Insurance carrier profit models in the age of self-funding
Historically, insurance companies made money by collecting more in insurance premiums than they paid out in medical claims (underwriting profit). Now, with the majority (68.3% in New Jersey) of insured lives covered by some form of self-funded plan, insurance companies do not bear the financial risk for medical claims payouts – the self-funding entities do. Consequently, insurance companies no longer have access to robust underwriting profits.
In response to this, insurance companies have developed alternate profit models. They now serve as Third Party Administrators (TPAs) to self-funding entities via Administrative Services Only (ASO) contracts. Roughly 50% of Horizon’s book of business is via ASO contracts. For Aetna, that figure is 75%.
When an insurance company, such as Horizon, contracts with a self-funding entity via an ASO contract, it provides a set of services and competencies that the entity cannot provide for itself, such as utilization review, preauthorization for services, or claims adjudication. Most importantly, the insurance company provides the entity with a network of providers with whom it has negotiated discounted fees. Without this network, the entity would be liable to pay full retail medical fees.
Discounted fees, negotiated by the insurance company (acting as TPA), are an important part of the cost containment strategies offered by the TPA to the self-funding entity. For these savings, however, the TPA charges a “commission”, ie, a percentage of the savings accrued to the entity for having used the TPA network, or for having the TPA adjudicate claims (for OON). After the TPA has paid a claim, it then draws funds from the entity’s medical benefit trust account for an equal amount (reimbursing itself). The TPA then also draws its commission – which is equal to a percentage of the difference between the paid claim and the provider’s actual charge. This commission applies to every medical transaction, both in-network and out-of-network.
How large are these commissions? They vary by insurance company and ASO contract. The contracts themselves are exceedingly difficult to find. A few are listed below. In general, insurance companies, acting as TPA’s, charge from 30% to 50% as cost containment commissions.
Here are some ASC cost containment examples:
1. ASO between CIGNA and School Board of Seminole County, FL (Commission = 29%)
2. ASO between United HealthCare and the City of Overland Park, Kansas (Commission = 35% in-network, 30% out-of-network).
3. ASO between Aetna and Polk County, Fl (Commission = 50%).
The New Jersey Neurosurgical Society has been engaged in obtaining ASO contracts here in New Jersey between the State Health Benefits Plan (SHBP) and its TPAs Horizon and Aetna.
In November of 2013, the City of Richmond (COR), and the Richmond Public Schools (RPS) published an audit of their self-funded health benefits plan, administered by Cigna.
Here are some key findings of the audit:
- The contract (ASO) allows CIGNA to charge certain fees to RPS/COR, in addition to the cost of claims. RPS’ portion of the total payments to CIGNA exceeded $30M and included:
o Paid Claims
o Stop Loss Premiums
o Administration/Cost Containment Fees
Excluding claims paid, RPS paid $5M to CIGNA during the audit period.
- The ASO provides that CIGNA receive 29% of any savings realized due to cost
containment, but does not require CIGNA to choose the most cost beneficial alternatives to
RPS. These negotiations are not always beneficial to RPS.
- In accordance with the terms of the ASO, CIGNA charged a specific percentage of
the savings through negotiations of billed charges under agreements with third parties.
During the audit period, RPS paid CIGNA $1.1M for cost containment. CIGNA withdrew these fees directly from RPS/COR’s joint bank account without RPS/COR’s review/approval. Under the terms of the proposed ASO, CIGNA is not required to justify these charges or provide documentation to substantiate the charges. Accordingly, information was not available, and the auditor was unable to verify the appropriateness of these charges.
- CIGNA did not allow the City Auditor to review any claim(s) or provide details/specifics for cost containment charges, because RPS had not signed the “audit clause” of the ASO.
In summary, COR/RPS paid approx. $30 million for its members’ health care benefits during the audit period. Roughly $25 million (83%) was used to pay actual medical claims. $5 million (17%) was paid to Cigna via an ASO contract. Of that, $1.1 million represented cost-containment commissions. Cigna drew a pure profit representing 3.7% of the COR/RPS total health care budget. This was accomplished without incurring risk for paid claims, which risk remained with COR/RPS. In addition, the suggestion was made that Cigna’s profit motive was at odds with COR/RPS’s budgetary best interests.
Insurance companies divert billions of New Jersey health care dollars, via cost-containment commissions, away from the benefits our residents have paid for and deserve. This is money stolen from our teachers, police officers, carpenters, and others. Insurance companies must be held accountable for this practice, and should be forced to justify their business model in front of Assembly and Senate committees, just as OON providers have been doing for years. Restricting OON charges might save some of the State’s health care budget (at what cost to access?). But tight regulation of ASO agreements, on the other hand, with elimination of hidden commissions, can save the State exponentially more.