Category Archives: Benefist Plan Stategies

Why Private Exchanges Kill the Cadillac Tax

One of the most pernicious of many pernicious features of healthcare reform is the infamous “Cadillac” or Excise Tax. This tax was so unpopular a part of the the ACA that its initial planned effective date in 2014 was pushed back to 2018–intentionally long after the ACA’s presidential author had left office.  The excise tax seeks to create more equal footing between the classes, since rich benefit “Cadillac” plans are not taxed at the same level as wages.  As the thinking goes, people with rich benefit plans (executives, for instance) pay less taxes as a percentage of total compensation than those at the same income level who do not have rich benefits (since $1,000 in benefits is taxed less than $1,000 in wages).  The Cadillac Tax was designed to offset this perceived injustice while increasing the revenues available for ACA.
Unfortunately, the plan was poorly written and the actuarial estimates were off, so much so that Towers Watson estimates the Cadillac tax is estimated now to hit over half of all plans by the time is goes into force–far more impact than what had been purported.  Furthermore, the tax overly penalizes union members who have excellent benefits.  The unions are ostensibly the constituents of the politicians most concerned about the tax inequality in the first place, which undermines the tax’s political support.
Due to the heavy handed and widespread consequences of the tax, some have theorized that as we near its implementation date the tax would be eliminated or pushed back again.  The only challenge with this strategy is that the government isn’t getting any richer and the ACA isn’t costing any less now than when it was originally foisted on the American people.  There will be strong motivators for the government to keep this tax in play.  Furthermore, employers are planning for it, as the excise tax is on the short list of planning topics for every major brokerage company.  With companies finding creative ways to scale down the value of their plans to avoid this tax, the likelihood decreases that the tax will hurt wide groups of people, thereby reducing the political risk of keeping it in play.
What this all means is that companies who are innovative enough to scale back their benefits to avoid the tax–with the least amount of disgruntlement among their employees–will be the strategic winners.  Companies who anger their populations, cause turnover, or embroil themselves in labor disputes while ratcheting down benefits will be losers, as will those who pay the 40% penalty the tax demands for those who maintain high coverage.
This is where private exchanges come into play: private exchanges have arisen as one of the primary strategies to combating the Cadillac Tax.  Exchange providers have found that when exchanges are used for open enrollment, the enrollment in high-deductible, lower-cost healthcare plans often triples.  These plans cost less per month in exchange for the member taking on more financial responsibility.  If enough members switch to these less-rich plans, it reduces the actuarial value of the benefits package and eliminates Cadillac Tax liability.  The most elegant part of this solution is that the members opt-out of the high cost, rich plans voluntarily, thereby avoiding population disruption that could occur if rich benefits were forcibly removed.

Advanced Benefits Strategy: The Five Pillars of Antifragile Plan Design

We look at the many forces at work today within the healthcare industry and it’s any wonder that companies are surviving.  With skyrocketing fee for service costs, increased utilization, the onset of Rx specialty drugs (still in its infancy and already concentrating towards a lethal dose for plan sponsors), and the administrative juggernaut of healthcare reform, plans are under assault.  Unfortunately, many employers are approaching the future’s looming uncertainty the wrong way, making them subject to greater cost increases, jeopardizing the plan’s financial stability and increasing its fragility to coming shocks.

Every plan is unfortunately subject to varying levels of fragility: some are barely avoiding a default event, others are financially stronger and will be able to hold on for a number of years, but all are still fragile to cost trends in the high single or double digits.  What most plans attempt to do is to become robust (defensively strengthened) against potential “foreseeable” events or conditions by following the crowd and staying with a “bigger is better” mentality when designing their benefits.  To survive, however, firms cannot simply accept the premise of high-single-digit annual cost trend, and then run to the largest PPO and simultaneously ratchet back benefits to survive.  The logical extreme of this scenario would eventually have every employer on the same network, receiving 99% discounts on $10 million procedures until bankruptcy ensues.

