to new issues of The Contrarian so you never miss an update.

Hi. I’m Maureen Becker, Chief People Officer at ParetoHealth.

This series will discuss ways to attract, assess, and retain talented people.

In fact, these are the same strategies that make companies 5.1 times more likely to engage and retain employees.

Let’s get right down to it, starting with employee experience.

Employee Experience

It would be nice if there were an easy way to fix large organizational problems. The good news is the best way to approach this is simple. The bad news is that “simple” doesn’t mean easy – it just means not overly complicated.

It isn’t easy to cultivate an environment where people grow, thrive, and contribute their best work. But it IS incredibly rewarding – both personally and professionally and a holistic approach to human resources management will give you a talent advantage.

You can do a few things today that will bring positive impacts, ranging from engagement at work to innovation for the future.

What Makes up the Employee Experience?

Employee experience is often defined as the interactions an employee has with the people, systems, policies, and the physical and virtual workplace starting from the application process through termination.

Consider the way the employee:

And then think about the overall effect of those feelings and perceptions on their well-being.

Let’s make this a little bit more concrete:

Geraldine works in your IT department. She comes into work every morning with a good attitude, she’s patient when your computer just needs to be turned off and on again, she set up that one system that everybody uses, and she’s the only one who can talk to the big, blinking server box in the corner.

In other words, she’s an exemplary employee. But she could be having a poor employee experience and feeling disengaged from the company.

Ask some questions, and don’t be afraid of hearing the answers:

Does Geraldine know what role she plays in your company’s mission? If her friends and family ask her what she does, can she explain how she fits into your general efforts? What story does she tell herself about her job and her company?

Does she have everything she needs to do her job? Is success in her role clearly defined? Do the people she works with know what her success looks like, and does everyone help each other achieve it? Does she feel like the leadership understands this the same way she does?

These are just some of the questions you need to be asking.

This brings me to the cornerstone of an effective approach: communication.

Communication

When most of us think of communication, we think of the things we send out: our internal value proposition, our employer brand, and our important messages.

That’s human nature: we focus on what we do. But it’s less than half of the whole issue.

Communication goes two ways. You need to ask questions, but far more importantly, you need to make it okay for employees to answer and you must truly listen to the responses.

Why is that?

Because a strong employee value proposition must be aligned with what people value, and you may not fully understand what your people value unless you listen to them when they share their perspectives.

Start now. Ask people if everything is working well for them. Make the responses anonymous if possible, and act on those responses.

In the next part of this series, I’m going to review the existing research on what people want from the employee experience.

I’ll be talking about 24 factors that influence the employee experience, with particular attention to the four things that people quoted as the most important to them.

If you aren’t already subscribed to The Contrarian, you won’t want to miss this.

Most people think of volatility as a bad thing. Prices go up, the stock market goes down, and your pockets feel distinctly lighter at the end of the day than they did at the beginning.

But what if I told you this was only one of the aspects of volatility?

…In other words, what if there was an advantage to volatile prices that you could tap into, if you only had the proper structure to do it in?

Well, you’re in luck. That’s exactly what I’m about to tell you.

You see, your costs can swing both ways – up or down.

The goal for any risk-management solution is to give you as much positive exposure as possible, while sheltering you from the downsides. What you want to do is get as much as you can from good years, while stopping the bad years from taking you out of the game completely.

Let’s look at an example to make it clearer.

Big insurance companies like it when people use old-fashioned insurance products – when you pay large, fixed costs every year. They call it fully insured, but that’s just a marketing term.

If you pay $1,000,000 dollars to insure your employees, but their costs come to only $400,000, what happens?

Well, you’re rewarded with next year’s renewal quote: $1,100,000. “They” pat you on the back and tell you this is a great deal for you.

In other words, you don’t get the benefits of positive volatility.

On the other hand, if your employee claims are $1,600,000, then your carrier makes a serious face and tells you that with claims like those, you ought to be grateful that your renewal is “only” $1,800,000…

…Even if the vast majority of these are one-time claims. You know – not likely to arise again.

With your new-found knowledge of positive and negative volatility, you should see what’s going on here:

You aren’t exposed to positive volatility, but you’ll pay dearly for negative volatility. The system is literally rigged against you. There’s no winning.

Now, let’s say you are self-insured. Here’s the situation:

In a good year, you pay only for the $400,000 of claims actually incurred. You gained some positive exposure to volatility. In the bad year, you pay the full $1,600,000, because you also have full exposure to negative volatility.

If you have the cash on hand to absorb the costs of a bad claims year, then you have a shot at reaping the benefits of this type of insurance. But it’s not as simple as that.

We’ve talked on The Contrarian before about the biggest risks for self-insured employers in 2022. These have one big thing in common:

The claims are mostly low-incidence and high-cost. This means that most of your years will be good – the problem is that the bad years can be so costly that they take you out of the game.

