Healthcare Regulatory Changes to Restore Negotiating Leverage for Plan Sponsors

By Alex Jung

Enough has been written about the failures of the healthcare industry and why prices and costs are continuing to rise. And while there are plenty of start ups and services being touted as solutions, there is a major blind spot that exists that needs to be addressed. That is the lack of regulatory oversight, lack of clarity over which federal or state agency is responsible for that oversight, the existence of regulatory loopholes, conflicts of interest and the complete lack of independence within the healthcare administration sector. Public policy has largely failed to create the right governance and controls to protect patients and consumers and abdicated the responsibility of managing the consequences to employers and their understaffed and many times under qualified benefits departments.

Despite the belief that employers (public and private companies) who sponsor employee healthcare plans have the negotiating leverage to demand accountability and transparency from their vendors (insurance companies, pharmacy benefit managers/PBMs and third-party administrators), the reality is that when there is so much concentrated power in so few companies, no one plan sponsor can make demands that would be accepted by the giant corporations that control the market. There are many common and prevailing practices that have become almost impossible to overcome because the vendor holds negotiating leverage and the plan sponsor doesn’t have many choices left for where to move their business.

Here is what needs to change and what regulators need to address to level the playing field to restore negotiating leverage for plan sponsors:

1. Clarity over federal agency authority and oversight for each stakeholder in the value chain. For example, hospitals are regulated at both the state and federal level (HHS/CMS) and insurance companies are regulated by state insurance commissioners. However, there is little if any oversight of pharmacy benefit managers (PBMs) because they are technically third-party administrators. There is also no oversight of insurance companies when they serve as third party administrators or PBMs for ERISA employer/plan sponsors or non-federal government employee health plans (state, city, county, school district employer plans).

2. Requirement of independence and disclosure of conflicts of interest. Sarbanes Oxley created a standard for professional independence and the reporting and disclosure requirements in the accounting industry have largely protected clients and taxpayers from the kind of fraud and failures that were perpetuated by Enron. There needs to be a similar standard for all vendors who are providing services for healthcare and pharmacy benefits. Too often, vendors promote solutions that steer patients into their own network or their solution without a requirement to test the potential conflicts of interest. Insurance companies and PBMs need to be held to the same standard of avoiding conflicts of interest and performing at a minimum a ministerial duty to the fiduciary plan sponsor. A ministerial duty requires the third party perform in a prescribed manner and in obedience to a legal authority, without regard to one’s own judgment or discretion. The legal authority in this case would be at the discretion and direction of the employer/plan sponsor.

3. Requirement of clinical independence. Most of the vendors in the market push standardized products and solutions that lower the cost of administration but are not necessarily built on the foundation of clinical appropriateness. Policies like pre-authorizations, P&T (pharmacy and therapy) committees, clinical advisors, and medical oversight panels are not necessarily prioritizing patient safety and medical necessity in coverage decisions. Rarely do clinical researchers get included in the due diligence around the approval of a drug on a formulary for example. There needs to be a federal requirement that every vendor that is relying on medical opinion for decisions around patient need, safety and efficacy, have a rotating panel of external and independent advisors that can provide a check and balance to internal decisions.

4. Requirement for periodic external and independent audits by third parties. Most vendors are subjected to financial audits by public accounting firms but there is nothing that oversees operating practices that may impact patient health and safety. There needs to be a requirement for an external business practice audit that evaluates quality and safety measures to ensure patients are not harmed by decisions made that are prioritized on financial outcomes. This audit needs to be performed by independent experts and the auditor should not be employed by the vendor. A routine and periodic business practice quality assurance assessment would balance the scales.

5. Requirement for price transparency and disclosure. Most vendors claim to be transparent but there is ample evidence of price spreading and profit taking by hedging prices for healthcare drugs, goods and services. While profit is inherent in a free private market, what is happening in healthcare is that the ability to manipulate price is largely driven by negotiating leverage of the vendor. That negotiating leverage is derived from the purchasing volume and funding provided by employers and their employee premium dollars.  There needs to be full transparency into how plan assets are used to negotiate prices and a requirement to use employee premiums solely for the purpose of paying for care. The MLR (medical loss ratio) standard of the ACA (Accountable Care Act) has failed to prioritize this requirement because there is no price transparency or disclosure requirement on how dollars were used.

6. Requirement to release claims and other plan data to the plan sponsor and covered patients upon request. While plan sponsors can request their claims data, vendors like insurance companies and PBMs place undue restrictions around the use of that data and claim proprietary ownership over “trade secrets” like prices paid. There needs to be a requirement that vendors provide plan sponsors with their data upon request, up to a specified number of times per year (for example, twice a year). This requirement should be extended to the covered member as well. In employer sponsored healthcare, employee payroll deducted premiums can make up between 30-50% of all dollars collected for a health plan so they should have the same rights as their employer to see claims data and associated prices paid. Relying on their explanation of benefits (EOB) after a service has been rendered is not sufficient because there is no ability to benchmark prices paid by other members in the plan, potentially creating discriminatory pricing practices.

Alex Jung is a retired partner at Ernst & Young, a former senior vice president of corporate strategy at Walgreens, and the CEO and founder of Alex Jung Consulting, LLC.