Aligning employer and adviser incentives to lower costs and raise compensation
There are many perverse incentives in healthcare, but they can be realigned to both the client and the adviser’s benefit.
A perverse incentive has an unintended and undesirable result. Some presume those who created the existing healthcare system were intelligent enough to see how it would evolve, decades into the future. Unlikely. I firmly believe that all the giants in healthcare — now benefiting from a myriad of perverse incentives — laid the groundwork of our current system with honest intentions, much like I believe the politician, when he first ran for local office, had a real desire to change the system and improve people's lives.
Brokers, consultants, advisers all get caught up in perverse incentives every day. We must examine the ways we benefit from these perverse incentives to determine how we can realign them in a way not just to remove them, but completely flip them on their tail and create aligned incentives with our clients — and the employees and families they employ.
There are three ways advisers are compensated:
- Commission-based revenue. I won't spend a lot of time on this because I hope the misalignment is obvious. Rates go up, we make more money. If the No. 1 thing employers look to us to do isn't to control costs, I don't know what it is. Through this form of compensation, we get a hefty raise when we fail to control costs. The problem with this model is obvious.
- Fee-based revenue. This is a baby step in the right direction. It removes the misalignment of incentives, but does nothing to benefit me as I bring benefits to the client.
- Performance-based compensation. Why is this not the industry norm? First and foremost, I think few consultants have confidence in their ability to actually lower costs. I did a horrible job of delivering on this the first 15 years of my career. I was amazed I was still in business — and thriving. In what other industry can I deliver bad news, year after year, and get more money the worse news I deliver?
As my firm, Lake Norman Benefits, started to evolve and bring clients very outside-the-box solutions with as much as 40% reduction in total healthcare spend, I no longer felt guilty for establishing a performance-based contracting system that asks for more money if we deliver on a mutually agreeable set of goals.
While I always work hard for my clients, and constantly look for ways to reduce costs, there is a little extra vigor, a little extra ingenuity and a little higher prioritization with those clients in which this incentive exists.
I am excited to be speaking on this very topic this month at EBA’s Workplace Benefits Summit in Boca Raton, Fla., where I plan to go into more detail. Meanwhile, some of the objections I hear from brokers are: “What about the large claims you can't control?” Or, “What about employers who won't let you bring in the solutions that actually lower costs?” Or, “How do you even measure performance?”
First, “uncontrollable claims” is a completely false premise. Every claim is controllable. That is why we have insurance carriers, TPAs, plan documents, deductibles, co-pays, networks, etc. Every one of those features is designed to do one thing: control the claims.
Also see: “Benefit pros on the move.”
Are unexpected claims going to happen? No, they are not. Why? Because in healthcare financing, we have to understand large claims will occur. They may be in areas we are unable to predict at this moment, but as soon as we start to expect those to occur, we can put in measures to control it.
Those large claims not only require the most control —to ensure three things occur: Best outcome for the member, zero fraud and wasted plan dollars, and lowest and most responsible prices paid on legitimate services — but also offer the greatest opportunity for us advisers to show our value!
Imagine if you can show a client that their employee, who is now back at work and well after open heart surgery, had the procedure done at a facility that cost their plan $25,000 instead of the U.S. average of $150,000? Remember, we are comparing performance before the performance-based contract existed and after, and those “unexpected” claims occurred in both time periods.
One other way to mitigate large claims — and one that has a positive impact on client retention — is tying the incentive to a three-year time period, instead of the 12-month period we are so accustomed to in this industry.
A few weeks ago, a large claim situation arose with a self-funded client where I have performance-based incentives. An Oklahoma City employee recently had a rotator cuff repair through the group’s Cigna network. The overall bill was $38,000, and the Cigna “discount” brought it to $22,000. The member also had 40 physical therapy visits at $300 a pop. Total cost was $34,000.
The member later called my account management team because he needed to have a repair done on the other shoulder, but he had exhausted his PT benefit for the plan year and wanted to inquire about getting additional visits approved. He was originally told he could wait until 1/1, but he rightly noted that his out-of-pocket responsibility would also reset.
I had heard a lot about the Surgery Center of Oklahoma and their unbelievable outcomes and ridiculously low infection and complication rates. I also knew they participated with no networks and all prices were on their website. The surgery the plan member needed would be 85% below the billed charge of the first surgery, and 75% below the allowed amount. The total bundled price is $5,900. I asked Dr. Keith Smith, one of the owners of the facility, if he could help arrange the post-surgical rehab physical therapy as well. He said he absolutely could and it would $950.
As a side note, there will not be many situations I can think of where the same patient will go through nearly identical procedures just months apart, one in a traditional fee-for-service environment and the other in a more free-market medical approach with risk on behalf of the provider in the form of the upfront bundled pricing. The plan member said the experiences were very similar, except he did get a higher sense of caring at the Surgery Center of OK with the same people being seen throughout the entire course of treatment.
Time to get comfortable
So, how does an adviser/broker/consultant turn this into more revenue? It is my firm belief that brokers are not used to talking about compensation, for the most part, and for a pretty simple reason: Most are uncomfortable doing it. They are not worth what they are being paid.
Let’s pretend I am offering to mow your lawn, and I am going to provide the best mow you have ever seen, with trimming and edging included. I have a plethora of customer testimony and I only charge $5. In that case, I can't wait to talk about my price. But, what if I charge $50,000 for the service? I will likely avoid discussing price, and maybe offer to buy other things, like your bushes, trees, chemicals and seeds, all so I can bury my costs in those items. The latter is what we brokers have become, for the most part.
With that analogy in mind, I decided that instead of charging less, I wanted to deliver more. I asked myself, what is the No. 1 thing my clients want and how can I better deliver it? At first, my mission was just to deliver an amount of “value” that made me comfortable talking about how much I get paid. This fundamentally changed things for me.
The exact tools we use, which are constantly evolving, will be for a future article, but when I can confidently say and backup, “We can reduce your healthcare spend by as much as 40%” and luckily have books, write ups and other customers as proof of this, it's a pretty powerful statement. With that confidence and ability to deliver I can talk about how much we get paid and why.
If an employer is going to judge me based on what I charge, which usually amounts to 1%-3% of their total spend (we do not base it on total spend. I am just using this as a point of reference), instead of my ability to manage the other 97%, then perhaps they are not the right fit as a client. As a side note, this has never happened.
Once I started to get comfortable charging a similar amount in a new way, I had a client actually offer to pay me even more because of the value I was delivering. I did not feel comfortable just taking extra money for delivering what I already committed to delivering, so I suggested we come up with a set of goals tied to additional incentives. We eventually settled on a per member per year claims spend over a 12 month period. This info was easy to get, and we looked at several different time frames. We then set goals for where we want that number to be one, two, three years out.
After setting a set of reasonably attainable goals of actually lowering spend (instead of just delivering “less bad” results), we put our plan into action. One other unanticipated side effect: Employers who have this plan in place give me far more latitude and a much broader permission slip to implement ideas. This allows me to flex my creative muscle a lot more than when I was just spreadsheeting carrier rates. Frankly, it makes my job far more satisfying.
We don't discuss this option with every client. Employers need to understand that I can't deliver this without changing something, and some employers are as entrenched in the status quo.
But, once my incentives are aligned in a way that benefits the client, I constantly look for ways to deliver on that. Every client is thought of every day, instead of just when there are problems or the renewal is looming. It is a completely new world, with much to do. It has also been lonely for so long. Gratefully, that is starting to change.
Future articles will discuss how we are lowering costs and improving care by aligning incentives within the plan — at the provider, prescription, TPA, network, and of course, the employee/member/patient level.