Health care insurance can cost businesses nearly $20,000 per employee, adversely affecting the bottom lines of small businesses.
Pacific Steel & Recycling, Great Falls, Montana, in 2014 made some changes to its health insurance options to help combat escalating health care costs. Pacific Steel & Recycling is an employee-owned company (also known as ESOP, which stands for employee stock ownership plan). A few years ago, Tim Culliton, chief financial officer at Pacific Steel & Recycling, along with the executive team recognized that the company and its 800 employees were spending way too much money on health care.
“In 2013, we saw a significant increase in facility costs,” Culliton says.
The company decided it had to reduce these costs to help employees. To reduce costs, Pacific Steel & Recycling transitioned away from a traditional self-funded health plan (with PPO networks) to a reference-based pricing health plan program. The company worked with USI Insurance Services, Valhalla, New York, to make the transition.
Scott Haas, a benefits advisor at USI Insurance Services and Health Rosetta advisor, says reference-based pricing has been around for a number of years and is emerging to replace preferred provider organization (PPO) plans, which became popular in the 1980s. “Prior to the 1980s, the way that health care reimbursement was calculated was based on relative value schedules, which is similar to reference-based pricing methodologies.”
Haas continues, “Reference-based pricing is a different approach to self-insured plans, establishing a benchmark of what they’re willing to pay. The methodology used is based either on a reference to Medicare allowed or a cost to charge reference to a hospitals actual cost of delivering a service.”
Reference-based plans will reimburse physicians and hospitals at variable percentage of Medicare allowed cost versus having a PPO contract determine what is allowed as payment. In the health care, we observe billed charges ranging multiple times more than what a PPO may contractually allowed. The carriers say, ‘we’ll give you a 20 percent discount’ and the plan still ends up paying 250 to 350 percent or more than what Medicare would have allowed.
“What reference-based plans are saying, the PPO environment has failed us,” Haas says. “So, we’re establishing reimbursement levels that are more fair and equitable based on what the purchaser is willing or able to pay. If there is a dispute on what the amount is, then we go into negotiation.”
Since making the switch to the reference-based pricing model, Culliton says Pacific Steel & Recycling reduced the company’s health care spending from $6.8 million annually to about $3.5 million annually. The company cut ties with its previous PPO networks, and today, the company directly contracts with about 4,500 health care providers across its region that offer high-quality care at a more reasonable price.
“We’ve been able to avoid medical inflation and cost increases employers are paying for health care, which is also beneficial to our employees,” Culliton says.
Win over the team
Pacific Steel & Recycling took time to communicate the new health program with all of its employees. Culliton says someone from the company’s executive team visited every Pacific Steel & Recycling branch over a one-month period to share about the reference-based pricing plan with its more than 800 employees and their spouses.
“Someone from the executive team went to every one of our 40 operations in December,” Culliton says. “Weather wasn’t always favorable, but we had meetings, dinners with employees and spouses to outline what the program is and that we were making the change and that there would be some pain points and disruptions. But [employees] knew the ultimate goal was to save them money and save the company money. They understood that if we could save money on medical costs, we could give them raises or more benefits.”
Pacific Steel & Recycling has been an ESOP company since 1978, and Culliton says this factor helped as the company rolled out this program. He says employees have more of a vested interest in the company since it’s an ESOP.
“We have a leg up because we’re an ESOP,” he says. “Because we’re an ESOP, when you embark on a program like this, we ended up with a lot more buy in and probably less pushback because our goal was to reduce medical costs. [Employees] can go to any physician they want to go to, but we’re getting it at a fair price now.”
Haas adds that executive leadership needs to take ownership of changes like this for it to be successfully rolled out. Culliton says the entire executive leadership team remained engaged throughout the transition to a referenced-based pricing program.
The first few years of the program required change. Culliton adds that there was some pushback from managers and team members. So, about one and a half years into the program, Culliton says the executive team decided to appoint one employee at Pacific Steel & Recycling to focus on any reference-based pricing program-related issues.
“We recognized we weren’t as responsive to employee and spouse complaints as we should have been,” Culliton says of that first one and a half years being on the new program.
“When we got pushback from employees and managers, the executive team realized that and dedicated an individual to the program,” Culliton says. “We had a person in our human resources department who worked for BlueCross BlueShield before. We made her our point person and in-house advocate.”
The company also has had cost savings ever since it went to the reference-based pricing plan five years ago. Culliton says that now many employees are complimenting the program.
Since rolling out the reference-based pricing program, Culliton adds that he would suggest that other recyclers considering changing health care insurance programs connect with him and his team to learn more about it.
“There were pain points for employees going into this process, but it was our hope that when we got done that pain would be gone,” Culliton says. “We have seen cost savings. We would suspect if we had remained on PPO insurance, our costs would be double what they are today.”