Do Insurance Carriers Want Healthcare Costs Up or Down? It Depends.

This video provides an in-depth exploration of how health insurance carriers' financial incentives regarding healthcare costs vary significantly based on their specific lines of business. Dr. Eric Bricker, the speaker, systematically breaks down six distinct types of health plans, illustrating that there isn't a single answer to whether an insurer wants costs to go up or down; rather, "it depends" on the particular line of business a member is enrolled in. This nuanced perspective is crucial for understanding the complex financial motivations driving decisions within the healthcare ecosystem.

The core of Dr. Bricker's analysis categorizes the lines of business into two main groups: employer-sponsored plans and government-sponsored plans, each with fundamentally different financial structures. For self-funded and fully-insured employer plans, the video argues that health insurance companies are incentivized to see healthcare costs rise. In self-funded arrangements, the carrier charges an Administrative Services Only (ASO) fee, while the employer directly pays the claims. Here, the carrier profits through its Pharmacy Benefit Manager (PBM) arm, which benefits from a higher volume and cost of prescriptions, and by taking a percentage of "savings" from negotiating large out-of-network claims. For fully-insured plans, carriers aim to maintain a Medical Loss Ratio (MLR) slightly above the mandated 85% (or 80% for ACA plans) to justify annual premium increases, thereby growing their fixed 15% administrative margin on a larger revenue base.

Conversely, for government-sponsored plans—including Medicare Advantage, Medicaid Managed Care, Affordable Care Act (ACA) plans, and Medicare Part D Prescription Plans—the incentive shifts dramatically towards wanting healthcare costs to go down. These plans operate under a risk adjustment model, where the government pays a premium to the carrier based on the member's diagnoses and their severity. Carriers are still subject to an MLR, meaning they must pay out a certain percentage of premiums in claims. To maximize profit, they strategically enroll sicker individuals (who bring higher government-paid premiums) and then rigorously control costs through stringent prior authorization to keep claims just below the MLR threshold. Dr. Bricker emphasizes that reimbursement rates for these government plans are often significantly lower than for employer-sponsored plans, with Medicaid rates sometimes falling below even Medicare rates, impacting provider participation.

Key Takeaways:

• Divergent Payer Incentives: Health insurance carriers possess conflicting financial incentives regarding healthcare costs, which are entirely dependent on their specific line of business. This foundational understanding is critical for pharmaceutical and life sciences companies in navigating market access and commercial strategies.
• Employer-Sponsored Plans Drive Cost Escalation: For both self-funded and fully-insured employer health plans, carriers are financially motivated for healthcare costs to increase. This seemingly counter-intuitive dynamic is fueled by administrative fees, PBM profits, and the strategic justification for annual premium hikes.
• PBMs as Primary Profit Centers: Pharmacy Benefit Managers (PBMs), frequently owned by major health insurance carriers (e.g., CVS/Aetna, Cigna), generate substantial profits from higher prescription volumes and more expensive medications. This creates a direct incentive for carriers to see pharmacy costs rise within employer-sponsored plan segments.
• Profit from Out-of-Network "Savings": In self-funded plans, carriers can profit by negotiating down large out-of-network claims (e.g., an ICU stay) and subsequently charging the employer a percentage of the "savings." This mechanism can inadvertently incentivize the occurrence of such claims.
• MLR Strategy for Premium Growth: For fully-insured plans, carriers strategically aim for a Medical Loss Ratio (MLR) slightly above the mandated 85% (or 80% for ACA plans). This allows them to consistently justify annual premium increases, thereby expanding their fixed 15% administrative margin on an ever-growing total premium.
• Government Plans Mandate Cost Reduction: For Medicare Advantage, Medicaid Managed Care, ACA plans, and Medicare Part D, carriers are incentivized to actively drive healthcare costs down. This is due to government premiums being risk-adjusted based on patient sickness, requiring carriers to manage claims tightly to stay just below the MLR threshold.
• Risk Adjustment Attracts Sicker Patients: The risk adjustment mechanism in government-sponsored plans provides higher premiums from the government for sicker patients with more diagnoses. This incentivizes carriers to attract and enroll individuals with greater healthcare needs.
• Prior Authorization as a Cost-Control Lever: Stringent prior authorization is a primary strategy employed by carriers in government-sponsored plans (Medicare Advantage, Medicaid, ACA, Medicare Part D) to control healthcare costs and ensure their claims payouts remain close to, but not exceeding, the MLR.
• Significant Reimbursement Rate Discrepancies: Reimbursement rates to healthcare providers vary drastically across different lines of business. Employer-sponsored plans often pay 250-400% of Medicare rates, while Medicare Advantage typically pays around Medicare rates, and Medicaid Managed Care can pay even less (e.g., 85% of Medicare), influencing provider network participation.
• Direct Impact on Pharmaceutical Access: The incentives for Medicare Part D plans to reduce prescription costs through strict prior authorization directly affect patient access to pharmaceutical products and necessitate sophisticated market access strategies from pharma companies.
• Strategic Implications for Pharmaceutical Companies: Pharmaceutical and life sciences companies must deeply understand these varied payer incentives to develop effective market access strategies, optimize pricing models, and structure commercial operations that account for differing reimbursement landscapes and prior authorization hurdles.
• Leveraging Data for Market Insights: Insights derived from MLR data, risk adjustment models, and claims analysis are crucial for pharma companies to analyze market dynamics, accurately forecast demand, and tailor their product offerings and support services to specific payer segments.

