“Most employers know their total healthcare spend, but far fewer understand where those dollars actually go. Healthcare is one of the largest expenses on the P&L, yet it is often one of the least transparent.” Paul Pruitt, co-founder and chief growth officer at SHARx, a prescription advocacy and drug procurement program, succinctly relates what others similarly express.
Observing that their healthcare premium does not tell employers whether their healthcare dollars are actually producing value, Frances Ducar, founder and president of Healthcare Solutions Centers who has two decades’ experience designing and managing customized, on-site healthcare clinics for corporate employers, notes that the question of value is more urgent than ever in today’s market as Arizona employers are facing significant healthcare cost increases. “Employers should look beyond the renewal increase and ask where their healthcare dollars are going,” she says, pointing to such issues as emergency room utilization, delayed care, high-cost claims, prescription spending, administrative fees, absenteeism and barriers that prevent employees from accessing care early.
Pruitt suggests employers start by examining pharmacy spending, specialty drug costs, administrative fees, broker compensation arrangements, dependent eligibility, vendor overlap and utilization patterns. “They should also understand how each healthcare partner is compensated and whether incentives are aligned with reducing costs or increasing spending,” he says, noting that, in many cases, the biggest opportunities are hidden inside pharmacy programs where costs can rise dramatically without employers having clear visibility into why.
To illustrate his point about alignment, he shares the example of a pharmacy benefits manager (PBM) that is tasked with doing prior authorizations for specialty medications but also owns the specialty pharmacy. In such a situation, the PBM is incentivized to have its pharmacy fill more scripts, not less. “When you look at the fact that the specialty pharmacy is as profitable as the core PBM services, that is a significant misaligned incentive,” Pruitt explains.
Chris Hogan, executive vice president and principal of insurance and financial services firm Alera Group – Arizona (formerly Benefit Commerce Group), cites two areas for employers to look at: details of contractual integrity and new opportunities to reduce the total cost of healthcare for the employer and for employees.
Regarding contractual integrity, Hogan suggests employers carefully review each contract they have with vendors, “to fully understand what they are paying. Then compare what it says in the contract with the invoices they receive/financial exposure.” This includes TPAs, PBMs, health insurance companies, stop-loss vendors and any point solutions the employer is using. “A skilled benefits consultant/broker should be able to assist in this to identify hidden costs, pricing inefficiencies and contractual concerns,” he says. “For example, during a review of a self-funded employer with approximately 1,500 employees, our team discovered approximately $378,000 in annual carrier fees that had accumulated over time and were not visible in standard reporting. Following our review, we negotiated fee limitations, conducted a carrier RFP process, and established stronger accountability measures and reporting requirements.”
Addressing potential new opportunities, Hogan says, “The most effective way to have consistent and ongoing impact on healthcare costs is for employers to steer employees and their covered family members to high-quality medical providers in their networks.” He emphasizes this does not mean just directing them to in-network lists nor to just high-performance networks but rather steering them using data-driven metrics that evaluate individual physicians on both quality and total cost of care. “By utilizing medical providers with lower rates of complications, readmissions and low-value care, organizations can improve outcomes while lowering overall healthcare costs,” he explains.
“Historically, the healthcare system has told employees to prioritize buildings and office suites: ‘Go there, because that group of doctors is in-network.’ But it isn’t about the building or office suite; it’s about the identity of the provider once you’re in that building and recognizing that there are significant variations in performance from doctor to doctor,” Hogan continues. “One office suite may have the best performing quality doctor and also the worst performing quality doctor. How do you know which one you are getting? So, don’t just tell the employee to go to an address; use data on quality outcomes to tell them which is the best doctor to see once they are at that address.”
