Why total cost of care is more important than discounts in health benefit plans

When employers consider their health benefit options, they tend to focus exclusively on two metrics. Companies with Administrative Services Only (ASO) plans look at the administration fees — how much they are being charged for the administration of the plan. And then, they look at the discounts.

“Those are the two aspects of a health insurance plan that most employers are looking closely at in order to size up one health insurer versus the next — what’s your discount at your hospitals and what’s the fee that you’re charging in order to administer services?” says Robert Yonick, Director Actuarial Services at Highmark Blue Cross Blue Shield. “What they’re not looking at is the total cost of care.”

Smart Business spoke with Yonick about total cost of care and what employers should look for as they review health insurance plans.

What is the total cost of care in health insurance benefits?

The total cost of care is an organization’s total claims dollars and total admission cost. However, when renewing or exploring new plans, employers often fail to take the total cost of care into account. Instead, they focus on the available discounts as a measure of value. When they do that, what they’re missing is the context of that discount. Some hospitals charge more — they have higher charge masters than other hospitals — so the actual price paid for services is higher, lessening the impact of any offered discounts. Just because a discount at certain hospitals doesn’t, on the surface, look as deep, an insurer might be working with lower-cost facilities. Employers should scrutinize plans that focus on big discounts because that doesn’t necessarily mean that the total cost of care is going to be less expensive.

Further, recognizing that the real value can be found in total cost of care can help employers ask better questions. Brokers often approach renewals with spreadsheets highlighting discounts. Employers that are armed with the questions around total cost of care can uncover insights that point to the better-value plan.

How can employers identify total cost of care across plans?

To understand the total cost of care, employers should look at the network and access. They should ask their brokers to do a full review of where the care goes. If the care goes to a higher-cost provider, employers will be paying more for the health insurance plan even if a significant discount is offered.

There are also always going to be network considerations depending on where the company is headquartered and employees live — so, geography could be a significant factor in the cost of health insurance.

The overall health of the employee population can change quickly, so it can be difficult, from that perspective, to look at individual employees and conclude that one carrier is better than another. So instead, the key factors in estimating the total cost of care would be ensuring that the network is comprehensive, and choosing a network of providers that have the best facilities and can provide the best care at the best cost.

How can employers make better health plan choices?

Too often the focus for employers reviewing plans is on administrative costs. But with health insurance, some 90 percent of the costs materialize as claims while 10 percent show up as administrative costs. There’s typically a great deal of evaluation around trying to manage down that 10 percent because it seems as if it’s the easiest place to realize savings. That understandable because administration is easier to understand. Claims, in comparison, are a lot more complicated, but they’re also by far the greater percentage of the costs. With this in mind, employers should do a deep dive into their costs and make sure that they’re asking the right questions. Brokers can help employers get a broader understanding of the total cost of care by doing an analysis.

For employers, it’s important that they understand what’s really driving their health insurance costs and not just looking at the low-hanging fruit of discounts and administrative fees. By taking a deeper dive and exploring ways to more meaningfully affect claims’ costs, employers should be able to better manage costs and provide a better plan for their employees. ●

INSIGHTS Health Care is brought to you by Highmark Blue Cross Blue Shield

Robert Yonick

Director Actuarial Services
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