By Andrew R. Silverio, Esq.
(As published within ECI Users Group Spring Newsletter)
It’s no secret that America devotes more of its gross domestic product to healthcare expenses than any other country. Runners up, including Canada, the Netherlands, France, Germany, and Switzerland, don’t even come close. There are many reasons we spend so much on healthcare; the blame can be properly distributed among many parties and over many decades, and it is hardly worth even getting into such a discussion in such a brief article. To such a complicated problem, it is of course no surprise that there is no silver bullet solution. However, from the perspective of health plans, there are several methods which have emerged over the years as successful ways to minimize costs.
Recent developments include various incarnations of reference based pricing, varying from simple Medicare+ (where the plan will cap payment at a set percentage of Medicare rates, for example 150%) to complex “cost plus” calculations which utilize a great deal of data from various sources to try to zero in on the “fair market value” of services, including Medicare rates, regional “customary” rates, and cost to the provider, just to name a few. Also gaining popularity and enjoying success is a method which involves pinpointing particularly costly services (a common target is very costly dialysis treatment), and using “carve-outs” to set caps on those particular expenses to minimize costs. This method reduces the plan’s exposure to catastrophic expenses from these especially costly claims, without exposing plan participants to much of the increased exposure and balance billing which would result from imposing such low payment caps on more common, routine services across the board.
While these methods are surely valuable and can be very effective if utilized correctly, it is important to not get too bogged down in the desire to always be on the cutting edge of cost containment, utilizing the newest methods at all costs, at the expense of losing sight of the staples of cost containment; the “classics”. These include things like direct contracting with providers, employee wellness programs, and of course, the pick and roll, the play action fake of health cost containment: subrogation.
The PPO network is one of the oldest and simplest methods of cost containment. The plan gets a discount on billed charges and the assurance that if those discounted bills are paid promptly, their plan participants will not be balance billed. In return, the provider gets steerage from the plan’s efforts to incentivize its members to use network providers for their care, and the assurance of prompt payment, thus avoiding the trouble of trying to pursue individual self-payers for payment. However, a discount of 20% off of a providers billed charges can quickly stop becoming a bargain as the provider’s billed charges grow more and more exorbitant. Because of this, a more targeted, small scale version of this arrangement can be an excellent option, provided the employer’s situation is conducive to such an arrangement. Imagine, rather than setting up shop in a city like Boston, where you throw a stone and have it bounce off three different hospitals, an employer is based in a rural area with only one major medical provider nearby. There is no reason for this employer to pay for access to a nationwide network. Instead, the employer wants to get the best value for the care its employees will actually need and utilize. The provider, on the other hand, wants to fill beds, and is incentivized to make a deal with the employer to discourage medical tourism and secure that patient steerage. These arrangements can often net employers more substantial discounts than a traditional broad PPO arrangement.
Another way of containing costs, which isn’t really even regarded as “cost containment” in the traditional sense, is employee wellness programs. Indeed, instituting such a program will involve the employer incurring additional expense. The savings come later, but they do come. A program which encourages employees to be more active, and do things like exercise and eat healthy, will result in an all around healthier workforce. The cost containment benefits then are obvious: healthy people don’t go to the doctor nearly as often as sick people, and are generally more productive in the workplace.
Subrogation is one of the most effective, and most misunderstood, methods of containing health costs from the plan perspective. Subrogation rights, and its sister rights of reimbursement, can frequently be seen in the national media in the form of a critique on “evil insurance companies”. Not surprisingly, these critiques tell one side of the story, and usually illustrate a lack of understanding of the process, and of self funding as a whole. They usually go something like this: Little Billy was hit by a truck driver who was drunk on the job, and suffered serious injuries. He suffered a great deal, and his life will likely never be the same. He received a large settlement from the driver of the vehicle that hit him, as well as the company that owned the vehicle. Then, without warning, Billy’s insurance company swooped in and sued him and his parents, taking a large chunk of the settlement. In fact, the insurance company claimed the full amount of benefits it had paid for his medical expenses, benefits which rightfully belonged to Billy and his parents after years of faithfully paying premiums.
This is certainly a compelling story, particularly if you only look at it from Billy’s perspective, and particularly if it is true that Billy’s settlement funds are now only going to pad a large insurance company’s profits or provide bonuses for their executives. However, the fact of the matter is that most of the time, it is not an insurance company but a self funded employee benefit plan, which is fundamentally different, seeking reimbursement. These plans do not have insurance companies’ essentially bottomless pockets, nor do they generate any “profit”. Plan funds come from employee contributions, are limited, and are used only to run the plan and pay the claims of other employees. The plan has a certain amount of assets available, and when a $100,000 claim is paid, that $100,000 is no longer available to pay any future claims. It is not cynical to assume that in a world without subrogation, the other side of this story (which will never make headlines) would go something like this: A negligent truck driver decided to go to work drunk, and caused an accident which seriously injured a young child. Luckily for the drunk driver and his employer, the child’s parents participated in an employee benefit plan which paid all of Billy’s medical bills. Because their bills were covered, there was no need to get into any messy litigation, and the drunk driver and his employer just had to pay Billy for the non-medical trouble they caused (sans medical expenses) and go about their business.
Of course, this seems unfair as well. At a fundamental level, it seems obvious that the party who caused Billy’s injuries, and the resulting medical expenses, should be responsible for paying those bills. This is all that subrogation really does: make sure that the party who is actually responsible for the bills pays them. This is an important tool in preserving limited plan funds and making sure that those funds are available when the next employee has a car accident, or needs a liver transplant, or falls in the shower. In addition, these rights serve as secondary purpose as a safety net to Plans, somewhat streamlining the administration process in certain circumstances. Plans are more comfortable paying claims where liability is in question if they know they will be reimbursed if the member ultimately receives a settlement for those medical expenses. Without subrogation and reimbursement rights we would see Plans denying claims with third party liability outright, leaving increased balances due (without any discounts the Plan would enjoy as payer), and making providers wait for months or years for a lawsuit to end before receiving payment for their services.
Unfortunately, it is unlikely that the general public will ever fully understand the process or its purpose, so the negative publicity which may result from high profile cases will simply remain a factor to be considered in making such decisions as a plan administrator.
There is an ever-increasing number of tools in the health plan’s “bag of tricks” to manage costs. As recent strategies are fine tuned, and new ones emerge, it is important to not lose sight of the classics, and the importance of not only utilizing them, but utilizing them properly to their full effect. If, as a plan administrator or employer, you are not seeing sufficient savings from your subrogation program (industry leaders activate one case for every 150 covered lives, and recover $25 per year, per employee life), you owe it to your plan and employees to seek out knowledgeable advisors who understand how to best protect your plan’s assets. aa