Looking into Transparency
“Transparency” is a word we are hearing in many contexts today. In healthcare, too, it’s an important factor. Says Pruitt, “Transparency should no longer be viewed as a luxury; it should be an expectation. Employers cannot effectively manage any major business expense if they cannot see the underlying data.” He believes that, at a minimum, CEOs and CFOs should insist on access to complete and unredacted claims data that should include pharmacy utilization reports and specialty drug spend. “They should also have insight into fee disclosures, rebate arrangements, administrative costs and any financial relationships involving vendors or their affiliates,” he adds, noting the goal is not simply obtaining more reports but understanding what is driving costs and whether current strategies are producing meaningful results. “If an employer cannot clearly see where healthcare dollars are being spent, they are operating at a disadvantage.”
Ducar states it even more baldly: “You cannot effectively manage what you cannot see.” To that end, she says, “Employers should expect meaningful reporting on medical and pharmacy claims, high-cost claim drivers, ER and urgent care utilization, chronic conditions, prescription trends, administrative costs and employee utilization of available healthcare resources.”
Looking at transparency from another angle, Hogan points out that “as part of their fiduciary responsibility, employers should demand transparency from their health plan vendors.” He notes this includes fees, claims data, population health data, utilization data, PBM rebates and broker compensation. “However,” he continues, “to date, the conversation on transparency seems to be focused exclusively on unit cost of the transaction: How much does it cost me to have a service at one facility versus another facility? Transparency needs to be widened. We shouldn’t only be looking at unit costs; we should be looking at quality. Don’t just tell me how much it’s going to cost to have a service performed, tell me what the likely outcome is going to be if I choose you to perform the service. Accessing the lowest unit cost possible is worthless if the care you receive is poor quality.”
Similarly, transparency may not be worth much if the presentation is poor quality. “The information should also be presented in a way leadership can actually use, not simply hundreds of pages of data,” Ducar notes. ““Transparency isn’t receiving more reports. It’s receiving information you can actually use to make better decisions.”
Putting the Pieces Together
“The question isn’t just, ‘What are we spending on healthcare?’ It should be, ‘What are we getting for what we’re spending?’” says Ducar. “At HCS, we see access as an important part of that equation. Our onsite and near-site healthcare model makes it easier for employees to receive convenient care earlier, giving employers an opportunity to address health issues before they become more expensive and disruptive.”
Pruitt again brings up employers’ fiduciary responsibility, observing from that perspective, employers should be asking whether decisions are being made in the best interests of the plan participants. “Increasingly,” he notes, “that means understanding how vendors are compensated and ensuring incentives are aligned with better outcomes rather than higher spend. Too often, employers are evaluating vendors based on promises and projections instead of measurable results.” Which underlies his belief that the first question employers should ask is whether their current strategy is creating measurable value.
Hogan points out that the regulatory framework has evolved significantly, turning health plan cost management from a passive corporate function into an active, high-liability fiduciary task. “Employers are now expected to manage health benefits with the same rigorous scrutiny as 401(k) plans,” he says. “The Consolidated Appropriations Act, 2021 (CAA 2021) mandated transparency and explicitly shifted the burden of proof regarding plan costs onto employers. This includes broker fee disclosure, removal of gag clauses from TPA and insurance carrier agreements, annual reporting of prescription drug and medical cost data to the federal government, and more. In addition to a careful review of every vendor agreement to determine costs and liabilities, it is important to do an annual audit with your benefits consultant to ensure that the employer is fulfilling all its fiduciary responsibilities.”
Specifically in the context of self-funded, Ducar notes those employers and the executives who oversee those plans take on fiduciary duties under ERISA to act in the interest of plan participants, use plan assets prudently and ensure fees paid to administrators, brokers and PBMs are reasonable. “That is not simply a legal formality; it is an active, ongoing responsibility, and employers should be able to document how they are meeting it.”
For pharmacy programs, Pruitt points to the need for employers to look beyond rebates and discounts and evaluate net pharmacy spend, specialty utilization, member experience, prescription access and transparency.
