Today we’re going to cover another part of drug pricing. Specifically how hospitals and large-chain pharmacies are pocketing billions of dollars by exploiting a government program.

And on the surface the program seems nothing like a cash printer - in fact it’s quite the opposite!

It’s a drug discount program called 340B, created to help hospitals serve under-insured and poorer patients.

But like most stuff in healthcare, there’s more than meets the eye.

The basics about 340B

340B is a federal initiative that requires drug manufacturers (who participate in Medicaid) to provide outpatient drugs to eligible healthcare organizations, known as "covered entities," at significantly reduced prices.

These discounts typically range from 20% to 50% off the drug's list price, and are given with the intent to "stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services."

Covered entities are providers serving high volumes of uninsured and low-income patients such as:

• Disproportionate Share Hospitals (DSH)

• Critical Access Hospitals (CAH)

• Children's Hospitals

• Federally Qualified Health Centers (FQHCs)

Pivotal moments in the 340B timeline are:

• 1992 - The 340B program was established by Congress as part of the Veterans Health Care Act of 1992. It was a response to concerns that the Medicaid drug rebate program, enacted two years earlier, might lead to increased drug prices for safety-net providers.

• 1996 - Initially, covered entities could only use in-house pharmacies to dispense 340B drugs. Recognizing that many entities lacked such facilities, the Health Resources and Services Administration (HRSA) allowed them to contract with a single outside pharmacy.

• 2010 - The ACA significantly expanded 340B in several ways.

  • Added more types of hospitals to the list of eligible entities, including critical access hospitals, sole community hospitals, rural referral centers, and free-standing cancer hospitals.

  • Allowed covered entities to contract with multiple pharmacies, leading to explosive growth in contract pharmacy arrangements.

    • Contract pharmacies are retail pharmacies that partner with covered entities to dispense 340B drugs.

And 340B has had positive impact in terms of delivering care:

• Critical Access Hospitals: 75% report that 340B savings help them remain open.

• Federally Qualified Health Centers: Many use 340B savings to provide care to more patients or offer more comprehensive services.

• Ryan White Clinics: These facilities, which provide care for half of the population with HIV/AIDS in the U.S., use 340B savings to offer free or low-cost care and support services like housing and food assistance.

Some hospitals and clinics are able to stay solvent exclusively due to 340B, which is huge for health accessibility. However, the growth of 340B has led to some unintended consequences.

Show me the money!

340B has seen dramatic growth since it’s inception:

• In 2000, there were just over 8,100 covered entity sites.

• By 2020, this number had grown to 50,000.

• Hospitals, which initially made up less than 10% of covered entity sites, comprised over 60% by 2020.

• Total 340B drug purchases have skyrocketed from about $4 billion in 2007-2009 to $53 billion in 2022.

This should mean that in 2022 there were $50B+ saved in drug costs for this population, but here’s the kicker - hospitals don’t have to report the rebates or how they’re used.

So no one actually knows whether that money is being used for uninsured/lower-income populations.

And because they don’t have to report the rebate, the insurance company has no clue about it. Allowing hospitals to submit the wholesale price for insurance reimbursement!

Additionally contract pharmacies have also exploded which should mean that there’s an increase of access to the drugs for low-income/uninsured populations.

However, it turns out as of 2022, an astonishing 71% of locations among the top four retail pharmacy chains (Walmart, CVS, Rite Aid, and Walgreens) held 340B contracts. And they too make a profit margin based on higher reimbursement rates from insurance companies - with Walgreens even warning of lower profits due to impending 340B restrictions.

So this discount program has now become a source of profits. Many such cases in American healthcare.

Current Challenges and Debates

The 340B program is currently at the center of various legal and policy debates, including legislative attempts to modify the program, legal battles between stakeholders, and calls for reform to increase transparency and oversight.

Here’s a broad overview of the types of solutions that are at play:

• Legislative Attempts: Multiple bills have been introduced in Congress to modify the program, focusing on issues like tightening eligibility criteria, increasing transparency, and regulating contract pharmacy arrangements.

• Legal Battles: Recent years have seen numerous lawsuits between drug manufacturers, covered entities, and the government. Key issues include manufacturers' attempts to limit 340B pricing for drugs dispensed at contract pharmacies and disputes over the calculation of 340B ceiling prices.