This brings us to the five ways that our captives shield you from negative volatility while also allowing you the benefits of positive volatility:

1. Risk-sharing

When you join a benefits captive, you share risk with the other members. This means that you accept a small portion of their risk and they accept a small portion of yours.

This means that in a good claims year, you might pay a small amount more than you would otherwise – continuing our example from above, this might be around $410,000. However, it also means that in a bad year, you’ll only pay $900,000 – you aren’t socked with the extra $700,000 that you saw above.

Better than that, your renewals won’t be ruinously expensive.

After good claims years, they can even be negative. As in, you pay less for next year.

Wild, right?

Another important aspect of how this can work is the following:

2. Vetting of new members

We don’t just let anyone become a captive member.

It requires a process of vetting and education. Let’s break that down:

The vetting process makes sure that an employer is financially viable. You don’t want to share risks with someone whose house isn’t in order, and chasing short-term gains risks weakening the captives.

Second, we need people who understand the nature of our solutions. Unlike old-fashioned insurance products, these require engagement and initiative. The last thing we want is to let people in before they’re ready.

By the way, this is a perfect time to shout out to our benefits Consultants. Without their expert guidance, that education effort would be much more difficult.

So that means we’re exclusive – not by industry or the flashiness of your sports car, but instead by whether you share the proper mindset. It’s part of our responsibility to ensure that our community of like-minded employers stays that way.

Our next way that the benefits captive manages volatility is related to this one:

3. Cost Management Efforts

During the vetting process, we make sure that every employer is serious about implementing cost management efforts (stay tuned for more articles on our approach regarding this: it’s too big a topic to cover fully here).

This means one thing: every Member gets the benefits of all of these cost-management efforts.

Want to hear a secret?

When you use other insurance products, you’re also sharing risks…

…But it’s with an anonymous mass of strangers. You don’t know if they’re pursuing the best care at the lowest cost, whether they have a wellness program, if they pay for gym memberships for their employees…

You don’t know anything about them. Knowing the people that you share risk with should be the rule, not the exception. But it almost never is.

This transparency is a key reason that our benefits captives are the largest in the country. People like to know that their risk-sharing is in good hands.

Our growth has led us to another key part of our strategy:

4. Size and buying power

Our captives manage almost three billion dollars in healthcare spending.

Let that sink in.

To put it in context, in terms of pure healthcare spend, these captives are bigger than a couple of well-known companies:

…Well, you get the idea.

And with that size, we can negotiate terms from our stop-loss providers that are among the best anywhere.

That’s a major part of our mission: delivering enterprise-level healthcare solutions to small and medium businesses. When we act together, we can do things that were impossible when we all acted separately.

Look, if you want to take on the big insurance companies, you need to be big as well. And if you’re not big, you need to belong to a big club.

By acting together, you can work for yourself much better. You can understand what you’re doing, share ideas with everyone else, and learn from everyone’s mistakes and victories.

That brings us to my last point:

5. Transparency

If you have access to your own healthcare data, you can make the right interventions.

Think about it:

If you know that a lot of your claims are coming from people with end-stage renal disease or diabetes, you can tailor your wellness program to answer those needs specifically.

If you don’t know what’s going on, then you’re forced to fly blind and address problems that your people may not even have.

By making things transparent, by introducing skin in the game, and by respecting local knowledge and expertise, we can take a long-term approach to healthcare.

Isn’t that the entire point of strategic leadership? I think so.

That’s something that you’re not going to get with the dinosaurs who are still pushing old-fashioned, one-size-fits-nobody policies. If you have no healthcare data, you can’t apply the Pareto Principle – focusing on the 20% of problems that are causing 80% of your expenses.

No, it’s not named after us. But people always ask.

Check out our resources if you’re ready to learn about captive insurance and what it can do for your healthcare spend.

And, as always, don’t forget to subscribe to future posts from The Contrarian using the form below.

We’re excited to launch our new podcast, 80/20 with ParetoHealth. It’s a bi-weekly chance for Pareto’s leaders to discuss the ins and outs of the health insurance industry, sharing their insights (and occasional hot takes) about the ways that the world is changing. Our two Andrews – Cavenagh and Clayton (CEO and President of ParetoHealth) – are the show’s hosts, but there’s a lot more on the docket. 

We’re also excited to give our Members, Consultant partners, and other thought-leaders a chance to tell their stories: every one of them has had a unique journey and we want to hear about it. 

 

We talk a lot about our mission to change the world of employee health benefits, and that’s always been our main focus. But the people who have joined us in that mission, who have made the whole thing possible, they also deserve time to shine, and that’s exactly what they do on every one of these episodes. 