Noting, in fact, that pharmacy expense continues to be one of the fastest-growing components of healthcare costs, Hogan enumerates factors that Alera Group utilizes specialized pharmacy consulting resources to evaluate: PBM contract performance, rebate transparency, biosimilar adoption opportunities, GLP-1 management strategies, specialty pharmacy utilization, manufacturer assistance programs, formulary optimization and alternative sourcing arrangements. “These reviews,” he says, “help ensure that pharmacy strategies remain aligned with both cost-containment goals and employee access to necessary medications.”
Referring to the importance of scrutinizing prescription coverage, Ducar says, “Employers should understand what medications actually cost, what the PBM is earning, where rebates and discounts are going and whether lower-cost alternatives are being utilized.”
Self-funding is another perennial topic in healthcare coverage consideration. “Many employers are being told, ‘Self-funding is the way to go, and this will definitely work for you,’ Hogan affirms but assesses the choice as “maybe yes, maybe no.” What’s important, he says, is “to understand what self-funding really means for your organization. It’s about your situation, your data and the stop-loss carrier’s contract.”
Explains Ducar, “With a traditional fully insured plan, the employer pays a fixed premium to the insurance carrier, and the carrier assumes the claims risk. Self-funded employers instead pay their employees’ healthcare claims directly, typically using a third-party administrator and stop-loss insurance to help protect against unusually large claims.”
“Basically, it’s math,” says Hogan, explaining, “If your claims are expected to be low, when you add those claims to your fixed costs, you may be able to save money against the fully insured cost. However, the analysis for your situation may show claims expectations that will not save you money. We had a recent case where the data showed that the group would have to have claims experience 13% lower than expected in order to break even with fully insured. The math there didn’t show that self-funding was a good option. In fact, they would have been risking $3.5 million that they would run 13% better than expected. Even if they won that gamble, they would only be breaking even with fully insured. When they looked at the math, they decided self-funding just wasn’t a good bet for them at this time.”
This underscores his point that employers should work with consultants/brokers who can perform a self-funding feasibility study that will model various scenarios for them to show expected costs. “Employers need to ask, ‘Where do my group’s claims have to run in order to break even against fully insured? And how does that compare to a rational expectation?’”
Additionally, he confides, “Much like fully insured carriers who are responding to the challenges of today’s market in various ways to mitigate their risk, we are seeing self-funded stop-loss carriers take drastic steps to mitigate their risk — actions that would have been unthinkable just a few years ago.” These include contractual features that protect the stop-loss carrier at the expense of the employer. “That’s why we encourage our clients to read their contract to make sure they don’t have unexpected financial exposure.”
Ducar believes that, for larger employers — particularly those with 500 or more employees — self-funding deserves serious consideration. “With a larger employee population, claims risk is generally spread across more people, making healthcare costs more predictable and giving employers greater opportunity to actively manage their healthcare spending,” she explains. “The potential advantage is greater transparency, flexibility and control. Rather than simply receiving an annual premium increase, a self-funded employer can have greater visibility into what is actually driving healthcare spending and use that information to make targeted changes, such as improving access to primary care, managing chronic conditions, addressing high-cost claims and evaluating pharmacy spending.”
But she cautions that self-funding is not automatically the best choice for every employer, even above 500 employees, noting claims volatility, cash flow, stop-loss terms, workforce demographics and the employer’s ability to actively oversee the plan all need to be evaluated.
Says Pruitt, “For healthcare plans, employers should evaluate total cost of care, predictability, employee satisfaction, flexibility and long-term sustainability instead of focusing exclusively on premium increases.”
C-Suite Oversight
“Healthcare can no longer sit solely in an HR silo,” Ducar says, noting that, while HR understands the workforce and employee experience, healthcare spending is also one of an organization’s most significant financial and risk-management decisions.
Expanding on that point, Pruitt explains, “The most successful organizations make healthcare a shared responsibility between HR, Finance and executive leadership. HR brings expertise around employee experience, recruitment and retention. Finance brings accountability around cost management and forecasting. Leadership ensures healthcare decisions align with broader business objectives.”
