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You are here: Home / Anderson On Health Insurance / Cost savings and Employer Sponsored Insurance

Cost savings and Employer Sponsored Insurance

by David Anderson|  September 26, 20228:59 am| 28 Comments

This post is in: Anderson On Health Insurance

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Mark Cuban has an interesting tweet:

If you run a self-insured company, I STRONGLY suggest you compare how much you spend on generic drugs to our pricing. We analyzed what the Mavs spent over the last 2 years. It was $165k. With @costplusdrugs it would have been $19k ! For more info https://t.co/N2By7eQwdg

— Mark Cuban (@mcuban) September 25, 2022

Many large employers are self-insured for health insurance.  This means that the employer pays all the claims.  They contract with an insurer to run the process but the insurer only charges a monthly per member per month fee.   The insurer processes claims and negotiates rates with clinicians and hospitals to produce a network.   The insurer does not make or lose money if spending is higher or lower than expected.  The employer takes on all of the risk and thus takes on the upside of saving money.

There is a lot of evidence that self-insured plans pay the highest rates.  Self insured plans pay a bit more for the same clinician and the same service than the insurer that is processing their claims pays for plans where the insurer takes on all of the risk.  There is a good amount of evidence that there is a huge mismatch in plan selection between what benefits most of the workforce and the plans actually presented/chosen by HR.

Cuban is raising a good point that the most expensive part of the US health care system routinely leaves a massive amount of money on the table where they are buying absolutely nothing.  Switching generic drug supplier to save 80% of spend in a given category has no obviously downside for the payer (the employer) or the beneficiaries.  Beneficiaries are either unaffected if the benefit design is either no cost-sharing for generics or co-pay only or better off if the the cost-sharing  design is deductible or co-insurance based.  The payer is better off because they are paying less. The big losers are the other generic drug manufacturers and perhaps the insurer’s prescription benefit manager (PBM) who can move fewer covered lives to get rebates.

The Mavericks are not a big company.  They’re tall but not big.  They are leaving a lot of money on the table.  Much larger companies are also likely leaving money on the table.  I was having a discussion with a fellow insurance nerd a few weeks on this topic.  We were scratching our head as to where the incentive mismatch occurs and we don’t have great explanations.  Is it a matter of brokers and insurance agents mostly being captured by insurance companies instead of their theoretical clients?  Is it a matter of incentive mismatch between HR and the C-level?  Is it a matter of rational ignorance or very high transaction costs to negotiate distinct contracts?  Is it inertia?  We don’t know, but whomever can figure this out will be making a lot of money wringing out a notable inefficiency in the most expensive slice of the US healthcare spending budget.

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Reader Interactions

28Comments

  1. 1.

    twbrandt (formerly tom)

    September 26, 2022 at 9:10 am

    They’re tall but not big.

    actual lol

  2. 2.

    Cheryl from Maryland

    September 26, 2022 at 9:39 am

    Tall – means their Orthopedic bills are astronomical.

  3. 3.

    Starfish

    September 26, 2022 at 9:44 am

    The drug coverage through Cuban’s program would be incomplete because there is stuff that they do not have yet. Would companies be able to get some other plan for the drugs that Cuban’s program does not cover yet, or would people be out of luck if they need those medications?

    And by drugs that are not covered, I don’t mean some exotic cancer drug, I mean diabetes drugs and epi-pens.

  4. 4.

    Anonymous At Work

    September 26, 2022 at 9:46 am

    Cough cough Akerloff cough

    Seems like an information mismatch since PBM are to pharmacists what insurance CEOs with MDs are to medical doctors, namely “pure evil”.  I don’t know the contract structure but I doubt that insurance companies acting on behalf of self-insurers are not held to the highest standards for negotiating, nor do the companies have such an incentive.  Additionally, the companies might have better information than the self-insurers about PBM’s true costs and true profit margins but not close to “perfect information”, and, again, little incentive to use such information on behalf of the self-insurer (as opposed to saving it for themselves next time THEY need to negotiate PBMs down).

    Oh, and you mentioned inertia.  I think the assumption about “health insurance inside baseball expertise” at self-insurers may be overblown.  Self-insurers the size of Wal-Mart would have dedicated experts, but anything below 4-figures (or even 5-figures) in terms of employees I wouldn’t make that assumption.  Cuban’s a billionaire from a multitude of different corporations and industries as well as an active team owner in a very health-conscious sport, and it seems like he’s only been catching on the last few years.

  5. 5.

    Anonymous At Work

    September 26, 2022 at 9:47 am

    @Starfish: Intermountain was supposed to be leading the charge on that front with its own generics production.  I haven’t followed up in a while but big non-profits and angels are getting involved in the field.

  6. 6.

