# Healthcare Exchanges: Math Doesn’t Work

Employers of all sizes are rushing into healthcare exchanges these days — often after heavy prompting by their consulting firm or broker. Part of the expectation is that employers can cap their future health plan costs while giving active employees more options. Sounds great, doesn’t it?

The problem is the math doesn’t work. In addition, this approach has been tried before and flopped miserably.

The previous iteration of healthcare exchanges was in the early ’90s and was called “cafeteria” plans. The same claims were made: “No longer will your costs be at the mercy of healthcare inflationary trends. You can control how much you want to increase your subsidy each year – that is, if you want to increase it at all.” This failed because the math worked against the strategy then, too.

Let’s take a steely-eyed look at the numbers. If a company puts employees into an exchange because it wants to cap its costs going forward, that creates a reverse leveraging effect on employee payroll deductions.

Here’s an example: Assume premiums (or self-insured budget dollars) are \$10,000 per employee per year and the company contributes 75%. The company pays \$7,500 per employee per year (PEPY), and the employee pays \$2,500. If plan costs increase 10%, and the company’s contribution stays flat, the employee cost will increase by \$1,000 per year (\$10,000 x 10%). That means the employee payroll deductions will go from \$2,500 to \$3,500, or an increase of 40%!

If costs go up another 10% in the next year or two, and the company contribution remains flat, the employee payroll deduction will increase another \$1,100, for a total of \$4,600, or a total increase of nearly 85% over a few years.

What employers quickly realized in the ’90s was that, if they didn’t keep increasing their subsidy level at a market rate, the cost to employees became intolerable. This reality led to the demise of so-called cafeteria plans.

If that is not enough, consider this. Some benefit managers hope exchanges will lead employees to choose less costly plans, ones with even higher deductibles. However, in an era in which 80% of plan dollars are being spent by 6% to 8% of plan members (called outliers), that notion is flawed. Why? The 92% who aren’t spending much may choose plans with higher deductibles and copays, but the outliers won’t. Period. The result is having about the same claim dollars as before but collecting less in employee contributions, an unsustainable proposition for employers.

Further, some outlier spending is deferrable. An outlier-to-be in a high-deductible plan can switch to a low-deductible plan in the following year, have an expensive surgery and then switch back. That, of course, is the definition of adverse selection.

A private exchange may look like a good fit for your situation, but beware. If your consulting firm owns an exchange, really beware.

Alas, considering the rush into exchanges today, it looks like history is doomed to repeat itself.

# Make Your Prescription Benefit Manager Work for You

Does your Prescription Benefit Manager contract deliver the actual pricing printed on its pages?

Can you verify the actual pricing?

If you can’t accurately benchmark your pricing, how can you competitively analyze your program or implement any meaningful predictive strategies?

The majority of large employers today do not have the necessary tools at their disposal to decipher and use to their advantage the key relationship between the actual Prescription Benefit Manager (PBM) claims pricing received and the contract language that supports those claims.

It is all well and good to negotiate an average wholesale price (AWP) less 72% for a certain tier of drugs from your Prescription Benefit Manager, but how do you verify that is in fact what you are getting? Your contract may back up and document that discoun,t but does that mean you are receiving it? It is critical for the purchaser of prescription benefits to understand that what they believe they agreed to in contract negotiations and what appears to be supported by the Prescription Benefit Manager contract is not necessarily what they are receiving. In fact, discounts are often inflated making contracts look great on paper but not so good in reality.

The distractions of the Prescription Benefit Manager procurement process sidetrack most employers, which shifts their focus in the wrong direction giving way to perception and not reality. Terms like pass-through, transparency, rebates and average wholesale price, combined with the presentations of the competing Prescription Benefit Managers, leave most employers with more questions then when they began. Even Prescription Benefit Manager executives become confused when comparing their own proposal to that of a competitor.

Your primary concern should be to understand the discounts you are receiving or what you are actually paying. You must evaluate all Prescription Benefit Manager pricing with specific criteria that eliminates individual Prescription Benefit Manager discount methodology. This precise methodology language must be embedded into the contract so you are playing by your rules and not the rules of the Prescription Benefit Manager. Your discounts can then be validated to ensure that you are getting what you pay for.

With specific pricing criteria, you can take the mystery out of prescription pricing, and by understanding the true cost of your drugs, you are in a better position to evaluate ancillary programs that Prescription Benefit Managers may offer. In addition, it is just as important to audit and validate the pricing on an annual basis to police the pricing accuracy.

All Prescription Benefit Managers have their own approach to managing costs — some are better than others and may or may not be in your best interest. When you are spending millions of dollars a year on prescription drugs, you have to take a sound business approach and protect yourself through your Prescription Benefit Manager contract. Only when you really understand the costs of your drugs and true discounts you receive can you begin to evaluate the overall value that a Prescription Benefit Manager can bring to you.