Key Concepts:

• Lines of Business: Refers to the different types of health insurance products offered by carriers, such as self-funded, fully-insured, Medicare Advantage, Medicaid Managed Care, ACA, and Medicare Part D.
• Administrative Services Only (ASO) Fee: A fee charged by health insurance carriers to self-funded employers for the administrative tasks of processing claims, without the carrier assuming the financial risk of paying the claims themselves.
• Stop-Loss Insurance: Insurance purchased by self-funded employers to protect against catastrophic individual or aggregate claims that exceed a predetermined financial threshold.
• Medical Loss Ratio (MLR): The percentage of premium revenue that health insurance companies spend on medical care and quality improvement activities, as mandated by regulations (e.g., 85% for large groups).
• Risk Adjustment: A methodology used in government-sponsored health plans where the premium paid to the health plan by the government is adjusted based on the health status and diagnoses of its enrolled members, with sicker members generating higher premiums.
• Prior Authorization: A process requiring healthcare providers to obtain approval from a health insurance plan before a prescribed medication, treatment, or service is covered, often used as a cost-control mechanism.
• Pharmacy Benefit Manager (PBM): A third-party administrator of prescription drug programs that negotiates drug prices, creates formularies, and processes claims for various health plans.

Examples/Case Studies:

• CVS/Aetna and Cigna: These major health insurance carriers are cited as examples of companies that generate more profit from their PBM arms than from their traditional health insurance operations, underscoring the significant role of PBMs in the pharmaceutical cost landscape.
• Out-of-Network ICU Stay: An illustrative example where a carrier in a self-funded plan negotiates a $500,000 out-of-network ICU claim down to $300,000, then charges the employer a percentage of the $200,000 "savings," demonstrating a profit mechanism for carriers.
• Provider Reimbursement Rates: Dr. Bricker highlights the stark contrast in reimbursement rates, noting that employer-sponsored plans often pay 250-400% of Medicare rates, while Medicare Advantage pays around Medicare rates, and Medicaid Managed Care can pay even less (e.g., 85% of Medicare), explaining why many providers limit their acceptance of Medicaid.
• Oscar: Mentioned as a prominent ACA carrier that exemplifies the strategies of focusing on risk-adjusted plans and employing strict prior authorization to manage costs within the ACA market.