Nearly 100 million people have health coverage through self-insured employer plans. Self-insured health plans are arrangements where large employers take on the risk of their employees’ medical costs rather than purchasing coverage through an insurer. One advantage of self-insurance is that self-insured plans are regulated by the federal government, rather than states laws. In addition, some employers may have healthy workers and can assume the risk of employee health needs cheaper than insuring them. It is generally assumed that large employers have the leverage and an incentive to negotiate lower prices with providers. This from Health Affairs:
In contrast to fully insured plans, employers using self-insured plans assume responsibility for employees’ medical costs and therefore have an incentive to reduce the prices of health care services.
The theory assumes that an employer with thousands of workers in a region can negotiate deals with one health care system, while denying other providers of their business. That is significant bargaining power. However, a new report published in Health Affairs finds something unexpected. Self-insured employer plans had higher, not lower prices for selected procedures.
We compared prices for common services in self-insured plans with those in fully insured plans. Using the Health Care Cost Institute’s data set of claims for one-third of the US population with employer-sponsored insurance, we found that unadjusted prices were higher in self-insured plans for most of the services we studied, with the largest differences found for endoscopies (approximately 8 percent higher in self-insured plans), colonoscopies (approximately 7 percent), laboratory tests (approximately 5 percent), and moderate-severity emergency department visits (4 percent). When patient characteristics, plan type, and geography were adjusted for, differences were generally smaller but were consistent with these findings.
Why would self-insured employers pay higher prices than insurers? Very large employers, with thousands of workers, may have significant leverage to negotiate favorable prices. However, it seems hard to fathom that a large insurer with tens of thousands, if not hundreds of thousands of enrollees, would not have even greater leverage to negotiate lower prices.
Employers negotiating their own prices with providers is referred to as direct contracting, which is a growing trend. An article that appeared in the American Journal of Managed Care (2021) found that large self-insured employers often lack the power to effectively negotiate with hospitals. Self-insured plans contract with third party administrators (TPAs) to manage their plans, adjudicate claims and negotiate prices. The TPAs who manage self-insured plans are often insurance companies. Not all employers have the expertise to negotiate prices and smaller employers especially often rely on the insurance company’s negotiating power.
The price comparisons mentioned were all less than 10 percentage points higher than the average prices paid by fully insured plans. Since these were averages, that suggests there are ranges of prices paid by self-insured employers. Some employers may negotiate prices identical to what insurers enjoy. Other self-insured plans may pay too much. I even wonder if some of the prices were set by TPAs, who may benefit from spread pricing. Spread pricing is when a TPA negotiates a price with providers and then charges their clients higher prices, making a small profit off each claim. I have heard from employers that they often have a hard time finding out how much they pay for various medical services. Spread pricing has been in the news recently especially among pharmacy benefit managers (PBMs), who stand accused of making money off clients and consumers when patients fill prescriptions. Cash prices are often cheaper than using an insurance card due to PBM’s spread pricing. Greater transparency would alleviate these (often secret) profits.
As mentioned above, one advantage of self-insuring is when employers believe they will save money because their workers are healthy with costs lower than insurance premiums. Another reason is to avoid states mandates and regulations. Directly negotiated medical prices may not be a significant driver of decisions to self-insure. Where there is room for improvement, it is assisting enrollees (workers and their families) with information about the cheapest place to receive care. This is one area where prior authorization can benefit patients. It is also an area that is sorely lacking in employee health plans.