Warren Buffett once said, “Price is what you pay. Value is what you get.” Could this sentiment apply any better to health care, where prices and value are often completely unrelated?
According to the Health Care Cost Institute, health care spending per person rose 4.6 percent in 2016, up from 4.1 percent in 2015. Americans didn’t use 4 percent more health care—the institute reported utilization was flat or actually declined.
Was the care provided 4 percent better? Probably not. According to the Peterson-Kaiser Health System Tracker, the U.S. lags behind similarly wealthy countries across a number of health-related measures, despite paying more than double or triple for the same services.
As a result, more and more employers feel like they are reaching their breaking point when it comes to value versus price in health care.
Buffett leading the charge
By now, most in the benefits industry have heard about the health care venture announced by Amazon, JP Morgan and Berkshire Hathaway, and Buffett’s assertion that health care costs are a “hungry tapeworm” on the U.S. economy.
Certainly any broker can commiserate with Buffett’s position, especially those who work with small and mid-sized employers. These organizations have faced 10 percent to 20 percent premium increases year over year, seemingly regardless of how many benefit plan redesigns or wellness interventions they implement.
Prices keep rising, but value in the traditional fully-funded health plan seems to be shrinking, and the Affordable Care Act is one reason why.
Why the medical loss ratio is driving employer costs
Here is an interesting anecdote. In regions of the country where hospitals have the most negotiating power and highest prices, insurers are making the most money. Most employers would say, “What? How can that be?” Because the ACA’s “medical loss ratio” requires insurers to spend 80 percent of all the premiums they collect on patient claims, the only way to achieve profit growth is for the entire pie to get bigger.
In regions where the providers have more leverage, they can negotiate higher prices with all of the insurance companies. This increases claims, which means the pie is larger, and the 20 percent the insurance company gets is a bigger number.
As employers increasingly recognize that the current system is failing to provide enough value, brokers have an opportunity to guide their clients into a more rational way of paying for health care. Some of these methods will not rely on the traditional role of insurance companies to negotiate with hospitals. Instead, some employers will contract with providers directly. Others are skipping the contract altogether and implementing reference based pricing models.
Hospitals sometimes feel that the contracting process is necessary to ensure protection for patients from risk related to high charge master prices and balance billing. More and more employers, however, are deciding to take that risk.
With employers providing health coverage for more than 50 percent of Americans, hospitals are finding ways to prepare for a future where the term “payer” refers less to carriers, but more to CFOs all across the country.
Alex Tolbert is the author of “Online Benefits Technology: The Strategic Broker’s Guide” and leads BerniePortal, an all-in-one HR platform built for brokers by brokers. Before he started the BerniePortal, he worked primarily as a group health insurance broker.