Below is a proven formula for employers serious about lowering their healthcare and health insurance costs.

First – “unbundle” the health plan. This means that a change needs to be made to replace the fully insured plan, with a new health insurance plan is one which is partially self-funded utilizing reinsurance to protect the plan from catastrophic claims and high frequency.

The beauty of the partially self-funded plan is that an employer only funds claims if and when they occur. They do not pre-pay monies to an insurance company or the third-party administrator. Cash flow savings is significant in control of the plan is given to the employer – not the insurance company

Second – remove the PPO network as you know it. This is required so as not to pay providers per the PPO contract “discount off of what.” Regardless of the discount, when hospital pricing continues to increase, it renders the PPO discount meaningless. Also, under a PPO, a hospital would otherwise get reimbursed based upon that PPO contract. The elimination of the PPO network also permits employees to go to any provider in the country that they want to – no network.

Third – ditch the insurance company.  A qualified and specialized Third Party Administrator (TPA) is contracted with to provide all of the administrative services that an insurance company would otherwise provide – claims payment, ID cards, plan documents, cobra, etc. The TPA can offer the services at a much lower cost than an insurance company, and can be much more flexible as well.

To the member It doesn’t appear any different than when they had an insurance company, except for there is no insurance company or PPO logo on the ID card.

Fourth – purchase Stop loss (reinsurance) coverage to protect the plan from any catastrophic expenses that a member may have during the year, and cap the overall expense of the plan for all members.

Fifth – contract with a qualified Pharmacy Benefit Manager that doesn’t profit from “spread pricing” and pays 100% of all of the manufacturer’s rebates to the employer.  They also must be able to customize the plan to accommodate specialty drug plan design.

Sixth – customize the level of benefits that you want to offer employees. In other words, design the plan of benefits you want to offer, rather than what an insurance company wants you to buy. You can customize your plan in any way you see fit, as long as you don’t discriminate.

Seventh – reimburse providers on a metric basis, not a discount like traditional PPOs. The metrics are the greater of the providers reported cost to the Centers for Medicare and Medicaid (CMS), plus a reasonable profit, or Medicare plus. Whether Cost Plus or Medicare Plus, in both situations this allows a provider to be reimbursed at a fair and reasonable profit. It’s their reported cost – not some fake number and it’s their reported Medicare reimbursement from CMS. If their reimbursement from Medicare doesn’t cover their cost, which in some cases is true, the Cost Plus method is used. It’s always the greater of the two.

Eighth – Within the plan document, create contractual language that states what the plan is going to pay. This is far different from a PPO “discount off of what.” Employers cannot act as a responsible plan fiduciary when they don’t know what the discounts are that the insurance company negotiates, and they don’t know what the prices are from the hospital or other providers. ERISA requires plan fiduciaries to pay reasonable expenses. An employer is usually using other people’s money (employee contributions) to purchase the plan which creates a fiduciary liability.  How can a fiduciary act responsibly when they don’t know what the insurance company and providers contracts are?


If an employer is going to continue to work with insurance companies and their traditional PPOs, don’t expect anything to change – except higher premiums and costs.  PPOs may continue to negotiate deep discounts, but the base charges continue to go up, everything goes up.

If you want to seriously reduce you healthcare costs and subsequent benefit costs, the formula has worked for hundreds of employers throughout the country, and can work for your company as well.  An easy way to understand how the formula can be applied to your healthcare benefits plan, let’s have a call with GoTo Meeting and I can demonstrate how it all works.  Send me an email at with a convenient date and time, and I will set it up.