HEALTH BENEFITS COSTS: WHAT IS THE MAGIC NUMBER? by Will Hinshaw, partner/founder, Captive Solutions & Options
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nsurance reporting is wrought with charts and graphs that document figures, percentages and acronyms that are difficult to understand in terms of cause and effect. Rarely do they drive clarity and action. However, those disparate reporting sources can be simplified to a single metric that links to what business leaders care about – cost! This metric can help leaders evaluate options, monitor progress through the process and assess the impact to the health benefit plan accordingly for the next year. This “magic number” is Total Cost Per Employee Per Month (PEPM). TOTAL COST PER EMPLOYEE PER MONTH Healthcare spend is based on the sum of a multitude of unit costs. These unit costs then are consolidated and summed based on an enrolled employee – hence the term Per Employee Per Month. This methodology is necessary because employee enrollment varies from month to month. These unit costs are grouped into three “buckets” of spend: administrative costs, insurance costs and claims costs. Image 1 depicts a total cost PEPM, while the buckets categorize the metrics and the unit costs that commonly are included. USING PEPM TO EVALUATE 0PTIONS At the onset of an annual insurance contract, PEPM can serve as the basis for calculating projected total cost, as well as comparing each bucket of spend. The insurer – for either a fully insured or partially self-funded plan – and the advisor or broker will be able to consolidate total cost into a single PEPM. While this is an excellent point of comparison that levels the playing field between demographics, plan designs, service delivery and cost containment programs, the components of the PEPM
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illuminate valid points of comparison. The mix of spend articulated via the percentage for each bucket further highlights the points of comparison. Some will espouse minimal fixed costs, so claims coverage is maximized. Others will counter that greater fixed costs reduce the volatility during the policy year. The goal is to simplify the process to allow for a targeted assessment, which leads to action. Total cost PEPM and the percentages associated with each bucket, in conjunction with the rates and factors that make up those percentages, are excellent tools to create a measurable comparison. While the comparison is not “apples to apples,” it will provide insight that can lead to better outcomes. As with any business decision, the choice is the risk vs. the reward criteria, which is specific to each company. USING PEPM TO MONITOR PERFORMANCE Where the total cost PEPM really shines is in a monthly snapshot vs. the contract, budgeting and/or additional benchmarks. Given that the rates associated with service delivery and insurance premium are fixed at the contract