Drawing from the philosophy and definitions of Nassim Taleb’s book Antifragile: Things that Gain from Disorder, the reality is that the opposite of fragility, or “Antifragility” is what plans must seek to become, not robustness.  To clarify terms, Fragility is a trait of a system weakened by uncertainty.  Robustness is neither helped nor hurt by uncertainty.  Antifragility describes a system strengthened by uncertainty.  (Read: Fragile systems suck lemons.  Robust systems build lemon shields.  Antifragile systems make lemonade).

Unfortunately, most firms avoid the very Antifragile principles that would allow them to profit and find strategic advantage from uncertainty and chaos.  The allure of following a crowd and ease of lazy thinking puts them in a box preventing breakthrough performance, crippling their plan and their employees with unsustainable cost increases.  At best these cost increases are met with annual benefit reductions and further clinging to a PPO discount, at worst employees are dropped entirely or sent to an exchange, the pinnacle of lazy action and a full relinquishment of empowerment.

It need not be so.  In fact, many firms in the U.S. have health care costs increasing at or around the rate of inflation.  These firms are gaining significant strategic advantage over their competitors who follow a robustness crowd mentality.  These results are not easy to obtain, but they are achievable by taking simple actions on the following common sense “Pillar” principles:

1. Transparency:  For clear thinking and wise decision making, it is critical that the plan sponsor and members have accurate, transparent data.  This principle flies against the self interest of other parties, however, who profit from obscurity.  Specifically, the plan should seek:

(A) Pharmacy price transparency and pass through rebates.  The pharmacy network model is complex and convoluted and hurts the decision making ability of the plan.  A transparent, pass through model gives the plan control and transparency over where its costs truly lie, unencumbered by a spread, and access to the full rebates provided by manufacturers to again profit accurately from decisions made.

(B) Cost/Quality Transparency.  Neither the plan nor its members can make wise decisions about their about the cost of services without a price transparency tool to shed light on the costs for major services.  Likewise, members and plans need at least rudimentary means of distinguishing the quality of services offered by providers.

(C) Plan Data Transparency.  Plan Sponsors need to have clear, accurate, and timely data with respect to their own claims costs so they can gauge performance and make decisions about the risks and opportunities of the plan.

2. Independence: To be most responsive to shocks, changes, and opportunities, plans need the maximum amount of independence possible to make decisions and adjust course.  This requires plans to “un-bundle” their plan and “self-fund” their claims (note: this is referring specifically to large employers, around 200-300 enrolled employees and up).  The crowd mentality is to group in with a large network, and have the network use all its services to meet pharmacy, disease management, and stop loss needs, largely to the exclusion of all other vendors.  This holds the plan hostage, stifles innovation, and relinquishes stewardship and responsibility.  It is also a recipe for a high cost trend with little option of addressing it.

3. Coordination: Eliminate the waste between providers and diagnoses.  A huge portion of healthcare spend is on duplication of procedures and lack of communication and coordination between providers, vendors and members.  A big part of reducing cost trend can be achieved through vendor selection that facilitates communication between related parties.  This can be achieved through service centers that are highly trained for three way calling and health utilization analysis, as well as outside vendors that integrate fully with vendors and guide members.  I have seen cost savings in excess of 10% immediately upon using the technologies to merely communicate and eliminate redundancies.

4. Education: Members must become educated consumers of healthcare.  The natural progression of data access is data use: once members have transparency surrounding provider pricing and quality, and plan incentives exist to encourage the use of this data, members can begin to educate themselves and seek education to make wise decisions.  Plan sponsors can also take steps to educate their members around the highest cost drivers or areas with greatest waste.

5. Alignment: The rewards and the drawbacks need to be aligned between the plan and the members.  The vast majority of plans exhibit heavy incentive imbalances that hurt the ability of the plan to make rapid and sustained progress along cost lines.  Frequently the plan can experience downside or upside, but the member rarely has access to either, and lacks incentive to make wise decisions.  A superior plan will add downside to the member through high deductibles or other penalties for making expensive choices.  The plan design of the future will include both positive and negative incentives to members that align with the upside/downside calculation of the employer.  These plan designs are just now starting to appear on the landscape and offer far better incentive to wise decision making.

