Small businesses save on healthcare with cost-reduction tactics

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Health benefit costs have crushed smaller businesses and eroded wages that should be rising in a booming economy, but advisers who defy the status quo, court C-Suite executives and follow Health Rosetta’s open-source blueprint for better benefits are coming to their rescue.

One is Megan Cook, founder and CEO of Adept Benefits, whose use of direct contracts and reference-based pricing (RBP) slashed Montesano, Wash.-based Vaughan Co.’s annual healthcare spend for more than 150 nonunion employees and their dependents by more than $450,000.

Facing a 55% increase on overall healthcare premiums in 2017 with one of the BUCAHs (Blue Cross Blue Shield, UnitedHealthcare, Cigna, Aetna and Humana), treasurer Stacie Vaughan enlisted Cook’s assistance in crafting an aggressive cost-containment strategy that actually produced a surplus at the end of 2018 and will do the same this year.

Another is Scott Haas, an adviser with USI Insurance Services who in 2015 helped Tim Culliton, CFO of Pacific Steel & Recycling in Great Falls, Mont., lay the groundwork for nearly cutting in half a roughly $8 million annual health spend for 750 employees. The secret was rolling out an improved RBP approach and pursuing direct contracting with healthcare providers known for offering higher quality at affordable prices.

Scott Haas, an adviser with USI Insurance Services

Both advisers agree that getting the C-Suite on board is a critical first step to achieving meaningful change. In Cook’s case, she always works directly with the ownership group and/or CFO, and many times both positions. None of her groups include the HR director as a chief point of contact.

“If you do not have the CEO and the CFO sitting at the table discussing reference-based pricing, do not pass go,” Haas cautions. “The ultimate accountability has to fall on the shoulders of the CEO and CFO because if an employer thinks that they are not in the healthcare management business by sponsoring an employee health plan, they’re grossly mistaken.”

Since Pacific Steel offers an employee stock ownership plan (ESOP), Culliton says it was only natural that he and the CEO become involved in tweaking health plan management and engaging employees at 44 branches in nine states to make better decisions about their health.

“The duty of being an ESOP company is we were able to explain to them that we would be able to reduce costs significantly over time, thereby enhancing the value of their ESOP and shares that are allocated within the ESOP trust,” he explains.

Managing an aging workforce

One of the challenges at Vaughan, which invented the first manure chopper pump for dairy farmers in 1960 with 40 worldwide patents that have been issued or are pending, was redesigning benefits to fit the needs of an aging population.

With low employee turnover, the company has a large group of employees who are in their 50s and 60s. Traditional health insurance carriers considered this demographic mix unappealing, which is why Vaughan decided on self-insurance and also emphasized employee wellness. Of roughly 120 employees, fewer than 50 belong to a union with their own robust coverage and more than 70 are nonunion office administrative employees whose dependents are eligible for generous employer-provided health insurance.

Vaughan Co., which pays 100% of healthcare premiums, shelled out $850,000 in 2017 and faced up to $1.2 million in expenses the following year if nothing had been done. But a surplus of more than $200,000 is expected by the end of 2019, which would mirror the previous year. In addition, a $5,000 annual deductible with a health reimbursement arrangement vastly shrank to just a $500 deductible.

On the Rx side, the company implemented a fiduciary pharmacy to recover its own prescription drug rebates, and bundles direct-to-manufacturer patient assistant programs and international drug sourcing. These voluntary arrangements allow health plan members who were accustomed to paying $50 or $100 copays to obtain the same script for free.

It’s worth noting that benefits have actually been enhanced amid all the cost cutting. For example, massage, acupuncture, chiropractic and nutritionist visits were increased to 24 a year. Moreover, free healthcare outside of a copay is offered under a direct contract with Summit Pacific Medical Center.

Megan Cook, founder and CEO of Adept Benefits

“None of the businesses that I work with would ever decide to go this direction for cost,” Cook reports, noting the importance of providing quality care and robust benefits. Indeed, if it was all about cost savings, Vaughan says “we would have asked our employees to share in a portion of the premiums. So it’s not just the dollars and cents that matter to us. It’s making sure that we can provide our employees with a health insurance plan that meets their needs.”

Vaughan notes that while most insurance brokers tend to sell a traditional health plan, make their brokerage fee and move on, Cook has “really invested in us as a company” while pushing a “completely radical, outside-the-box idea of this approach to healthcare.”

Cutting out the middleman

Pacific Steel, which has been serving customers for more than 120 years, pursued a similar path. The company was fully insured until the mid-2000s when its health plan became self-funded with a PPO network. After experiencing a nearly 400% increase in facility costs in the first part of 2013, the manufacturer implemented RBP. But the strategy didn’t begin to work until two years later when Haas came on board, according to Culliton.

That’s when USI established benchmarks and metrics to analyze Pacific Steel’s historical health plan data. It also developed a second generation of RBP that was aligned with a member advocacy component and third-party administrator known for its adjudication integrity and process management after two different TPAs didn’t work out.

The new model reimburses providers at more fair or equitable rates relative to the previous RBP system that was in place, while pricing now varies by type of service, provider and facility. It also recognizes that 85% to 90% of all healthcare encounters are with ancillary providers and the rest with facility-based organizations for surgeries or procedures.

Pacific Steel now has more than 5,000 safe-harbor or direct-contract agreements with high-quality physicians and ancillary providers who have agreed not to balance bill members. In addition to creating an open-access environment where care essentially can be sought from any provider, the manufacturer has five direct contracts with hospitals and health systems that are based on revised pricing methodology agreements, while others are pending.

Realizing that RBP cannot produce stellar results on its own, Haas views this strategy as part of an umbrella of alternative reimbursement as the marketplace evolves toward direct contracting arrangements “without the intermediary of a network or carrier in the middle of the relationship.”

It has made a significant difference at Pacific Steel. The per employee per month composite medical spend, excluding prescription drugs, plummeted 46.1% between the end of 2013 and 2018, falling to $442.32 from $812.13. “That calculates out to an aggregate cost reduction of about $3.6 million,” Haas reports.

While the revised pricing cannot eradicate large claims or control utilization, he says the plan will cycle at “a lower cost threshold because of the reduction in claims cost, which primarily is reflective of a reduction in facility cost.”

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