Your health expenses are one of your company’s biggest annual expenditures after employee wages and salaries. One of the best ways of keeping track of your benefits expenses is a metric known as your Medical Expense Per Employee Per Year (PEPY). Your PEPY delivers a simple but powerful measuring stick for gauging how much you spend on benefits for each employee. Although a Willis Towers Watson survey of 2,248 companies found the 2019 national average rose to $13,243, you can drive your annual costs down by implementing new cost containment strategies.
Calculating Your PEPY
Before you can lower your PEPY, you have to calculate it. This calculation is straightforward: Divide your plan expenses for the year by the number of employees you have.
To see this calculation in action: If your plan costs $3,600,000 and you have 300 employees, your PEPY is $12,000. Although this is slightly below the national average, there are likely still many opportunities for improvement.
Lowering Your PEPY
Once you know your PEPY, you can develop a strategy for reducing it. When we work with our clients, we tackle PEPY by addressing the four most costly areas in health benefits:
- Prescription Services
- Inpatient Services
- Outpatient Services
- Office Visits
In developing unique cost containment strategies for each service, you can eliminate excess spend from your overall benefits plan.
Your prescription services are the low-hanging fruit in slashing costs. Pharmaceutical Benefits Managers (PBMs) have multiple hidden techniques for pushing employers and employees into overpaying for services, including:
- Not paying on rebates
- Charging administrative fees on reversed claims
- Charging for more medication than is actually dispensed
Analyze your PBM contract to identify unfair billing practices. Once these dishonest strategies are identified, you or your advisor can negotiate better deals or look elsewhere for a better PBM.
Inpatient Services, Outpatient Services, and Office Visits
In most cases, inpatient services, outpatient services, and office visits can be addressed with the same strategy: reference-based pricing. Reference-based pricing relies on data to select vendors based on the prices they offer and the quality of services they provide.
We start our evaluation of medical spend by asking questions such as:
- Which hospitals do employees use for surgeries and emergency visits?
- What do these hospitals charge for different procedures and treatments?
- Which doctors do employees visit for checkups?
With this data in hand, we then work to find the best possible vendor for each medical scenario an employee could face.
Developing new strategies for prescriptions and medical care feels uncomfortable at first because it pushes employees and their employers outside of the PPO networks they are familiar with. These networks are part of the problem, however. Because they are operated by publicly-traded companies, they are incentivized to maximize profits for shareholders and have fewer incentives to manage claims and reduce costs. The result is a higher PEPY for companies that work with them.
Case Study: Getting PEPY Down to Nearly Half the National Average
One of our clients, a county government in Kentucky, suffered through multiple 30% rate hikes over consecutive years. The brutal rate increases were unsustainable for both the county and the employees, especially since the employees were responsible for a $3,000 deductible. With a PEPY of $8,812 that continued to increase, county officials wanted to act quickly to contain their benefits plan.
As they started their search for better value at a lower price, two of their employees encountered enormous medical expenses. One employee was injured in a terrible car accident and another was prescribed a medication that cost $27,000 for a three-month supply. If they failed to respond quickly, their PEPY would increase even further.
After we partnered with the county, we focused on attacking the prescription expenses those two employees had encountered. After researching and negotiating on behalf of the employees, we dramatically reduced the expenses for the employee in the car accident. For the other employee, we found a way to source the medication directly from the manufacturer for free.
Afterward, we analyzed the county’s PBM agreement and identified areas we could slash unnecessary spending and create additional savings for employees.
Inpatient, Outpatient, and Office Visits
Once we sorted out the pharmaceutical issues, we turned our attention to inpatient services, outpatient services, and office visits. After additional negotiations, research, and incorporating reference-based pricing strategies to find the best facilities with the lowest prices, we altered their plan design. We identified better, less-expensive facilities in the region for employees to receive care and instead of dealing with a $3,000 deductible, employees now have a $0 co-pay with every visit to the doctor’s office or hospital.
After the initial plan alterations, the PEPY dropped to $6,562—savings of $2,250 per employee every year. As we move forward, we remain vigilant for new assistance programs, rebates, and sourcing discounts we can apply to reduce costs even further.
When you change your expectations around what your PEPY can be each year, you give yourself new opportunities to direct new strategies for savings. By exploring these strategies in greater detail, you can drive your PEPY down year over year.