• Calls for Reform: Various stakeholders are pushing for changes to the program, including: Increased transparency in how 340B savings are used More stringent eligibility requirements for hospitals Clearer definition of eligible patients Greater oversight of contract pharmacy arrangements

• Regulatory Challenges: The Health Resources and Services Administration (HRSA), which oversees 340B, faces challenges in effectively regulating the program due to limited statutory authority.

All in all our takeaway is that this is mainly a regulatory issue in healthcare.

We’re interested in seeing if tools helping track rebates and drug purchasing data can be a tech-forward solution in combatting 340B misuse, but it’s highly unlikely to be effective unless there are compliance requirements by law.

So for now, we’ll just have to wait and see if policy is introduced to combat the misuse of 340B.

If you’ve made it this far, we hope you now are better informed about how even drug discounts can be money-makers!

We’re always looking to learn from others, so if you have any thoughts or building something in this space please feel free to reach out.

And if there’s anything you were curious about or think we should modify/add let us know!

— Suli & Praneet

In this post we’re going to pull back the curtain on how drug pricing in America works and the puppet masters pulling the strings (and lining up their pockets).

The Basics: Drug Pricing 101

Drugs fall into two categories - the 'formulary' list, which includes medications your insurance company might actually help pay for, and the 'non-formulary' list – over-the-counter meds, reproductive treatments, and cosmetic drugs not covered by insurance.

The formulary list is the one worth taking a closer look at (as is everything handled by insurance).

Imagine the drugs on the list as a fancy airline.

You've got your first-class drugs, your economy drugs, and everything in between. The specific tiers look like this:

Tier 1: Generics - The Economy Class

• These are your generic drugs. They're like the basic economy seats – no frills, but they get the job done.

• Cost: Around $10 for a month's supply.

• These are equivalent to brand-name drugs but without the brand label price tag.

  • They don’t have to make up for R&D and marketing costs the brand might’ve incurred. → Generics are usually developed after a drug’s patent expires

Tier 2: Preferred brand - The Premium Economy

• "Preferred brand" is like getting extra legroom, but for your medicine cabinet.

• Cost: About $30 per month.

• These drugs are "preferred" by your insurance company/PBM

  • The PBM has cut a deal w/ the manufacturer to then list their drug as the preferred (more on how this works later)

Tier 3: Non-preferred brand - The Business Class

• Here we have the "non-preferred brand" drugs. You're paying for that brand name that the PBM doesn’t like!

• Cost: Approximately $60 per month.

Tier 4: Specialty pharmacy - The Private Jet

• Welcome to "specialty pharmacy" – think injectable drugs, cancer treatments, etc.

• Cost: $1000+ per month.

These pricing dynamics are decided by a complex dance between pharmaceutical companies, insurance providers, and our shadowy mafia men - the PBMs.

Enter the PBM: The Wizard Behind the Curtain

The simplest description of PBMs is they’re middlemen between insurance plans and pharmaceutical companies. What this looks like in practice has evolved over time.

When PBMs started in the 1960s, they came in to help insurance companies with the growing volumes of prescription drug claims. They also started negotiating drug prices to be as low as possible for insurance plans’ patients.

This is very different than the mafia picture we’ve portrayed of PBMs. But starting in the 1980’s certain legal proceedings put the PBM villain arc into motion:

• 1987 - The government says group buying entities can accept payments in the form of rebates from manufacturers

• 1999 - Pharmacies sue to get same discounts (the rebates) on drugs. But the government ruled if the purchasing entity was big enough to shift market share, they could get secret rebates.

• 2003 - Medicare Modernization Act says Medicare can’t negotiate drug prices for it’s patient population. Only PBMs can do this.
  
  * This recently changed with the Inflation Reduction Act, which allowed Medicare to negotiate. Classic government fixing a problem they helped create*

• 2000s - Consolidations of PBMs into insurance companies are considered legal.

• Until 2018, there were “gag clauses”, preventing pharmacists from recommending drugs to customers causing PBMs to profit less

Before going into the details, here’s a quick diagram of the money flows:

If you haven’t spotted it already, the government precedents set in motion unlocked new revenue for PBMs. It’s this guy right here:

When you go from negotiating down prices with someone, and now get paid by that someone….

