Are We Managing Cost? Cutting Cost? Both? Or Neither?

Understanding Cost Dynamics and How Healthcare Data Powers Your Business

By Antonio Williams

When it comes to making your business successful or even keeping it solvent, the simplest business decisions involve some risk. And since healthcare cost is typically the second-largest expense a company attributes to its employees, there’s a huge incentive in managing it effectively over time. All risk expected in the renewal period gets rolled into premium rates each year, and many employers don’t understand why they are continuously faced with more and more volatility year after year. Companies can have the most thought out objectives to grow their business, but an improperly managed healthcare program can easily drain the financial resources needed to push key initiatives that drive a company forward.

What Many Small to Midsize Businesses are Asking

Q:How can we control our costs and understand what is behind all the volatility and unpredictability?

A:It may be time to upgrade your framework for evaluating the effectiveness of your healthcare strategies”.

Managing healthcare cost is a continuous, cyclical process and it’s no secret that good data drives good decisions. The key to not letting the complexity grow is in breaking down changes into manageable pieces and making progress one step at a time. The goal of good reporting is to help employers make informed strategic decisions that create value and empower results. Some benefits consultants provide employer groups with complex reports that arbitrarily list statistics and fancy charts. Many times, however, the data in this reporting is far from actionable and does not provide any real strategic insight for one very simple reason. Unless a data element can be easily compared to another on a per capita basis, it typically cannot be of much assistance in guiding strategy.

Meaningful Metrics Lead to Positive Change

The way to know whether or not a healthcare strategy is working is to translate measurements into simple terms that relate directly to the company’s business model. One set of metrics that every organization has in common is: PEPM(1), PMPM(2), PEPY(3) and PMPY(4). Continuous awareness of how costs are trending on a Per Employee Per Year (PEPY) basis not only supports healthcare cost management, but also creates a way for healthcare cost to stack up against average fiscal year employee productivity.

The profit margins of smaller companies typically don’t have room to offer employees anything beyond basic health insurance. At the same time, they are reminded of the importance of balancing this with competitive benefits employees can appreciate. The value in tracking per capita cost breakdowns and evaluating them over time is that strategies and their outcomes can then be compared internally, as well as externally, to better understand performance and competitiveness.

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Great Strategies Are Systems

Renewal strategies are heavily influenced by whatever strategy is currently in place. Therefore, it’s important that monthly reporting and the most recent budget forecast can be reviewed side-by-side in an easy-to-understand way. That is… that they work as a system. When the per capita metrics used to develop annual premium rates are captured on a consistent basis through dashboard reporting, this allows for frequent and continuous budget forecasting. The renewal process moves away from being a once a year renewal meeting to more of a year-round continuous process where there are no surprises and the key drivers of cost have already been identified and discussed. Also, the more seamless the dashboard reporting is relative to renewal forecasting, the more prepared a group is to implement changes at renewal and determine when there is a need for corrective action.

Linking Current Performance to Risk Management Objectives

Plan design and contribution strategy have a direct impact on how much members will utilize the plan and subsequently impact claim cost over time. As these change, risk gets shifted around and those decisions eventually end up connected to certain outcomes. For example, a company may offer its employees two plan options – Plan A with copays for the pharmacy benefits and Plan B (an account-based, consumer-driven health plan) with coinsurance after deductible for pharmacy coverage. Reporting might reveal that year over year, trend on per capita pharmacy expenses is significantly lower for Plan B. The company might use Plan B’s PEPY averages to benchmark cost and utilization patterns and decide if it should change Plan A to a coinsurance arrangement. A reasonable expectation is that utilization would decrease in Plan A and the overall combined per capita cost for pharmacy would decrease as well. In the next phase, using a simple PEPY metric, it becomes easier to monitor performance against other plans as well as industry norms. The problem, however, is that not all benefits consultants are quantifying these kinds of outcomes and checking to see if these implementations of new strategies worked last year.

A Focus on Strategic Flexibility

Proactively managing cost via the simplest metrics leads to greater cost predictability. The cost breakdown used to evaluate performance has to be simple enough to conceptualize different types of emerging data. In addition, reporting exhibits and budgets need consistencies across the data, along with visually informative data views that tell a story employers can use to make good strategic decisions. Self-funded employers should be constantly reminded of their medical claims costs, pharmacy costs, administrative fees, and reinsurance fees on a Per Employee Per Year basis so that new strategies can be thought out and cost-saving scenarios can be modeled at renewal time.

  • PEPM is “Per Employee Per Month”, (2) PMPM is “Per Member Per Month”, (3) PEPY is “Per Employee Per Year, (4) PMPY is “Per Member Per Year”

    Antonio Williams SR Financial Analyst Regions Insurance Group antonio.williams

    Antonio Williams
    SR Financial Analyst
    Regions Insurance Group