So often while talking with employers, we find that when it comes to providing health insurance to their employees, they think of this process as a transactional one rather than one of continued engagement. We will regularly refer to this as the ‘Transactional’ approach vs. the ‘Asset Management’ approach (more about this later). Don’t get me wrong, insurance has been long thought of in a transactional manner. Most insurance advertising is just that – transitionally based (i.e. 15 minutes can save you 15% etc.). When it comes to health insurance; however, employers have seen a very different result over the past decade than they have when comparing other types of insurance. While the traditional Property and Casualty markets have had what we refer to as soft market times and hard market times (soft being where the carriers are much more aggressive in their pricing vs. hard markets where they are not), rarely do we see soft markets when it comes to health insurance. This is largely due to the fact that health insurance really is no longer insurance at all rather it has become healthcare financing with some risk pooling involved.
Between 2007 & 2017 health insurance premiums increased by 55% while the overall inflation rate in the U.S. rose just over 18% during that same period. That’s a more than 300% variance between the two. Given this information, there must be more going on behind the scenes, right? Yes – yes there is, and we are falling right into the trap. If you want to really understand why health insurance premiums are increasing to the tune of 3 times the rate of everything else, look no further than the health care industry. Health insurance companies are the primary financier of the healthcare system. Said differently, Blue Cross Blue Shield, Aetna, Cigna and United Healthcare (to name a few) are really just the Visa and MasterCard of Hospitals, Doctors and Pharmaceuticals. Think about it – who really pays cash for much of anything anymore? Whether we are buying groceries, a new television or even movie tickets, instead of paying cash, we throw down our debit card or credit card (got to get those points, right?). In the same way, when we go into a Doctor’s office, the Hospital or local Pharmacy, what’s the first thing we reach for – that insurance I.D. card. Yep, feels kind of the same, right? But, what makes all other transactions different than healthcare transactions is the fact that we know the price of what we are paying for when it comes to every other thing we buy, but not when it comes to health care. When it comes to health care related transactions, we think of the copay or the deductible, not the price, and as a result, we fall right into the hands of both the healthcare system and the health insurance industry which for decades approached one another more as rivals, but now seem to be collaborators.
THE ECONOMIC PRINCIPAL
The “Economic Principal” is rather simple – the true cost of something is equal to the number of units consumed multiplied by their price. Business owners have long since known this principal and applied it to most everything in their business. For a pizza restaurant owner, for example, if the cost of meat and/or cheese goes up, they might think about re-pricing pizza or the quantity of pepperoni used. If fuel costs go up, the same pizza restaurateur might re-think how they manage their delivery routes or where they send our drivers to get gas. Paper products, cardboard boxes, even employee uniforms are all approached with the economic principal in mind, so what makes health care any different? Cost is equal to the number of units consumed, multiplied by the price in which they were consumed. If health insurance is just healthcare financing, to lower health insurance costs, we must reduce the number of units of healthcare we consume or the price in which we consume them.
THE ONE YEAR TRAP
Health Insurance is bought and sold in one-year increments. This is intended for two reasons. First, it allows an insurance company to re-price their premiums on an annual basis so as not to take long term losses, and second, it gives you the consumer a sense of security (at least for 12 months). But the reality is that if you are an employer in the United States, you’re likely going to provide health insurance to your employees for more than one year unless of course you plan to be out of business in a year (which is a very different conversation altogether). So, if you plan to be in business and provide health insurance to your employees, the first step to applying the economic principal is to stop thinking of your health insurance spend in one year increments. By doing this, you fall into the trap of the insurance company. An employer who pays $500,000 per year in health insurance premiums will pay a total of nearly $3 million over the next 5 years and over $7.5 million over the next 10 (this is based on an average increase of 9% per year). But insurance companies through their messengers (Brokers) have done a great job of selling increases. Early on in my career, I had a sales manager that taught “show prices in pennies and savings in dollars.” What he meant was, when presenting bad news, show the lowest possible denominator. When it comes to health insurance, brokers are taught to not focus on the current spend – I mean, you’re already spending that, right – and instead focus only on the increased amount. Then show that in as small a number as you possibly can (maybe a monthly increase or even better yet, a per-employee increase). This makes a $1,000,000 spend getting a 10% increase only look like a new $100,000 spend; or better yet, only a $8,300 a month increase; or to go even further, if there are 100 employees, only $83 more per employee per month. All the while, because of the way most insurance brokers are compensated, by getting the employer to buy this increase, they get paid 10% more in commissions. Sure, the health insurance industry recognizes that you’ll be upset (for a while), but employers typically move on and re-focus on other things for the remaining part of the year, kicking the can down the road only to find themselves in the same predicament the next year. Score one for the insurance company (and the broker).
