Carve-outs can be a thorn in the side of health plans. But with a little creative thinking in key areas, insurers can solve the problems that cause employer groups to rely on carve-outs.
For employers, the appeal of carve-outs is simple: They reduce the cost of providing health care coverage to employees. If an employee is prescribed a high-cost drug, for example, covering it might be overwhelming or impossible for a self-insured company. Carve-outs allow the company to pay a flat fee to a third-party vendor for coverage of that drug.
Carve-outs might include a large chunk of a plan or just one or two benefits, like pharmacy, dental or trauma services. Other clinical programs can also be bolted on to contracts to provide different options of paying for specialty drugs and other services.
But there’s nothing the third-party vendors are doing that a health plan couldn’t do. Plans should prevent carve-outs as part of maintaining better relationships with employers. The key is for health plan executives to focus on three main areas:
1: Underwriting
Most health plan underwriting is not aggressive enough to let the insurer put a deal on the table that’s competitive in the current market.
Historically, health plans have made a large profit margin from the pharmacy side of the benefit, and they want to retain that margin. Especially when it comes to groups with 1,000 lives or fewer, health plans are often not very aggressive from an underwriting perspective. But a coalition can be aggressive in that scenario, which means they’re able to put together a more competitive deal.
A health plan might reach out to a physician to ask them to switch an individual from a high-cost drug to a generic drug. This saves the plan money. But with a self-funded group, the plan doesn’t see that savings — the group does, so it’s not as valuable for the plan to make that request individually. This means they essentially don’t focus on it for self-funded groups.
But a coalition negotiates in aggregate, which then allows them to offer the same deals to smaller groups as they do for groups of 5,000 or 10,000 lives. Health plans need to start putting together deals that are competitive with what a coalition can offer to smaller employers.
Underwriting deals also need to be flexible and offer multiple underwriting options, including a transparent option. Health plans have traditionally avoided transparency because the margin is thinner. Employer groups prefer working with PBMs that offer explicitly transparent contracts.
These agreements pass along all discounts and rebates to the group, keeping only an administration fee. Health plans — many of which own PBMs — historically use the traditional model. Their fees come from multiple sources: a portion from discounts on generics, another portion on rebates. Without a transparent option available, the group’s only option for transparency is to carve out.
In addition, underwriting of the pharmacy benefit is often too vague. Insurers need to offer a pharmacy contract that is specific, detailed and auditable. A typical third-party ASO (administrative services only) contract contains more and better details, such as specifying which guarantees are included. Coalitions are equipped to offer smaller groups a higher level of specificity than health plans have been willing to traditionally.
2: Access to programs
Health plans are often late adopters of innovative, small group-focused programs. They tend to resist working with vendors who offer these programs, whether on principle (they don’t believe that a particular solution is something their clients need) or because they lack the internal functionality to handle it (it creates too much operational complexity). Insurers are not typically great at taking existing capabilities from the insurance side of things and transferring them over to the self-funded side to function in a group-focused setting.
Large employers likely have someone within the organization who can manage insurance policies, but smaller companies probably need to outsource that work. This creates a lot of complexity from an operational perspective.
But these programs are important to groups, and if a plan isn’t going to offer them, the employer will work with a vendor that does. In order to be competitive and avoid carve-outs, health plans need to either create innovative products or allow vendors to do it for them.
3: Marketing
There is room for most health plans to improve promoting what they do from a clinical management perspective. They may be managing the clinical dollar very well, but they don’t know how to promote those capabilities. It’s important to develop collateral materials that outline the value proposition. Their account management team needs to be able to speak clearly and articulately about their capabilities.
The main marketing contact for a health plan is usually on the medical side, and they aren’t always effective at communicating the value proposition of all the various aspects of a plan, particularly the pharmacy side. Coalitions, on the other hand, are good at talking up what they do: here are all the things we’re doing to manage your clinical dollar. The health plan might be doing the same things, but the group never hears about it.
Carve-outs are the bane of health plans, but the reality is, health plans have the power to prevent them if they adjust their thinking and offerings in ways the market is demanding.
