Part 1 Overview: What Am I Paying For?
Updated: Jan 31
The Chronic Cost
Breakdown of a Health Insurance Plan
It's important you know exactly what you're paying for in your premium each month for your health insurance plan. This is the first step in controlling your company's Chronic Cost. The three main categories that make up your health insurance premium cost are: administrative costs, stop-loss coverage, and claims.
Chronic Cost #1: Administration Costs
This is the smallest portion of your bill that goes toward a Third Party Administrator or TPA. The TPA is the one who handles all the day-to-day tasks to keep your plan running smoothly.
"In addition to managing and paying medical claims, the TPA is responsible for building out the summary plan description, billing the employer for administrative costs, and paying any relevant carriers and vendors." - Part 1 from The Chronic Cost by Clayton Wood.
Unfortunately, the TPA, just like any other sales organization, does not always have your company's best interests in mind and are constantly working towards improving their bottom line with added commissions. This is why it's so important for your broker to understand this, and help mitigate vendors double dipping on the revenue they are earning.
Chronic Cost #2: Stop-loss Coverage
Stop-loss insurance protects against catastrophic and unpredictable expenses. There are two types of stop loss insurance. Both types of stop loss can take up to 30% of your total premium based on different factors.
"Specific stop-loss insurance protects the employer when an individual on the plan submits a catastrophic claim. After the claim meets the Specific Deductible, the stop-loss will step in to pay the rest of the claim.
Aggregate stop-loss insurance protects the employer by giving them a ceiling for the total amount of claims that can be paid during the contract. This comes in the form of reimbursement." - Part 1 from The Chronic Cost by Clayton Wood.
Chronic Cost #3: Claims
The two main types of insurance claims are prescription (Rx) and medical claims. These claims make up more than half of your premium cost each month. The most common type of plan people are enrolled in is a PPO plan or Preferred Provider Organization. These plans have contracts with healthcare providers where patients pay less for services that are completed if they use someone inside their network.
"PPO networks offer a discount for claims processing if the medical service was administered by a clinic or provider who was in network." - Part 1 from The Chronic Cost by Clayton Wood.
It's important to know it is not always more cost-effective though.
Fixed vs. Variable Costs
When taking a closer look at your specific costs, there are two primary categories - fixed costs and variable costs.
Fixed costs account for around 30-40% of the total health plan - they don't fluctuate month over month. Fixed costs include: Third-party administrator fees, network access fees (PPO), claims management and stop loss premiums.
Variable costs account for around 60-70% of your premium - they are based on the claims submitted each month. The claims come from hospital services for both outpatient services and inpatient services, as well as non-hospital medical services like professional services (physicians offices) and pharmacy services.
"Outpatient services are where most (29%) variable costs are going. These include surgeries and medical procedures that need to be done in a hospital but do not require an overnight stay, such as a colonoscopy, ultrasound, or MRI scan."- Part 1 from The Chronic Cost by Clayton Wood.
How to Manage the Variables in Your Variable Costs
In order to successfully manage your cost, you have to manage your claims.
"In health insurance, you will often hear the Pareto Principle applied regarding how healthcare costs are divided among the population. In this case, 80% of healthcare costs come from 20% of people."- Part 1 from The Chronic Cost by Clayton Wood.
Only 20% of your employees are driving up your cost of your health plan. When you manage this small percentage of employees, you lower your claims cost, and in turn, manage your variable costs.
We have only covered the overview of what goes into your premium each month, if you haven't received your FREE Download of The Chronic Cost: Saving Hundreds of Thousands of Dollars for Companies with 50-500 Employees, Click Here!
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