    BruceFromOhio

    September 26, 2022 at 9:50 am

    A quick run of five healthcare plan companies that I could name yields 680,000+ employees and $850+ billion dollars in annual revenue.

    I’ll take “Inertia” for a hundred, please, Alex.

  7. 7.

    Rster

    September 26, 2022 at 9:52 am

    HR is usually the department with the dumbest people in any company.

    Letting them do almost anything guarantees a stupid, wasteful solution.

  8. 8.

    David Anderson

    September 26, 2022 at 10:05 am

    @Starfish: yep, could contract out for all the other drugs

  9. 9.

    Starfish

    September 26, 2022 at 10:09 am

    @David Anderson: Yay!

  10. 10.

    Kineslaw

    September 26, 2022 at 11:08 am

    One issue would have to be the complications of using prescription insurance for some drugs and the Cost Plus don’t-take-insurance for others.  One other aspect is Cost Plus has no physical locations, so if you need a generic drug that day or the next, it doesn’t help.

  11. 11.

    Jesse

    September 26, 2022 at 11:12 am

    Wait, Cuban’s getting into the insurance biz?

  12. 12.

    Obvious Russian Troll

    September 26, 2022 at 11:21 am

    @Kineslaw: It’s definitely an issue, but the bulk of the money people spend on drugs is generally going to be for ongoing prescriptions. If you take 3-4 medications daily (or more!), even an expensive one-time prescription will tend to be only a small portion of your overall expenses.

    On another note, my understanding is that Cost Plus doesn’t currently offer insulin. Cheap insulin would be a huge savings for a lot of people.

  13. 13.

    Mai Naem mobile

    September 26, 2022 at 11:31 am

    Whats the difference between this and the list Kroger and I think Walmart used to have of generics for $5/mo? I remember seeing the Kroger list(this is several years ago) and the whole list was a one pager and included OTCs and for the most part older meds like thyroxine, lisinopril and lasix. I seem to remember it had the older diabetic meds but not the(back then) newer ones

    Also I am guessing the Mavs  organization demos trend younger and healthier overall. And a lot of people for whom paying for the  more expensive non generics  out of pocket wouldn’t  be a problem.

  14. 14.

    Victor Matheson

    September 26, 2022 at 11:41 am

    “They’re tall but not big.”

    More of this in academic writing, please!

  15. 15.

    Old School

    September 26, 2022 at 11:43 am

    @Jesse:

    Wait, Cuban’s getting into the insurance biz?

    The prescription drug business, at least.

  16. 16.

    artem1s

    September 26, 2022 at 11:52 am

    My employer has tried several of these mail order drug companies. They are plagued with routine data breaches so they are terrible at protecting healthcare info. One of them had their sales staff calling us trying to upsell us more expensive drugs or even telling us to ‘suggest’ to our primary physician what drugs we should be taking. They are not at all concerned with the health of their customers. Only big contracts and profits.

  17. 17.

    Ruckus

    September 26, 2022 at 12:01 pm

    David, I’d say the big money issue is that a lot of the drug business is not about the product, it is only and always about the profit margin. And as business owners there are two ways to make more, charge more or become more efficient and grow. Most old line businesses have become internally lazy and if they are any size run more by M(ust) B(e) A(ssholes)s and that becomes an all about the bottom line proposition. It is easier to charge more than to make a more efficient business. Efficiency enhancement has a cost, which will be repaid over time if it is done correctly, charging more is a no brainer. And those kinds of companies seem to have a fair number of executives with a lack of brain/business power, but no lack of greed. Proper production should give a better profit, but it takes effort and time and if you lack the concept of effort and time because there is actually a cost for those, you will very likely settle for raising prices. If everyone does this it doesn’t hurt in an absolutely necessary business, except where that money grubbing kills customers. IOW it is all business outlook and profit driven and that, in the long run can kill a business. Or customers.

    The old adage it takes money to make money is true at every level of business.

  18. 18.

    artem1s

    September 26, 2022 at 12:03 pm

    I was faced with a really expensive, out of pocket charge for a prescription once that wasn’t covered at all by my employer insurance. The cheapest alternative was for my physician was to prescribe it thru the county hospital pharmacy. The lowest price we could find from mail order drug company or CVS type pharmacy – over $500 out of pocket. The county hospital pharmacy charged me $11. I use the county hospital main campus pharmacy as my default now. Getting access to the bulk rate pricing is the next improvement that needs to be added to ACA.

  19. 19.

    Kevin the Hen

    September 26, 2022 at 12:12 pm

    @Anonymous At Work:

    PBM are to pharmacists what insurance CEOs with MDs are to medical doctors, namely “pure evil”

    PBMs are a huge racket. What with kickbacks/incentives/discounts all done on the sly on the backend that get published as “formularies,” it’s borderline corruption.   They make the most $, more than “health” (illness) insurance. I love what Cuban, GoodRx and the like are doing. Need to be more of them covering all drugs.