And this affects both pharmacies (who purchase the drugs from wholesalers) and patients.

But what does this mean? And more importantly how do PBMs/manufacturers get away with this?

The Infinite Money Glitch

PBMs have some unfair advantages enabling them to be massive monopolies.

We’ll cover the major ones - rebates, spread pricing, and consolidation.

Rebates

Earlier we mentioned how PBMs dictate which drugs go on to the formulary list, determining whether the drug is covered by their insurance partners. The higher up the drug is on the list, the more likely it is for the doctor to prescribe it (usually doesn’t require as much admin work).

And how does a manufacturer get their drug near the top of the list? By offering rebates.

The way rebates are supposed to work is they go to employers covering their employees’ insurance costs.

But what really happens is PBMs end up taking a large portion and giving the rest to employers. They get away with this because they’re not required to disclose any pricing negotiations/rebates.

So if the rebate was $100, they’ll take $75 and might tell the employer the rebate was only $25.

As a result, the rebates cause messed up incentives:

• PBMs want to sell the higher cost drugs, because they can also get higher rebates on them

• PBMs want more prescriptions bc they’ll make more money (rebates paid out more frequently)

Spread pricing

Spread pricing occurs when a PBM charges a health plan or employer more for a drug than it reimburses the pharmacy, and keeps the difference as profit.

Here’s a general example:

A patient is prescribed a 30-day supply of Generic Lisinopril (blood pressure medication).

• Pharmacy Purchase - The pharmacy buys the drug from a wholesaler for $2.

• Patient Purchase - A patient with insurance comes to fill their prescription. They pay their copay of $10.

• PBM Reimbursement to Pharmacy - The PBM reimburses the pharmacy $20 for the drug. This covers the pharmacy's cost plus a small profit margin.

• PBM Charges to Health Plan/Employer - The PBM then bills the health plan or employer $30 for this same prescription.

• Spread Calculation Spread = Amount billed to health plan - Amount paid to pharmacy $30 - $20 = $10 → The PBM pockets this $10

This also happens because no one knows the true drug cost except for the PBM, not even the insurance companies that partner with PBMs!

Consolidation

As if rebates + spread pricing weren’t already a killer combo, the other advantage for PBMs is they’ve been rolled up into large insurance companies.

Three PBMs own two-thirds of the market, which has created an oligopoly:

• Caremark (acquired for ~$21B) -> owned by CVS health (which has insurance company Aetna) 

• Express Scripts (acquired for ~$54B) -> owned by Cigna

• OptumRx -> Owned by United Health

Each of these insurance companies have their hands in various parts of the money flow we charted out earlier. And now that they own PBMs, they have an incentive to do everything they can to grow their revenues.

At this point, the infinite money glitch may seem unstoppable, but luckily we have a well-known billionaire taking it on.

Enter the Maverick

In 2022, Mark Cuban started Cost Plus Drugs and used the infinity money glitch against PBMs.

Unlike PBMs with their secretive rebate schemes and pricing, Cost Plus Drugs operates on a transparent pricing model. Here's how it's tackling some of the industry's biggest issues:

1. Transparent Pricing: Cost Plus Drugs reveals its exact markup (15%) and pharmacy fee ($3) for each medication, eliminating the mystery of drug pricing.

2. No Rebates: By avoiding rebates altogether, the company removes the incentive for artificially inflated list prices.

3. Direct Negotiations: Cost Plus Drugs negotiates directly with drug manufacturers, cutting out layers of middlemen that typically drive up costs.

4. Consistent Pricing: All customers pay the same price for medications, regardless of insurance status, promoting equity in drug access.

5. Online Accessibility: As an online pharmacy (utilizing TruePill), it reduces overhead costs associated with traditional brick-and-mortar operations.

6. Focus on Generics: By emphasizing lower-cost generic medications, Cost Plus Drugs targets a segment of the market where traditional PBMs often extract significant profits.

While not a complete solution to all of pharma's pricing issues, Cost Plus Drugs is changing the industry. It's forcing traditional PBMs and pharmacies to reconsider their pricing models and bringing much-needed transparency to an opaque system.

As this model gains traction, it could lead to broader changes in how medications are priced and distributed in the United States. And even though this is a promising step in the right direction, there’s a lot of room for innovation!