Observing that health plan expense now ranks among the top five line items in the budget for most employers, Hogan notes that achieving success in this area, in terms of savings money or optimizing costs, has the same impact to an organization as achieving any other significant objective. For this reason, he says, “We think you should apply the same disciplines to your health plan as you use in other areas of running your business. When you are rolling out an important strategic goal, you may be asking these same questions that you should ask about your health plan strategy: Did you use data? Did you have an intentional strategy? Are your employees connected to the outcome? Are they incentivized to contribute to a positive outcome? Does everyone know their role? Do we have a cohesive communication strategy?
“We believe this should be a joint responsibility between finance and HR functions, with the CEO having oversight on both functions,” Hogan continues. As he breaks it down, finance should be reviewing actual to expected claims and utilization as well as reviewing contracts to identify financial leakage, improve transparency and align contracts with fiduciary standards while HR should be reviewing employee engagement in programs, especially those designed to promote well-being and improve the health of employees and their families.
Emphasizing healthcare is a business investment as well as an employee benefit, Ducar believes it should be evaluated like one. “At HCS, we believe value should include more than claims costs. Employers should also consider access to care, employee utilization, time away from work, prevention, chronic disease management and whether employees are engaging with the benefits the company is paying for.”
There is another side to the cost equation, as Pruitt notes, “Every dollar spent unnecessarily on healthcare is a dollar that cannot be invested elsewhere. When healthcare costs rise faster than business growth, employers are often forced to make difficult decisions around hiring, salaries, retirement contributions, wellness initiatives, and other employee investments.”
His point is that healthcare spending should be viewed through the lens of opportunity cost. “The question is not simply, ‘How much did healthcare cost us?’ It is also, ‘What opportunities did those costs prevent us from pursuing?’ For many employers, improving healthcare efficiency is one of the most direct ways to create resources that can be reinvested back into the workforce.”
Evaluate the Bottom Line
CHROs and CFOs, in particular, should be preparing ahead of annual benefits renewal to better manage pharmacy spending rather than simply shifting higher costs to employees. Moving the conversation beyond premium increases and contribution changes, Pruitt suggests CHROs and CFOs jointly review total pharmacy spend, year-over-year trends, specialty drug exposure, GLP-1 utilization, high-cost claimants, employee cost share, member complaints and access to care metrics.
“Just as importantly,” Pruitt says, “they should ask whether their strategy is reducing underlying costs or merely shifting expenses onto employees through higher deductibles, copays and contributions.” In his experience, the most effective pharmacy strategies balance four factors: affordability, access, member experience — and predictability, which only occurs in conjunction with the ability to manage risk in a meaningful way, such as having a plan to avoid or mitigate catastrophic pharmacy claims in the future. “If one of those areas is missing, the strategy is likely creating problems somewhere else.”
And Back to ‘Start’
The best preparation starts with asking critical questions.
“I would ask, ‘Can you show me exactly where every healthcare dollar is going and who benefits financially from each decision being made on our behalf?’” says Pruitt. “That single question often reveals whether incentives are aligned with the employer’s goals or someone else’s,” he explains. “Healthcare contracts can be incredibly complex, but transparency tends to simplify the conversation quickly. If partners can clearly explain where the money goes, employers are in a much stronger position to evaluate value. If they cannot, that is worth investigating further.”
Hogan believes planning starts with the business owners asking themselves if they view their healthcare expense as an investment or an expense: “Am I simply interested in getting the lowest price possible, no matter the impact to my organization and people, or do I view my benefits as something that helps my business be successful?”
Ducar recommends businesses ask potential plan providers, “Show me exactly where our healthcare dollars went last year—and what we’re going to do differently next year to get more value from them.” That question, she says, “changes the conversation from simply accepting another renewal to evaluating the entire healthcare strategy.”
Underscoring the importance of employers not being afraid to challenge the status quo, Ducar says, “A healthcare program should not only pay claims when employees become sick. The best strategy should make it easier for employees to access care, encourage earlier intervention and prevention, and, ultimately, help create a healthier, more productive workforce.”
