If you want to control your company’s healthcare costs, you need to know where the money is actually going. It’s not just medical care. Administrative overhead and carrier margins quietly consume a meaningful share of every premium dollar. However, once you see the breakdown, you can start redirecting spend toward actions that improve outcomes.
The 80/20 Rule
Under the 80/20 Rule, health insurance carriers must spend at least 80% of the premium payments they receive on medical care and other activities that improve the quality of their members’ care. They can spend the remaining 20% on administrative costs, overhead and marketing. When insurance companies sell plans to large employer groups, 85% of premium dollars must go to medical care or activities that improve the quality of care.
This rule limits how much health carriers can profit, but it still allows a lot of your premium dollars to go toward things other than care.
Let’s say you’re spending $2 million a year on premiums. Of this, $1,700,000 should go to medical care and initiatives to improve the quality of care. This leaves $300,000 that can go toward other costs.
Carrier Profits
Becker’s Payer Issues analyzed earning reports from the largest health insurers in the U.S. to see how much they earned. Of the seven insurers, only one – Centene – posted a net loss. However, Centene’s loss was largely driven by a $6.7 billion non-cash goodwill impairment charge. According to Healthcare Dive, the charge does not affect the company’s cash or underlying operations, and without this charge, Centene would have posted a small profit.
Among the six other carriers that Becker’s Payer Issues examined, the profits were staggering. UnitedHealth Group pulled in total net earnings of $12.1 billion. Humana, CVS Health, Elevance Health, and Cigna Group all pulled in between $1.2 billion and $6 billion. Molina Healthcare pulled in $472 million.
The High Cost of Medical Care
Some of your premium dollars go to carriers, but what about the 80%-85% that goes to medical care? This money doesn’t go nearly as far as it would in other countries.
The U.S. spends twice as much on healthcare per person compared to the average of other countries, according to The Commonwealth Fund. It’s not just because Americans receive more or better care, either. Higher prices are driving healthcare spending.
The Commonwealth Fund explains that there are many factors behind excess spending in the U.S., including wages, equipment and prescriptions.
Another problem is that healthcare pricing tends to be opaque. When people seek out healthcare, they often don’t know how much it will cost of whether it could be obtained for less at another facility. Although new transparency rules have aimed to address this, PatientRightsAdovcate.org found that many hospitals only post price estimates, percentages or algorithms, not actual prices in dollars amounts. Many of the algorithms are unquantifiable due to missing information, while other algorithms can only be understood by a contract expert. That’s not very useful for the average person trying to figure out how much a CT scan or blood test is going to cost.
How Can Employers Squeeze More Value out of Premium Dollars?
The problem is clear. Employers are struggling with rising costs and shrinking plan value. Meanwhile, out-of-pocket costs keep rising for plan members, to the point that some can’t even afford to use their coverage.
So how can employers squeeze more value out of their healthcare spending?
- Cut out the carriers. Employers pay carriers act as the middleman, but why? Often, the answer is simply that it’s the way it’s done, but it doesn’t have to be. When employers switch to self-funding, they take control of their health coverage. When they contract directly with local healthcare providers they gain even more control.
- Steer members toward high-value care. Healthcare price transparency is still sadly lacking, and it’s hard for the average person to comparison shop for care, but it’s not a lost cause. With careful plan design and member education, employers can steer members toward high-quality, cost-effective care options.
Here at Health2Business, we facilitate direct partnerships between employers and community healthcare providers. If you want to get more value out of your healthcare dollars, this could be the solution you’ve been looking for. See how direct partnerships work.
