Medical premiums are by far the largest portion of any benefits budget. Whether you are fully insured, level-funded, or self-insured, a large part of your benefits discussions likely revolves around how to control your medical cost. But how can you control these costs if you don’t understand what they consist of? Here is a breakdown of how your premium dollar breaks down, and the implications they have on how you should budget and negotiate your contracts.
The Government Breakdown
With the passage of the Affordable Care Act in 2010, the federal government set standards by which insurance companies may charge premiums. Specifically, they decided that 85% of your premium must be spent on “claims” and 15% may be spent on “administration.” Therefore, if less than 85% of the premium is spent on “claims,” you will see a rebate of a portion of those funds. The only issue is “claims” and “administration” costs are not clearly defined. So, how do carriers really break this down?
The Carrier Breakdown
85% of your costs attributed to “claims” contain a large number of categories: claims, IBNR, stop loss, stop loss administration and taxes, and broker and general agent commissions. In addition, a 3% risk charge (which is, in reality, profits) is also added to this 85%. So, if you see a rebate, that is after the carrier has taken out their profits and the profits to the brokers and agents on the account.
The 15% of your costs attributed to “administration” factor in not only administration costs, but also taxes and, again, profits. Between your “claims” and “administration” costs, the carrier will obtain over 9% of your premium in straight profit. So, if you pay $1M of premium, the carrier will make $90,000 in profit right off the bat.
The Hidden Profits
Lastly, what carriers don’t want to share is the additional prescription rebates they receive from specialty prescriptions. Every time an insured individual fills a specialty prescription, the insurance company receives money from the pharmaceutical company. This adds on average another 6% of your premium as a profit. So, if you pay $1M in premium, in reality, the carrier will make $150,000 in profit.
So, what can you do? If you are self-insured, accessing pharmacy rebates can be a great way to control and minimize your costs. If you are not self-insured, there are various other ways to minimize the funds and profits going to insurers to save you money and put you in control of your budget. If you want to explore these options, contact us today!
