4 drivers of healthcare costs — and what advisers should do

Employer innovations in health benefits have come to include initiatives such as expanding wellness incentives, offering health savings accounts and health reimbursement accounts, and covering preventive drugs at 100% of cost.

These may have some value but they keep the broker and the employer on the frustrating benefits hamster wheel of activity with no measurable bottom-line results. None address the frequency and severity of the real drivers of healthcare costs.

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A medical doctor, right, examines a patient at a health center in Maryland, U.S. Photographer: Andrew Harrer/Bloomberg

According to the independent actuarial and consulting firm Milliman, there are four primary drivers of healthcare costs (shown with their percentage of claims dollars):

· Hospital care 31%
· Outpatient surgery 19%
· Physician services 29%
· Prescription drugs 17%

Reducing the frequency and severity of these cost drivers reduces healthcare and insurance costs. You can reduce frequency (utilization) with tactics including:

· benefits concierge (lowers frequency of physician office and Emergency Room visits, surgeries, diagnostic testing);
· telemedicine (physician office and Emergency Room visits); and
· independent medical second opinions (unnecessary surgeries and procedures).

Reduce severity (cost) with such tactics as:

· Fiduciary PBM (lowers severity of prescription drugs);
· provider direct contracting (outpatient surgeries and inpatient care);
· bundled-price outpatient surgery centers (surgeries);
· medical utilization management (surgeries and other high-cost treatments);
· specialty drug cost mitigation programs (prescription drugs); and
· Reference-Based Repricing (RBP) (surgeries, treatment procedures, and diagnostic testing).

Advisers are generating huge bottom-line results for their employer clients by reducing the frequency and severity of claims. John Clay of BetterSource Benefits in rural Somerset, Kentucky, recently implemented reference-based repricing to save a 44-life company over $184,000 in just a six-month period. Jeff Fox of HJ Spier in Indianapolis, Indiana, used a direct hospital contract to save a 409-life county government almost one million dollars in their year-over-year annual healthcare spend.

And within six months of her new consulting engagement, Allison De Paoli identified over $800,000 savings on her client’s prescription spend, without reducing benefits.

Should you be asking your prospects, “What is your broker doing to reduce the frequency and severity of your claims?” Asking that question first is a good starting point.

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