If you’ve made it this far, we hope we’ve helped you understand the game of drug pricing!

We’re always looking to learn from others, so if you have any thoughts or building something in this space please feel free to reach out.

And if there’s anything you were curious about or think we should modify/add let us know!

— Suli & Praneet

Go to the hospital. Get recommended for procedures/scans/tests.

Wait for insurance to tell you whether it’ll be covered or not.

Get procedures/scans/tests done.

Wait to see if you’re going to pull your hair out because of a surprise bill dropped on your head.

The sad reality of healthcare today is it’s a battle between providers, insurance companies, and patients to figure out how much care will cost.

Today we’re going to shed some light on the inner workings with a short primer on insurance claims processing (exciting!).

We’ll cover what claims actually are, how they’re processed, weird game mechanics, and startups we’ve seen in this space.

Claims 101

When you think of an insurance claim you might think of a receipt - you have line items with associated costs sent to an insurance company.

But an insurance claim is better thought of as a proposal.

It’s a case the provider puts together for an insurance company to convince them that they should cover your medical costs.

And this case has multiple parts:

1. Patient info (personal details, medical history, etc.)

2. Policyholder info (if it’s different from the patient - applicable to family plans)

3. Provider info

4. Insurance info

5. Service details

6. Medical codes

   1. Patient condition codes (ICD-10 codes)

   2. Procedure codes (Current Procedural Terminology or Healthcare Common Procedure Coding System codes)

7. Charges (line items of services administered and the associated costs)

8. Additional supporting documentation

This information collection starts before, during, and sometimes after you’ve received care.

And this is a part of a larger process called revenue cycle management (RCM).

RCM = Getting money from insurance

Everyone who accepts insurance has to execute RCM well to play the insurance reimbursement game.

Ideally, it shouldn’t be a game, but more on that later.

RCM can be broken down across 3 parts.

The front-end, middle, and back-end.

The front-end

This is where all your personal info is collected, main purpose is just to make sure you’re eligible. Involves two steps:

• Pre-registration

  • Patient information collection

  • Verifying patient’s insurance coverage and benefits to figure out eligibility and financial responsibility (this is only an estimate)

• Registration

  • Patient check-in for service

  • Obtaining consent and authorization for treatment

The middle

This is the meat of the provider’s work.

When an encounter (when a provider sees a patient) happens, they’re trying to take care of their portion of RCM:

• Charge capture

  • Recording services provided to patient (procedures, treatments, and supplies) and assigning appropriate medical codes to services

• Claim submission

  • Compiling all necessary information and documentation to create a claim, including patient details, provider information, service codes, and charges and submitting electronically or by paper (fax machines!!) to insurance

  • Each insurance company has different rules/preferred methods of submissions

    • This leads to an insane amount of admin burden in healthcare

  • Good resource from Aetna

The back-end

After insurance has processed the claim, they’ll send some stuff back for the provider to review. Things like whether the claim was accepted/denied, outstanding balance, etc.

Usually there will be some sort of revenue team that deals with these parts of RCM:

• Payment posting

  • Receiving and processing payments from insurance companies and patients and post to the patient accounts w/ relevant adjustments

    • Takes into account contractual allowance, copay, and deductible

      • Contractual allowance => difference between the provider billed amount and how much insurance has agreed to pay based on contract w/ provider

        • Ex. a provider bills $200 for a service, but the contracted rate with the insurance company is $150, the $50 difference is the contractual allowance

      • Ex. w/ adjustments

        • Provider Billed Amount: $500

        • Contractual Allowance: $150 (negotiated discount)

        • Adjusted Amount: $350 (billed amount minus contractual allowance)

        • Insurance Payment: $280 (80% of the adjusted amount, assuming 20% coinsurance)

        • Patient Responsibility: $70 (20% coinsurance) + copayment + any applicable deductible

• Claim management

  • Address and resolve any denied or rejected claims from insurance by identifying the reasons for denial, correcting errors, and resubmitting the claims

• Patient Collections

  • Billing patients the remaining amount and determining payment plans (if patient can’t pay it back all-at-once)

This process seems pretty straightforward and if done well should result in all insurance claims being paid.

But you know that’s far from the truth.

The Game

The requirements for a game are as follows:

• Clear win/loss condition

• Rules

• A challenge to be overcome

Insurance claims processing has all of these.

