There have been lots of discussions over the years about healthcare pooling—most notably increases in the cost of pooling. And the volume of the dialogue has certainly increased recently as insurers struggle with the cost/risk associated with high-cost medications.
We saw the creation of extended healthcare policy protection plans (EP3) in 2013 to deal with this issue for the smaller end of the market on an industry wide basis. However, a significant portion of the business underwritten in the Canadian market is not covered by this industry-wide approach.
Insurers are spending a significant amount of time stressing over their health pools—many proposing fairly hefty increases in charges, increases in pooling levels (i.e., the employer is being asked to assume more risk) and in some cases the introduction of a “new model” for the calculation of pooling costs. Invariably this will mean—and we’ve begun to see this happen already—some form of experience rating of pooling costs on a client-by-client basis.
This has the potential to become a significant issue for insurers and plan sponsors. Some might suggest it’s already a significant issue although it feels like we might only be seeing the tip of the iceberg when it comes to high-cost medications. The worst may be yet to come. So what are the issues?
- The risks are bigger and therefore the costs are larger. In the past, the focus of health pooling was always on out-of-country costs—the risk of a large claim for emergency medical treatment abroad—notably the United States. This risk still exists but it pales in comparison to the risks related to high-cost medications. And the number of these medications entering into the market is only expected to increase over the years. To put a fine point on this issue, I have a client who recently had a $750,000 drug claim (no, this is not a typo). The health plan is handled on an administrative services only basis with a $10,000 pooling level. So the employer assumed only $10,000 of this cost. The rest was assumed by the insurer. It was great for the client, but the insurer wasn’t very happy. This is today but tomorrow looks even scarier.
- In addition to higher cost, the nature of claims is changing. For the first time ever, pooled claims can be recurrent. This was never contemplated in the concept of pooling. Pooling was always intended to protect against unforeseen circumstances—a single event. Many high-cost drug claims are repeating. This obviously changes the nature of the risk for insurers. And it’s hugely problematic for plan sponsors as some insurers limit pooling protection for recurrent claims when coverage is transferred from one insurer to another.
- Costs are increasing but there is very little transparency and consistency. Perhaps the biggest problem is a lack of transparency around pooling costs. Pooled claims are reported but when trying to connect the dots as it relates to the pooling cost (i.e., why is my pooling cost increasing —the common refrain is “costs are increasing so we need an increase”). The insurance industry could do a far better job of putting the size of the problem in context—unfortunately “because” rarely works. There is also very little consistency as to how insurers calculate pooling costs, what’s included, etc. Sometimes this inconsistency is within the same insurer who might handle things differently depending on the client. This certainly contributes to the perception that pooling costs are a bit of a black box. There is not a lot of science behind coming up with the numbers.
- In the interests of complete honesty, advisors are a part of the problem. We are great at pushing back on insurers. Not letting them increase their pooling costs if our client’s pooled experience does not support it and we will be the first to demand a reduction if pooled claims are far less than pooled premiums. We do this because of the lack of transparency, because we’re often successful and because our goal is to ensure that our client’s pooled costs are as competitive as possible. Even though we understand the concept of pooling, our behaviour is more aligned with experience rating (certainly when it benefits our clients).
So what is the longer-term solution to this problem? I’m biased. I’m not a big fan of experience rating a pooled coverage. It flies in the face of the concept of pooling (you spread the risk out across a significant large group/population) and everyone pays. There will always be winners and losers. It’s kind of a fundamental principle, but chances are that today’s winners will be tomorrow’s losers. You absolutely need to prudently manage the risk within the pool. Chronic losers (i.e., high claimers) should pay more over time, but the concept is sound and practical. Ultimately the solution to this problem may be driven by government policy. The concept of a national pharmacare program seems to be being discussed more frequently these days with such a program been seen as the answer to increasing drug costs. Why? In part because—at a high level—the pooling of costs, risks and buying power makes sense.
I would certainly argue for greater transparency regarding pooling costs. I understand the competitive nature of the marketplace. However, we are in a fact-based business—decisions are made based on facts, generally supported by numbers. I have been around this business long enough to think I have a pretty good understanding of how benefits are priced. But in this area of pooling, I have no clue as to whether what I’m being told is fact or fiction. I’m not sure “trust me” works anymore (if it ever did). The market is skeptical.
Read: Improving drug plans
Maybe it’s time for more competition is this space. In the U.S., it’s quite common for plan sponsors to purchase pooling protection separate from their health provider. Many plan sponsors participate in employer coalitions or collectives (assembled to pool risk) to leverage the cost of stop-loss insurance coverage down. When you compare Canada and the U.S., it’s always important to remember that scale and scope matters. The markets are significantly different and certainly from a U.S. perspective it does not take a significant swing in buying behaviour to make an idea potentially financially attractive. In the face of increasing pooling costs in Canada maybe there is an opportunity to consider competitive alternatives.
The risks that are covered by a pooling arrangement are unquestionably getting bigger so it stands to reason that the associated cost of this protection should and will increase. The question, “By how much?” is clearly an unknown as the future is impossible to predict. However, if insurers fear the future as much as they seem to be—some reasoned dialogue today on what they are facing might be appropriate. And perhaps other options need to be explored to bring price stability to the market.
It really does feel like there must be a better way.