So, check out our pilot episode here. Cavenagh and Clayton talked about fully insured healthcare and why it’s probably the worst choice for small and medium businesses – deferred, not insured is the main takeaway from that one. 

Then they had a chat with Austin Madison from Hub International.  He shared what led him to becoming a key player in the health benefit space. The discussion includes baseball, having too much fun in college, and something that must have been a misunderstanding about GPA.

To wrap it up, they shared some insights about how you can tell if an insurance broker is… a little bit off the ball? Lacking in insight? How to put this diplomatically… fine, a knucklehead. 

80/20 with ParetoHealth is the perfect podcast for insurance industry deep dives, Consultant partner stories, and a little bit of gentle roasting. 

You’re going to want to subscribe. 

Nothing kills the vibe of a cocktail party faster than a monologue about health insurance. At least, that’s what people keep telling me. At cocktail parties, mostly.

But what am I supposed to do, just not talk about health insurance?

Ridiculous.

That’s why we’re setting this blog up. I need a place to share the information I keep coming across and my commentary on it, and my friends and neighbors need some peace and quiet.

I’ve had some things on my mind recently. Four things, to be precise. These are the biggest factors that are going to affect self-insured employers for at least the next year, and too many people are ignoring them at their own risk.

1. Talent Pool

Almost every employer is struggling to attract new talent, and the fierce competition among them has shifted the focus of benefits. Today, the need to both attract and retain outweighs conventional cost considerations. As an employer, you have to double down on what your employees really want: mental health, virtual care, flexible schedules, maternity benefits, infertility treatments, and the list goes on.

If you think you can offer a health plan “benefit” with a $50,000 deductible, $500,000 out-of-pocket maximum, and minimal employer contribution, then you have a serious shock waiting for you sometime in the next year. Probably not just one, either. These luxe benefits aren’t going anywhere, either. Still, you have to focus on the basic economics of the situation.

As employers are expected to deliver enhanced benefits and higher salaries, they need to look for ways to offset the increase in costs. Expect many organizations – especially the fully insured – to start looking for greater efficiency in paying for health benefits. This is going to spur demand for creative solutions like employee benefit captives, pharmacy benefit managers (PBMs), and level funding.

2. 2023 pricing

Just as no conversation with a Philly sports fan can go on too long without mentioning Santa, no discussion of healthcare or health insurance can afford to ignore upcoming price increases. I can say with certainty that health insurance costs will rise. What makes me so sure? Basic mathematics and a pair of open eyes.

There are two big issues facing us right now that are going to have a material impact on 2023 prices, whether you’re fully insured or self-insured.

The first one is inflation. Healthcare inflation has been clicking along at 5-8% over the last decade, with stop loss increasing two to three times due to leveraged trend (the phenomenon where large claims grow exponentially faster than the underlying claims). If we see increases in the underlying costs in healthcare, such as for medical devices, durable medical goods, and labor, then we can expect healthcare costs to increase.

The second one is emerging gene therapy. We may see as many as ten new gene or CAR-T cell therapies hit the market in 2022 alone. They have incredible medical potential that may reduce costs in the long term, but the ironic part is that life-saving therapies come at heart-attack prices.

3. The Long Shadow of COVID-19

As the virus recedes, healthcare will gradually return to normal. But that means the costs of deferred elective medical procedures have to be absorbed into the healthcare system. (I don’t know about you, but I would have preferred it if my recent colonoscopy had actually been “elective.” I wasn’t the one making the choices there.) While there will be an increase in these more minor claims, we expect them to be offset by fewer catastrophic COVID-19 claims.

4. Consolidated Appropriations Act (CAA) of 2021

The Consolidated Appropriations Act of 2021 requires that brokers and consultants disclose any direct and indirect compensation they receive that is directly related to a health plan. The self-insured space is already so transparent that we aren’t expecting a dramatic impact. The ones who do have to worry are those in the fully insured market, especially when many brokers receive additional compensation (“overrides”) from insurance carriers.

The CAA will hit a group I call the “knucklehead” insurance brokers. They’re the ones who are reading this and shedding a single tear over the fact that they won’t be able to collect two fees for the enormous task of updating a spreadsheet once a year, quoting exactly the same companies that all their competitors sell. Let me get you a tissue.

Don’t get me wrong: if you have expertise, strategy, an ability to see the field, and are driving value, then you deserve to be well-compensated for it. You’re not the one I’m talking about. But if you’re just a glorified country club golf buddy with a spreadsheet in one hand and a bill in the other, then your time has come and gone. Smart employers want a thoughtful partner who is ready to roll up their sleeves and fight the good fight – and they are more than happy to pay for it.

 

Phew. Thanks. I needed that. My next cocktail party is safe.

I’ll be back soon.