Win condition → Insurance companies win when they don’t have to pay out claims and get to keep more of the insurance premiums paid to them. Healthcare providers win when they get reimbursed more.

Rules → The rules are sending and processing a well put together claim reflecting patient care.

Challenge → The challenge is getting money (for hospitals) vs keeping money (for insurance plans).

As you can imagine both parties don’t play nice.

Just take for example how insurance companies process claims:

• When an insurance company gets a claim they do claim adjudication

  • They review the claim to ensure it has all the necessary info

  • Verify patient eligibility for coverage and services provided are covered under the patient’s plan

  • Ensure that the procedure was actually necessary for the patient

  • Checks for right medical codes

  • And then will calculate proper pricing based on benefits

This process is weird for a couple reasons.

It reminds us of the tax system. The IRS knows how much you should pay but makes you do the work of inputting all the data to figure it out.

Why would an insurance company that knows the right medical codes and modifiers check that you submitted the right medical codes as opposed to auto-assigning them? Because it allows them to deny claims.

Why would an insurance company ensure the procedure was necessary for the patient after-the-fact? Because it allows them to deny claims

Another weird thing is most claims are auto-adjudicated:

• 85% of claims are auto-adjudicated by software (no humans see them) because it costs $20 for a human to review a claim

  • If it gets through an initial automated check and it seems like the insurance will pay the claim there’s a secondary audit that’s kicked off (this doesn’t happen often)

• In some cases if the claim is < $10K-$15K, the carrier will just let the claim pass through because it’s so expensive to do manually

  • This allows for a lot of fraud and abusive spending -> 3%-10% of healthcare spend is fraud

  • This is bad because bad claims might be paid for by insurance and this could increase insurance costs for employer/individual

And healthcare providers also try to exploit loopholes, mainly through processes like up-coding (adding an inaccurate medical code to increase reimbursement).

The rationale being “If this claim is going to be auto-adjudicated if it’s less than $10K, why not just charge up to that limit?”

But to combat this, insurance companies use maneuvers like prior authorizations.

Prior authorizations are approvals from insurance required before administering certain medications or procedures. So if you need a procedure that requires prior auth, your provider will have to submit a case explaining why you need it.

Which leads to a ton of paperwork, so sometimes (usually in the cases of meds) the provider might just choose the service which doesn’t require prior auth approval.

Tech Innovation

A lot of processes we’ve mentioned here (RCM, prior auth, etc.) are highly manual right now. They also take away time from practitioners to focus on patient care.

Advances in OCR (optical character recognition) + LLMs (tech behind ChatGPT) allows for automating a lot of it. Which seems pretty straightforward, but anyone who has dealt with integrating with insurance plans will tell you a different story.

But the market opportunity is quite lucrative. Every healthcare business that deals with insurance is trying to increase the reimbursement rates.

And for reference one of the biggest players in the space, R1 RCM, does $1B+ in annual revenue.

Combining the technical inflection and market opportunity makes this a ripe problem space for startups to go after.

Here are a handful we’ve come across:

Candid Health - RCM automation for digital health companies

Fay - Automating billing and insurance operations for dietitians and nutritionists

Alma - Helping mental health practices with billing and insurance operations

Silna Health - Prior auth for autism, physical therapy, and speech therapy practices

Juniper - Billing and insurance operations for health & physical therapy practices

Cohere Health - One of the current leaders in prior auth automation

A recurring pattern is taking the same approach (handling billing/insurance/prior auth) and applying it to a different specialty (mental health/nutrition/etc.).

This seems to be a winning model (highlighted by Derek Flanzraich in his newsletter).

But on the flip-side, this is just an opportunity to streamline the process. Not to fix the underlying incentives.

So how can that be done? Through precision medicine.

Precision medicine is a fancy way of saying you’re tailoring care specific to a patient biological data (genetic profile, glucose levels, hormones etc.).

If this sounds too sci-fi, bear with us.

A lot of the game theory dynamics in healthcare arise from subjective care.

Care is based on the doctor’s judgement on the treatment needed, and the insurance company decides if they agree.

An example to illustrate is drug prescription.

When you get prescribed medication and dosages, the doctor’s making a guess that this will work for you.