  20. 20.

    Anonymous At Work

    September 26, 2022 at 12:16 pm

    @Kevin the Hen: Hilarious video on the topic: https://www.youtube.com/watch?v=_khH6pZnHCM

    And yes, vertical integration without oversight has been a complete failure.  Here’s to getting 2+ more Democratic Senators and keeping the House.

  21. 21.

    Ruckus

    September 26, 2022 at 12:17 pm

    One of the things the VA does is everything is generic if at all possible. Also they are big enough that they can purchase generics at a good price. And if you are not a combat vet you do pay for drugs. The cost is a lot cheaper than OTC pharmacies. Most of the time. One thing I take I can buy for $4/120 days they have been selling me at their minimum $8 charge. (Overall my costs are still low because some things are still $8 that would cost me more in any public pharmacy.) And one drug that used to have a cost of $40/application (it was the only drug on the market and it worked amazingly well) I would pay $24 for a 90 day supply. Overall the cost of VA supplied drugs is fantastic. It of course hasn’t worked near as well after SFB replaced the VA accounting dept with some outside company to do all the billing. That was amazingly bad.

  22. 22.

    lee

    September 26, 2022 at 12:30 pm

    OT:

    I rented a car this last weekend while in Wisconsin. It was a Chevy Spark. Drove it 3 hours from Minneapolis to my destination. Great little car and fun to drive.

    Made me wonder if you ever found the solution to your problem?

  23. 23.

    Kevin the Hen

    September 26, 2022 at 12:31 pm

    @Anonymous At Work:

    Dr. Glaucomflecken does.not.miss

    Wish I could attach images here, but he shows this chart:

    Health Insurance Chain of Command:

    Satan

    ↓

    CEO

    ↓

    Pharmacy Benefit Manager

  24. 24.

    Ruckus

    September 26, 2022 at 2:56 pm

    @Ruckus:

    Was just on a call with the VA.

    The medication that I used to pay $8 for 120 pills, that I can purchase for over the counter $4 for 120 pills was $24 on my last VA bill. I called. I’ve been paying $24 for 120 pills since 2017, after Shit For Brains took bill collecting away from the VA and gave it to a private company that so screwed up the bills that they were not worth the effort to figure out. It went from one item for each charge to 3-5 pages of charges and credits that it wasn’t worth the hours it would take to go through each bill. Which of course was the point.

    Want to know why the price was raised from $8 each to $24 each?

    Because this over the counter medication comes, not 90 pills, but 120 pills. Which means they only get to bill 2/3 as often so they raised the price 3 times what it had been.

    FUCK SHIT FOR BRAINS. I have no idea what it will take to bring sanity back to our federal government but it has to be done. Joe Biden is doing a great job doing that but it is a big government and SFB fucked up a lot so it is a big job.

  25. 25.

    Yutsano

    September 26, 2022 at 3:14 pm

    @Ruckus: ​

    FUCK SHIT FOR BRAINS.

    You couldn’t pay me enough.

  26. 26.

    Ruckus

    September 26, 2022 at 3:32 pm

    @Yutsano:

    I did not mean that literally.

    I did mean it with say a semi truck, fully loaded of course.

  27. 27.

    Pamoya

    September 26, 2022 at 4:36 pm

    Is the question here “why don’t self-insured employers do more relatively simple things to reduce costs?” I think the answer is pretty clearly the increased transaction costs from doing that. I’ve sued an employer and a third-party administrator over their plan benefits and gotten glimpses under the cover about how many self-insured plans work, and the answer is that the insurers are selling companies self-insured plans and making them operate as similarly to fully insured plans as they possibly can.

    For example, see here: https://www.coastalmgmt.com/ppt/SIIA-Presentation.pdf

    The main benefits to being self-insured that the insurers advertise are: (1) you avoid the state insurance regulators because of ERISA preemption; (2) (though they don’t state this baldly): you control 100% of the risk pool because they are all your employees and can be fired. And even if you don’t operate ruthlessly with respect to 2, TPAs sell you reinsurance. So from the perspective of HR, there is very little difference between a fully insured and self-insured plan, and I think they typically just accept all of the TPA’s recommendations unless they are massive multi-state corporations.

  28. 28.

    Mousebumples

    September 26, 2022 at 7:04 pm

    Late to the thread, but that’s definitely an opportunity for cost savings. That’s where pharmacy discount cards can have an impact.

    Or, another group that my work is somewhat connected to – Civica Rx.

    https://civicarx.org/civicascript-announces-launch-of-its-first-product-creating-significant-patient-savings/

    Between drug companies, drug distributors, and retail pharmacies – among others – there’s lots of companies trying to add to their bottom lines.

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