Employers must begin to think about health insurance on a multi-year basis. Recognizing what we stated earlier, that insurance premiums are just the finance payments of health care units consumed, employers must begin looking at and understanding the units of health care that their employees are consuming. They then need to engage by education or negotiation. Reduce the number of units consumed by employees or pay a lower rate.
THE DUMBER UNDERWRITER WINS
Another strategy of the insurance industry has been to recognize that every so often, they need to ‘trade cases’. What I mean by that is they need to have the broker ‘shop the market’ to find a better deal. While that worked for a while, since the passage of the Affordable Care Act and the continued consolidation of the insurance industry, it just doesn’t work anymore and insurance companies have abandoned this practice. Most insurance companies in the U.S. are publicly traded and thus their fiduciary responsibility isn’t to you, their consumer, rather it’s to their shareholder. Think you’ll find a lower cost by shopping the market? Think again. Since 2010 throughout the U.S., we’ve seen a rapid decline in the number of available health insurance carriers. At the same time, with the adoption of the ICD-10 coding system (I know, I’m getting geeky and into the weeds) the ability for an underwriters to set health insurance premiums at a rate to insure they don’t lose money has become all too effective because of their ability to forecast risk.
THEY’RE ALL OUT TO GET YOU
In the past I often referred to the health care system in the U.S. as a three legged stool with each leg supporting the whole. Within one leg is the Delivery System (Hospitals, Doctors, Labs, Pharmaceutical Companies, etc.); another leg is the Finance System (Insurance companies); and finally, the Consumer System (you and me). I no longer refer to this as the three legged stool, rather instead the Three Headed Cannibalistic Dragon as both the Delivery system and the Finance system continue to feed off of one another and you and I, the Consumer, find ourselves at the bottom of the food chain. Over the past decade, we’ve seen more collaboration within the delivery and finance systems. Want an example of this? Look no further than the pharmaceutical structure of the delivery system.
Within the United States, all prescription drugs are bought and sold by middle men called Prescription Benefit Managers or PBM’s. These companies are responsible for negotiating pricing with pharma companies then selling those drugs to you and me all-the-while using the insurance company to pick up the tab (only to pass along that cost by way of insurance premiums). Roughly 85% of all drugs are distributed by three PBM’s. Today, because of consolidation, all three are now either own or are owned by insurance companies (Express Scripts & CIGNA, Optum & United Healthcare, and finally CVS and Aetna). While this is just one example, there are multiple others involving labs, hospitals and even doctors. Still don’t think the system is rigged?
THINK LIKE YOU DO IN A 401(K) INSTEAD OF INSURANCE
Now that we’ve established that you are the pawn and they seem to have an upper hand, we must begin to think differently about how we approach health insurance, more importantly how we approach health care. As business owners, we must begin thinking about health insurance in the same way we think about our retirement plan or 401(k). To draw a better analogy, I’ve provided below the three key steps to managing your health plan like an asset rather than a transition:
- Step 1: Develop a long term plan or strategy. Don’t have one, get one. Just like most big ticket items on your P&L, think about health care in the same way, multi-year. When investing in our retirement, experts would tell you to think about the end goal not the one year goal – do the same when it comes to health insurance. Build a multi-year budget and plan ahead as to how to manage your expense within that budget.
- Step 2: Focus on the data. Just like in an investment portfolio, you want to look at the market and understand where your money is going. The healthcare system, just like the stock market is ever changing. The company that was the ‘winner’ 5 years ago, may not be the best option today. In the same way, how employees are consuming healthcare may have changed, and you need to change with. Understand who the best players are and where you might get the best return on your investment.
- Step 3: Don’t get distracted. Just like the stock market, emotions can play a role. I remember when Facebook went public. So many people got caught up in the allure of owning part of that company only to find that short term opportunities rarely yield long term success. Stay the course. Develop a long term plan and stick with it. Sure, you’ll need to make adjustments once in a while, but don’t get side tracked by a one year offering from an insurance company. Likely they are trying to pull you away from your strategy because that strategy is working (which means they aren’t winning like they used to).
In summary, when it comes to health insurance, think health care (they are different). Apply the Economic Principle in this area of your business just like you do in other aspects. Success can be found, just think different and execute.