One of the most important lessons I’ve learned over my long career has been the role an advisor can play in helping health plan sponsors embrace a fiduciary mindset. This means employers taking on the widespread lack of transparency and prevalence of conflicts of interest for the benefit of their employees/plan members.
All too often, plan sponsors assume they have little opportunity to control or reduce their healthcare spend. They accept the status quo and do not challenge brokers who are receiving financial incentives to keep them in poorly managed arrangements with specific insurers.
Dave Chase’s book, Relocalizing Health, provides a playbook for plan sponsors to take greater control of their health plans by embracing this perspective. Chase outlines a 5-step process called LOCAL that a plan sponsor can implement to better manage the health of their workforce and their healthcare spend:
L – Learn How to be Liberated from the Status Quo
O – Optimize Health Plan Infrastructure
C – Carve out PBM
A – Add Value Based Primary Care
L – Leave Behind Value-Extracting PPO Networks
Chase asserts that plan sponsors can see a potential 20-40% reduction in healthcare claims spend by implementing this process. It starts by rejecting the status quo and looking beyond traditional approaches.
Once liberated, plan sponsors should seek an advisor who is aligned (including through compensation) with those goals and who has the right technical team, tools, and commitment. The advisor can then identify the right suppliers, such as TPA, network, and stop loss carrier to secure contract terms that facilitate better management of both routine and large claims.
If you think about it, most benefit brokers are focused on 40% of the claims spend while leaving 60% of it ineffectively managed. The 60% is driven by a limited number of large claims, so it is critical to put the right suppliers in place to better manage them. Obtaining a 25% reduction on 60% is obviously much greater than a 10% reduction on 40% of the spend. Chase is confident LOCAL can save 20-40%.
Traditional approaches start with a solution or product. LOCAL reverses that by first setting goals and strategies, and then finding the right advisor and suppliers. I would estimate 4-7% savings by implementing the first two steps. Savings are probably even greater if the baseline plan is fully-insured.
The next step is an easy one ꟷ carve-out your PBM. A thoughtful clinical drug benefits management approach, especially given the pipeline of specialty drugs and cell and gene therapies, is critical to short- and long-term savings. Are you ready for a $1 million recurring year-over-year drug claim? What resources and arrangements do you have in place to manage such claims? Remember, stop loss insurance may only help you in the first year.
The problem is that the three largest PBMs make money by buying and reselling drugs, not by managing them. So why are they called “prescription benefit managers” when “prescription drug resellers” would be more accurate.
There are a limited number of truly transparent PBMs in the market ꟷ ones that are agreeable to effective contract language and that apply the methods required to manage drug spend.
Similar to medical claims, a small portion of participants drive over 50% of the prescription drug spend. Over the past two years while I have been at Chelko, I’ve seen its management approach reduce client drug spend 20-30%. Thus, this step can reduce the total medical and drug claims by 3-5%.
Next in the process is to “Add” a primary care strategy focused on population health management. One based on value vs. fee-for-service. How well is your physician managing your health? Is it simply a transaction or a retainer type relationship? A high percentage of plan participants do not have a primary care doctor. An effective primary care strategy is vital to active population health management.
While we should be striving towards this, as Rick Chelko pointed out in a previous article, it does have its challenges. So, while we wait for more of the provider market to pivot in this direction, you can start building the foundation for it in your long-term planning. Based on actuarial insights and modeling this can achieve 6-10% claims cost reduction over time. Short term savings will be less depending on the availability of providers where your plan participants live.
The last step is “Leaving” behind value-extracting PPO networks. Finding or developing a PPO network focused on centers of excellence and population health can achieve 8-12% reduction in claims cost (could be significantly higher depending on your large claims).
A situation where this aligns with the other four steps in the process is when it enables a plan sponsor to source a high-cost infusion more efficiently. For example, one of my teammates recently helped a client’s plan member get two required treatments for almost $500,000 less per year. Please note, this is for the same drug, and it was administered at a more convenient and clinically comparable location. Prior to our involvement, the traditional PPO network authorized the outrageous cost without giving the plan sponsor the opportunity to fulfill its fiduciary responsibility.
If you add up the estimated savings for each of the five steps of LOCAL, you can see how Chase estimates a 20-40% reduction in plan cost. Even if he’s only half right, that would still be 10-20% of annual savings.
Embracing a fiduciary mindset can help you achieve meaningful results ꟷ not only in reduced costs, but also in better health for your plan members.