The health insurance industry has been in a state of chaos for decades, but the major players in the industry are in no hurry to make any changes.

Within the past 10 years:

  • Health insurance carriers’ profits have almost doubled from $8 billion to $15 billion.
  • Hospital revenues have grown from $760 billion to $936 billion.

The norm in the current health care delivery system is for hospitals to mark up prices a 1,000%, then give the insurance carriers a 30% discount on those over inflated charges, as part of a Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO) agreements.

The insurance carriers don’t mind paying these inflated costs. They simply pass those costs on to their clients, mostly employers, in the form of higher premiums. Under healthcare reform, insurance companies for large employer groups must spend 85% of all premiums on actual health care costs. The remaining 15% represents the carrier’s profits and administration costs. This is known as the Medical Loss Ratio (MLR). In a way, the healthcare reform legislation creates a financial incentive for the hospitals and insurance carriers to keep the cost of care high.

graph comparing costs of large group without managed costs and a large group with managed costs

For example, if actual health care expenses for an employer are $1,000,000, then the insurance carrier’s profit and administration limit is $150,000. But, if the insurance carrier managed the cost of the care provided and reduced the claim expense to $750,000, then the profit and administration limits for the carrier would be limited to 15% or $112,500. There is no incentive for insurance carriers to control the cost of care in the current system. In fact, they are financially rewarded when claims are high.

There are other solutions that are compliant with the Affordable Care Act (ACA) that circumvent the current system, limiting the profits of the insurance industry and the hospitals.

One solution is called Reference Based Pricing. The primary element to success is plan design and structure. Reference Based Pricing plans are partially self-insured, meaning that the employer pays claims up to a certain threshold, after which, reinsurance covers the rest.

Under a reference base pricing model, a third-party administrator (or TPA) creates and administers the plan. Hospitals are paid, not on billed charges, but rather are paid 150% of the Medicare reimbursement. This provides the hospitals with profit, but limits the profits to a reasonable amount.

Hospitals do not like this system. It is disruptive to their business-as-usual. Sometimes the hospital will send bills to members, demanding that the member pay the difference between their billed charges and the amount paid by the health plan. This is called balance billing.

In the event this happens, the member contacts the TPA. TPA attorneys work with the hospital to resolve the dispute. 95% of all claims filed with hospitals are paid without any disputes or balance billing.

In the event the hospital does balance bill the member, the TPA attorney will handle negotiations with the hospital.

Imagine this scenario:

Attorney:  Hello, I’m contacting you to settle a balance bill for my client, John Smith.

Hospital: He owes us $25,000 in outstanding charges.

Attorney:  I went to the drug store today and purchased a box of 10 bandages for $4.00. You billed my client $400 for one of the exact same bandage. No one is opposed to the hospital making a profit, but it has to be reasonable. The payment the hospital received from the TPA represents a reasonable profit.

If you disagree, let’s try an experiment. I will contact the local TV news stations, give them this bill and explain the cost differential. I will also show your demands for this individual to pay these inflated prices. Let’s let the public decide what is reasonable. How does that sound?

When presented with this scenario, the hospital settles. They know they have no case in the Court of Public Opinion, and this information could unravel the current status quo of huge profits from other employer groups.

When a reference base plan is implemented correctly, it can result in a 20% rate decrease for the employer in year one. After the first year, the rates tend to level off.

The model works. It is disruptive to business as usual for hospitals and insurance carriers. When so many powerful organizations are vested in the status quo, major change has to be disruptive.