Mastering the Fundamentals of Group Health Plan Purchasing
Table of Contents
Understanding the Health Plan Supply Chain
As a business owner or HR professional tasked with managing your company’s employee benefits, one of the most critical responsibilities is ensuring your group health plan is optimized for cost-effectiveness and employee satisfaction. However, navigating the complex web of health plan components and vendors can be a daunting challenge. In this comprehensive guide, we’ll unpack the fundamentals of the health plan supply chain, empowering you to make informed decisions and effectively manage this essential expense.
At the core of any group health plan are four key components: the Third-Party Administrator (TPA), the Network, the Pharmacy Benefit Manager (PBM), and the Insurer. By understanding the role and impact of each of these elements, you’ll be better positioned to evaluate your current plan, identify areas for improvement, and implement strategies to drive down costs while maintaining high-quality coverage for your employees.
The Role of the Third-Party Administrator (TPA)
The TPA, or Third-Party Administrator, is the backbone of your health plan, overseeing a wide range of critical functions. These include claims processing, customer service, plan administration, legal compliance, and cost management. In essence, the TPA acts as the intermediary between your organization, your employees, and the insurance provider, ensuring the smooth operation of your health plan.
When evaluating your TPA, it’s important to consider factors such as price transparency, access to preferred networks, and the level of support they can provide in managing your plan. As the TPA’s fees are typically a fixed cost, it’s crucial to carefully assess their capabilities and align them with your organization’s needs. [Link to “Fundamentals of group health plan purchasing Explained” video]
The Role of the Network
The network component of your health plan refers to the providers, hospitals, and facilities that are contracted to offer in-network services to your employees. These networks, such as Cigna or Aetna, negotiate discounted rates with healthcare providers, allowing your employees to access care at a lower cost compared to out-of-network providers.
However, it’s important to note that the network costs, which are primarily driven by the claims your employees submit, are considered a variable expense. This means that the more your employees utilize in-network services, the higher your network costs will be. To manage this variable expense, you can explore strategies such as direct contracting, reference-based pricing, or cash-pay arrangements, which can help reduce the overall cost of care. [Link to “Fundamentals of group health plan purchasing Explained” video]
The Role of the Pharmacy Benefit Manager (PBM)
The Pharmacy Benefit Manager (PBM) plays a crucial role in managing the prescription drug component of your health plan. PBMs are responsible for negotiating drug prices with manufacturers, managing the drug formulary, processing claims, and establishing pharmacy networks to ensure your employees have access to the medications they need.
Similar to the network costs, the PBM expenses are also considered a variable cost, as they are directly tied to the prescription drug utilization of your employees. By carefully selecting a transparent PBM that passes along rebates and discounts to your plan, you can significantly impact this variable expense and potentially achieve substantial savings. [Link to “Fundamentals of group health plan purchasing Explained” video]
The Role of the Insurer
The final component of the health plan supply chain is the Insurer, which is responsible for providing the risk transfer mechanism. The Insurer takes on the financial risk associated with your employees’ healthcare expenses, ensuring that your plan can cover high-cost claims or unexpected spikes in utilization.
The Insurer’s fees, including stop-loss coverage, are considered a fixed expense in your health plan. While you have less direct control over this component, it’s essential to work closely with your Insurer to ensure that your risk transfer strategy aligns with your organization’s risk tolerance and budget. [Link to “Fundamentals of group health plan purchasing Explained” video]
Identifying Fixed and Variable Costs
As you navigate the health plan supply chain, it’s crucial to understand the distinction between fixed and variable costs. This knowledge will empower you to focus your efforts on the areas where you can have the greatest impact on your overall health plan expenses.
- Fixed Costs: These are expenses that remain relatively stable throughout the plan year, regardless of utilization. Examples include the TPA fees and the Insurer’s risk transfer costs.
- Variable Costs: These expenses fluctuate based on the utilization of healthcare services by your employees. The network claims and PBM costs fall into this category.
By understanding which costs are fixed and which are variable, you can prioritize your efforts and implement targeted strategies to manage the variable expenses, which often present the greatest opportunities for cost savings. [Link to “Fundamentals of group health plan purchasing Explained” video]
Strategies for Managing Variable Costs
Now that you have a solid understanding of the health plan supply chain and the distinction between fixed and variable costs, let’s explore some strategies you can implement to effectively manage the variable expenses in your group health plan.
Optimizing the Network
As mentioned earlier, the network costs are a significant variable expense in your health plan. To manage these costs, consider the following strategies:
- Direct Contracting: Bypass the traditional network and negotiate directly with healthcare providers to secure more favorable rates for your employees.
- Reference-Based Pricing: Establish a pricing structure based on a percentage of Medicare rates, rather than relying on negotiated network discounts.
- Cash-Pay Arrangements: Encourage your employees to utilize cash-pay options for certain services, which can often be significantly less expensive than the network rates.
By implementing these network optimization strategies, you can potentially reduce the variable costs associated with your employees’ healthcare utilization. [Link to “Fundamentals of group health plan purchasing Explained” video]
Optimizing the Pharmacy Benefit Manager (PBM)
The PBM is another area where you can have a significant impact on your variable costs. To optimize your PBM, consider the following strategies:
- Transparent PBM: Choose a PBM that offers complete price transparency, passing along all manufacturer rebates and discounts directly to your plan.
- Formulary Management: Work with your PBM to manage the drug formulary, encouraging the use of generic and lower-cost alternatives where appropriate.
- Specialty Drug Strategies: Implement specialized programs to manage the high-cost specialty medications that can significantly impact your overall drug spend.
By carefully selecting a transparent PBM and implementing effective formulary management strategies, you can potentially achieve substantial savings on your variable prescription drug costs. [Link to “Fundamentals of group health plan purchasing Explained” video]
Leveraging Data and Analytics
To effectively manage your group health plan expenses, it’s essential to have access to comprehensive data and analytics. By understanding the utilization patterns, cost drivers, and trends within your plan, you can make informed decisions and implement targeted strategies to optimize your costs.
Work closely with your TPA, network, PBM, and Insurer to obtain detailed reports and data on your plan’s performance. Analyze this information to identify areas of high utilization, opportunities for cost savings, and potential areas for improvement. This data-driven approach will empower you to make more informed decisions and ensure your health plan is aligned with your organization’s goals and budget.
Conclusion
Navigating the complexities of the group health plan supply chain can be a daunting task, but with a solid understanding of the key components and a strategic approach, you can effectively manage this essential expense. By focusing on the fixed and variable costs, implementing targeted optimization strategies, and leveraging data and analytics, you can position your organization for long-term success in providing high-quality, cost-effective healthcare coverage for your employees.
Remember, the health plan supply chain is a dynamic and ever-evolving landscape, so it’s crucial to stay informed and adaptable. Continuously review your plan, explore new solutions, and collaborate with your vendors to ensure your group health plan remains optimized for your organization’s needs. [Link to “Fundamentals of group health plan purchasing Explained” video]
If you have any further questions or would like to explore how you can optimize your group health plan, feel free to contact me at rich@benesmartservices.com or click the orange button at the top of this page so we can schedule an Executive Briefing. We’re here to help you navigate the complexities of employee benefits and ensure your organization is positioned for long-term success.