And if it doesn’t? Well you’ll just keep tinkering with the dosage and the drug till it does work. Guessing and checking until landing on the right solution.

In an ideal world you should have continuous monitoring of your vitals, hormones, blood/glucose levels, etc. so the dosage is as accurate as possible for your biological makeup. And you can also see in real-time how the drug is affecting you.

If someone solves this holy grail of healthcare, it makes the system better for everyone.

1. Insurance has less wiggle room to deny the potential outcomes and reject claims

2. Patients get the care as specific to their condition as possible

3. With increasing patient data you can provide more preventative care

Some companies we think are interesting in this space are:

Synex - Non-invasive metabolite (glucose, lactate, etc.) monitoring

Eli - Real-time hormone testing

Superpower - Biomarker testing and analysis

Founders bringing the sci-future of precision medicine to reality makes us more optimistic about the future of healthcare and humanity!

If you made it this far, thank you for reading.

We’re always looking to learn from others, so if you have any thoughts please feel free to reach out.

And if there’s anything you were curious about or think we should modify/add let us know!

— Suli & Praneet

The American healthcare system is messy.

It’s expensive for patients. It’s stressful for healthcare professionals.

And even though America spends $4T+ (17% of GDP) on healthcare alone, no one seems to understand how the system fully works.

Ourselves included! (we’re the dummies in the title)

Which is why we’ve decided to dig in and learn how healthcare works.

And we’re sharing our learnings along the way, starting with the basics of insurance.

A small history lesson

Today, insurance in America is mostly dependent on your employment status.

1. If you have an employer → you have health benefits

2. If you’re unemployed → 😬

But it wasn’t always this way (you can thank Teddy Roosevelt for that).

Employer-based insurance is a big driver of healthcare costs.

Different employers choose to go with different health plans, which then leads to healthcare providers having to deal with different plans to get reimbursed, which leads to more admin costs for dealing with all the insurance plans.

There is a solution to this (having universal healthcare), but that’s a topic for another time.

Health Plans 101

What is a insurance health plan?

An insurance health plan is mainly a contract between an individual/employer and the insurance company outlining the covered services and how costs are handled.

FYI, health plan, insurance health plan, and insurance are interchangeable terms.

What are the different parts of a health plan you should know about?

• Premium → The monthly amount you pay the insurance company for coverage

• Copayment → The fixed amount you pay per visit

• Coinsurance → The percentage of the total cost that you have to cover vs. the insurance company will cover

• Deductible → The amount a patient has to cover before insurance starts covering expenses

  • i.e. If your plan has $5000 deductible this means you have to cover $5000 in medical expenses before the insurance company starts covering expenses

  • Embedded deductible - If you’re on a family plan you often have a smaller individual deductible as well as a larger family deductible

    • Individual deductible - Once an individual on a family plan meets their deductible, insurance will start covering expenses

    • Family deductible - once the whole family in aggregate meets their deductible (an amount set for the whole family), insurance will start covering expenses

• Out of pocket max → the max amount you have to pay out of pocket (deductible + copay + coinsurance) until insurance will cover all remaining expenses

  • Copays do not count towards out of pocket max, you always have to pay copay

• Coverage → Providers are either In-network (IN) or Out-of-network (OON) w/ your health plan

  • IN = healthcare provider and insurance company have a contractual agreement to provide services at pre-negotiated prices

  • OON = healthcare provider and insurance company don’t have a contractual agreement to provider services at pre-negotiated prices

What are the different types of health insurance plans (based on who provides it)?

• Broad categories based on who provides the insurance

  • Government-sponsored health insurance → Health coverage programs funded and administered by the government.

    • Medicaid

    • Medicare

    • Children’s Health Insurance Plan (CHIP)

    • Veteran’s Health Administration (VHA)

  • Individual Health Insurances

    • Either bought directly by an individual from an insurance company or through the Health Insurance exchanges enabled by the Affordable Care Act (ACA)

      • Health Insurance exchanges are platforms for individuals and businesses to compare and purchase insurance (before you’d have to go to each insurance company directly)

  • Employer-sponsored insurance plans

    • These fall into two categories → fully-insured or self-funded

      • Fully-insured = employer pays fixed premiums to an insurance carrier, which assumes the financial risk for paying healthcare claims

      • Self-funded = employer assumes the financial risk for providing healthcare benefits to its employees

        • Usually larger companies opt for self-funded because it’s cheaper and more customizable. Self-funded is cheaper because

          1. There are no state taxes on self-funded plans

          2. You pay claims as they’re processed (so if the cost is less than the premium you save money)

          3. Cuts out the admin costs you incur by using a carrier

        • A new wave of companies like Yuzu are helping SMBs launch self-funded plans as well → Less than a 1/3 of small businesses offer health benefits

          • Halle Tecco has written more about this here.