High healthcare costs are the natural punishments received by plans that do not know or do not have the discipline to implement the correct principles of benefits strategy.  Hopefully these pillar principles can be a starting place for plans looking to regain control of their costs and systems.

The Paradox of Specialty Innovation: It Will Save Lives and Bankrupt Everyone, and What to do About It

Is it just me, or did it seem like innovation was predicted to dry up in healthcare as a result of ACA?  With all the statistics of doctors getting paid less, anecdotes of them retiring early, and even stories of pre-med students becoming art majors, I was certain that a dearth of innovation would also be upon us.  I was shocked to discover that the opposite is true: over 5,400 new drugs are currently in late stage testing (the most ever recorded).  Also, in 2012 the FDA approved the second-greatest number of drugs since 1998, and is on track to approve the greatest number ever in 2013.


This silver cloud comes with a shadowy lining, however: the majority of these drugs are specialty drugs.  Specialty drug approvals have now overcome traditional drug approvals, which is also a first.  The paradox of all this innovation is that we are going to be flooded with some pharmaceuticals so amazing that everyone will need to have them—and they might just threaten to bankrupt us all.


Specialty drugs are the Ferraris of pharmaceuticals.  They have more horsepower and niche ability than the sedan, but you pay for it.  They are harder to deliver, trickier to prescribe, and require advanced, specialized pharmacies to provide them (think $2,000 oil change).


Luckily, they have composed a very small portion of our drug spend since forever, but this is no longer the case.  These new innovations are virtually guaranteeing that they will begin to take over as the standard.  Doctors, too, have traditionally been hesitant to prescribe specialty drugs.  This is no longer the case: as physicians are sold to more and more by specialty drug reps, and see the great results these drugs generate, doctors are prescribing them with greater frequency.


So, what can you do to protect yourself?  There are a few things on the radar, all of which will be fleshed out on this blog in more detail if you are interested.  The short answers are as follows:

  1. Design your plan to encourage treatments that graduate from lower to higher cost.  Basically, put in place a preauthorization on any high cost drug.  Next, when someone calls in requesting it for the preauthorization, check to ensure all the lower cost treatment options have been exhausted, and start with the ones that haven’t been used yet.  Then go to the lowest cost of the expensive drugs.  Only at the final step do you “green light” the most expensive treatment.  This seems intuitive because it is, but most plans don’t have this step-by-step solution in place.
  2. Use specialist pharmacists for specialty drugs.  This also seems pretty intuitive, but ensure that the pharmacy that is dispensing the drugs has a specialty pharmacist on hand to double check everything.  They can catch overdosages, mis-diagnoses, or mis recommendations done by doctors who might not be as familiar with either the drug or the condition.  Talk to your PBM about options here.
  3. Dispense 15 day segments when just starting out.   The rockiest part of any new patient-to-drug relationship is right at the beginning.  Many people try a new prescription and hate the side effects so much they only take it once or twice and then toss the bottle, and then your plan is out a bunch of money and your member converts to a healthcare emergency in waiting.  Instead, only prescribe 15 day supplies for the first 2-3 dispenses, and check in with the member every two weeks.  Your PBM should be able to help you with this, or your TPA, but you can make this happen and then you’ll avoid the waste and ensure the program is going to work long term before you commit a ton of resources in meds.
  4. Use Bioidenticals.  A “Bio-Identical” of a specialty drug is similar to a generic of a brand name: it basically does the same thing at a lower cost.  There are differences in “bio-identicals” and “generics” because “generics” are essentially “identical-identicals” and “bio-identicals” are not absolute copies of the original, but are pretty close.  These bio-identicals may not be prescribed as readily by doctors because they will not have all the advertising budget behind them, so you will need to ensure your plan and preauthorization strategy has them written in there and that you ensure you use them before prescribing the full agenda with specialty drugs, that could cost many times more than the bio-identicals.


There you have it.  A quick summary of the most important ways your plan could save millions and millions of dollars over the next couple of years on specialty drugs.