If you lead a small-to-midsize organization, there's a good chance your healthcare costs contain 20-30% in unnecessary (and hidden) markups.
Yes, you read that right. Since founding the benefits brokerage Nava, I've spent time with hundreds of small-to-midsize (SMB) employers across the country. About 8 in 10 are in this situation and they don't even realize it.
To put the financial impact into context, let's take your average small employer, ACME Co. They have 200 covered employees and are paying the national blended average of ~$10,000 per employee per year for medical insurance. If ACME Co's insurance costs increase at the national average of 6% per year, over the next five years those mark-ups add up to a whopping $2.25M. Think of what ACME and their employees could do with that money back in their budget.
But there is good news: it turns out America's largest employers have figured out how to avoid these mark-ups, and so can SMBs. Let's unpack what they are, why you're paying them, and how to cut them out of your plans without impacting the benefits you offer your employees.
The three mark-ups you've (probably) never heard of
Insurance carrier profit mark-up
Your fully insured plan includes a 15-20% markup on your claims. Why? Insurance company profits are regulated. The government allows them to take no more than 20% of the premiums you pay as profits (this is called the Medical Loss Ratio).
Here's how it works. First, the insurance carrier assesses the risk of your population. Then they develop a model to predict how much they are likely to pay in claims. They take that number and tack on 15-20%. They don't take any more — but they sure don't take a penny less.
So what exactly are you getting for this mark-up? Mostly claims processing and customer support. Given that, doesn't 15-20% seem like a lot? For comparison, the airline industry gross margin is about 5.5%, and the auto industry is about 9%.
Most employers pay this markup because they have no idea it even exists or that there's any other way.
But here's the kicker: There's not a single large employer in the United States that pays this markup. Not a one. They figured out that they can purchase the administration and support services they need for a fraction of the cost, removing the need for the 15-20%. The best part? SMBs can do this too.
Prescription drug mark-ups
Prescription drugs are one of the most mark-up-laden areas of healthcare. Want an example? A 30-day prescription of the cholesterol drug Liptor could cost you anywhere from $7.76 to $126.00 depending on your insurance, pharmacy, and coupons. That is a 16x difference for a pill that's been on the market for 20 years.
How, you ask? Well your healthcare plan relies on a Pharmacy Benefit Manager (PBM) to be the intermediary between the drug companies and your employees, negotiating drug prices on your behalf. They have a long history of hiking up costs while hiding behind complex, opaque systems. The PBM you get in SMB insurance plans is typically owned by your insurance carrier and marks up prices by 30-40%, resulting in an unnecessary 7-10% tacked onto your total medical plan cost.
These mark-ups have contributed to a massive spike in prescription drug spend among SMB employers, which now accounts for the largest share of your medical premiums at over 21%.
Most SMBs assume they don't have a choice over which PBM they use. Well, you do have a choice. Just like the country's largest employers, you have the ability to upgrade your PBM to one that delivers price transparency and a better patient experience while putting most of that mark-up back in your pockets.
Excessive broker commissions
I'm willing to bet that most of you couldn’t tell me how (or how much) your broker gets paid — most employers can’t, because it’s hard to find. (Hint: check your 5500 report)
Most SMB healthcare plans are loaded with hidden brokerage commissions and bonuses designed to keep them loyal to the carriers that pay them. Depending on a number of variables, these commissions can add up to 6-8% of your total premium spend. It's not tied to performance or outcomes; it's just part of the contract. It also means that the higher your premiums go, the more your broker makes, which is the definition of a misaligned incentive.
America's largest employers will have none of this. They negotiate a transparent fixed fee with their brokers. This ensures they know exactly how much they're paying, and the broker isn't automatically getting a raise if their premiums go up.
What most SMB employers don't realize is that you have the exact same power. Exercising that power will usually result in anywhere from 2-4% of your premiums going back into your pocket.
So what can you do about these mark-ups?
You might be thinking, “Brandon, my broker is great and I hired them to build me the most cost-effective plan. So if this is all true then why aren't they beating down my door to make these changes?”
The truth is that architecting a plan that eliminates these mark-ups is a lot more work for your broker (not you!) than just sticking with the status quo. It also pays them about 30% less. Small brokerages may not have the technology and resources needed to take on all this work without passing it along to their clients, and larger brokerages may not be incentivized to lean in.
But in my humble opinion as the CEO of a brokerage firm, that's their problem, not yours. So start by talking to your broker. As your trusted advisor, their job is to function as the bridge connecting you to the best innovation in healthcare, and they're most equipped to take action on your behalf.
I'm willing to bet that you can address at least one of these mark-ups for your January 1st renewal. To that end, here are three questions to ask your broker to get the ball rolling ASAP:
- Based on our employee population and their needs, can you recommend some options for alternative funding strategies to lower costs without cutting benefits?
- Can you recommend options for lowering our pharmacy spend this year?
- What is your total compensation from my account? Can we align on a fair fixed fee?
Just start the conversation. If you don't ask, you'll never know.
(Not getting the guidance you need? Reach out to our team for a personalized plan diagnostic right now.)