  • Short-term health insurance 

    • Like the name suggests it’s for short terms (typically 12 months and up to 36 months

  • Health Care Sharing ministries (these are wild)

    • Insurance plans where members of a religious group cover each other’s insurance claims

• Most insurance today (i.e. the one you have) is employer sponsored and is one of these types of alphabet soup managed plans

  • HMO - Health Maintenance Org

    • The primary care physician (PCP) acts as a gatekeeper and coordinates all care for the patient (provides referrals to specialists and other healthcare services)

      • Without a referral, the plan won’t cover the specialist care

    • No deductible

    • No OON Coverage

  • PPO - Preferred Provider Org

    • Has IN vs OON cost structures (OON is more expensive)

    • Has deductible

    • Has PCP copay & specialist copay

  • POS - Point of Service Plan

    • Same as an HMO plan, but has OON coverage

  • CDHP - Consumer Directed Health Plan

    • Good for healthier individuals who are less likely to use insurance 

    • Higher deductibles, but lower monthly premiums

    • Paired w/ a tax-advantaged account such as Health Savings Account (HSA)/Health Reimbursement Arrangement (HRA)

      • HSA = An HSA is a tax-advantaged savings account that individuals can use to pay for qualified medical expenses. Contributions to an HSA are tax-deductible, and withdrawals for eligible expenses are tax-free. HSAs are also portable, meaning you can take the funds with you even if you switch employers.

      • HRA = An HRA is an employer-funded account that reimburses employees for qualified medical expenses. Unlike HSAs, HRAs are not portable and are typically tied to the employer.

The Insurance Business

Behind that plastic card are some very powerful people and companies.

Here are some you should know about. In future posts we’ll go more in depth about the inner workings of them (especially PBMs).

• Insurers - provide insurance coverage, manage risk, and process claims

  • Ex. UnitedHealthcare (~$450B (as of 06/10/24) Minnesotan behemoth, larger than next 5 competitors combined), Blue Cross Blue Shield, Aetna, Cigna

• Employers - offer health insurance as part of employee benefits packages, often sharing the cost of premiums with employees

  • Usually businesses or the government (if you’re in the public sector)

• Third-Party Administrators (TPAs) - handle admin functions for self-funded plans (claims processing, provider network management, and customer service)

  • Ex. Meritain Health, UMR, HealthSCOPE Benefits

    • United Healthcare owns both UMR and HealthSCOPE, and you’ll see this pattern with a lot of health plan companies. They don’t want to lose money from employers choosing self-funded plans, so they’ll try to provide services that help with this.

• Healthcare Providers - the people/institutions providing care (doctors, hospitals, clinics, specialists, pharmacies, etc.)

• Government agencies - handle regulation and ensure compliance, provide public health insurance programs

  • Ex. Centers for Medicare & Medicaid Services (CMS), state insurance departments, the Department of Health and Human Services (HHS)

• Brokers and agents - will help individuals or employers figure out what plan to buy

  • Can be independent (not tied to a specific insurance company) or captive (exactly as it sounds)

• Pharmacy Benefit Managers (PBMs) - manage prescription drug benefits on behalf of health insurers, negotiate with drug manufacturers, process prescription drug claims

  • Ex. Express Scripts, CVS Caremark, OptumRx

  • Stay tuned for a hit piece on PBMs by yours truly

• Reinsurers - provide insurance to insurance companies, helping them manage risk by covering large or catastrophic claims

  • Ex. Munich Re, Swiss Re, Hannover Re

If you’ve gotten this far, congrats!

You’re no a longer a complete dummy when it comes to insurance.

In our coming posts we’ll cover what actually happens when you use your insurance card (Spoiler alert: the businesses above make money).

And if there’s anything in this primer you were curious about or think we should modify/add let us know!

— Suli & Praneet