In Arizona, between 80-85% of an employer’s health insurance premium is used by the insurer to pay claims. Companies looking to make a serious dent in health insurance costs need to focus on solutions that help reduce the insurer’s claim spend.
Here are the 3 areas that have the greatest influence when it comes to claim costs and the most effective strategies Arizona employers are adopting to address each of them.
Self-funding is a claim financing strategy that can significantly curb a company’s overall spend on health insurance. Over the years it’s received a bad rap in the small employer market because the term “self-funding” conjures up images of owners going bankrupt when an employee is diagnosed with a chronic illness. Not the case!
The largest variable factor in a health insurance premium is the amount of money the insurer expects to pay out in claims. This is called the “Expected Claims Factor”. Every insurer bases their premiums on what they expect to pay out in claims.
To keep things simple, let’s use a basic example of $100.00 as an employer’s total health insurance premium.
Behind the scenes the insurer has that number broken down as follows:
However, in a self-funded arrangement the first two premium components highlighted in yellow are variable so if the employer’s claims run better than expected then a portion of the premium surplus is returned to the company. If claims run worse than expected, the other insurance components designed for protection kick in.
In recent years, partial self-funding has become an increasingly viable strategy for more and more employers and now there are self-funded products tailored specifically for smaller employers that remove any major risk so it’s definitely worth exploring.
Reference Based Pricing
The challenge for insurers looking to curb claim costs is the fact that physician and hospital billing largely differs according to who’s paying them. For example – if you’ve ever offered to pay cash for a medical service such as an office visit or MRI you will have likely received a better price than if you had used your insurance plan.
Here’s how it works. Let’s assume I’m a doctor, and my true cost for a particular medical service delivered to a patient is $100.00. Reimbursements based on payer, work as follows:
Looks like this:
Reference-based pricing is a relatively new approach quickly gaining traction with Arizona employers . The concept abolishes the traditional PPO network model and simply:
The savings to employers can be huge and everyone, particularly employees, like the idea of paying a more reasonable fee for healthcare services.
Consumerism tactics such as Health Savings Accounts (HSAs), Telehealth, and limited networks are just some of the ways employers can steer employees toward more economical choices when it comes to health services.
These tactics in combination with additional consumerism resources like “Healthcare Bluebook™” can produce significant savings for both employers and employees.
For a quick demonstration of Healthcare Bluebook™ at work, watch this short clip:
Next time you’re considering new strategies to reduce your costs, ask yourself if you’re confident your company is doing everything it can to reduce your claims spend.
Joanna Morrow is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU). Joanna is a senior partner at Arizona Benefit Consultants in Phoenix.