Health Plan Savings: Pie in the Sky, Understated or Real? Measurement Considerations and Tips
By Zachary Nelson
Health Watch, January 2023
Health plans are investing in programs to try to control the rising costs of health care while maintaining or improving quality of care and provider and member satisfaction. Over time, programs are becoming more robust in their specificity and measurability. Actuaries will be called upon to help validate and measure savings driven by these programs.
Stakeholders’ initial thoughts to savings measurement results may include the full range from the results being overstated, about right or understated. Financially minded stakeholders will likely differ from stakeholders directly operating or overseeing the savings programs. Those respective perspectives’ initial thoughts may sound like the following:
Financial Perspective: “These savings figures are overstated, pie in the sky. If we are achieving this much in savings, we should be seeing impact to trends and our bottom line.”
Operational Perspective: “These savings are understated. Our program is hard at work touching members every day. We know there are more uncaptured savings than what is being measured.”
Before responding to these as right or wrong, keep an open mind. The perspective of stakeholders depends on how they view and plan to use savings, and their expectations may not fully align with the actuarial approach. Here are some considerations and tips to help you address challenges you may encounter with measuring savings.
Cost Savings vs. Cost Avoidance
Many programs will tout savings and improved quality of care attributed to avoiding future costly conditions or procedures. Measuring the value of costs avoided in the future is more challenging than immediate cost-saving programs. The following is how actuaries may classify and delineate between cost savings and cost avoidance.
Cost Savings
- Tangible—derivation is intuitive and measurable with claims experience.
- Immediate impact to financial statements.
- Example: Changing a member’s prescriptions from high-cost brands to low-cost generics that are equivalent in terms of efficacy, quality and safety.
Cost Avoidance
- Less tangible—measurement is tied to previously observed study or claim savings assumption.
- May include upfront or short-term cost with longer-term benefit (more than one year out).
- Immediate impact to financial statement is not likely.
- Example: Closing cancer screening quality gaps will lead to the removal of polyps identified during routine colonoscopy, potentially avoiding a cancer diagnosis and long-term treatment costs.
When measuring cost avoidance in addition to cost savings, consider your approach to the following.
Communication. Prepare to clearly communicate to program owners how cost avoidance is being included or excluded in the measurement and why. This will help avoid stakeholder misunderstandings . Communicating early and often with stakeholders on your measurement approach will help garner alignment and avoid hurdles with stakeholder buy-in as you approach final measurement roll-out.
Present value. Long-term savings are not guaranteed. Determine appropriate assumptions to discount long-term savings on member engagement taken today.
Accounting. Determine a process for tracking whether cost avoidance savings realized in future years have already been accounted for in prior years.
Value Story vs. Health Plan Financial Impact
Be prepared to navigate your stakeholders and their needs. Modeling savings may support financial planning and analysis, marketing and sales, or both. The savings of the program measured may differ on the stakeholder perspectives. While financial planning and analysis will focus on the savings impact to the health plan’s financial statement, marketing and sales may focus on additional savings to the member’s cost sharing or a self-funded group’s claims cost.
Marketing and sales projecting the value of programs to individual members and groups can be referred to as “value story.” Value story savings will differ because the impact to health plan financials will reflect immediate quantitative savings, whereas value story may also reflect qualitative value and future savings beyond the current financial reporting period. Some value of the program will be retained by self-funded groups, cost sharing savings to the member, as well as longer-term member benefits that are lost to the health plan due to disenrollment. Here is a nonexhaustive list of considerations where value story may differ from the impact to health plan financial statements.
Member cost sharing. Value story will capture the savings of lower member cost in addition to lower health plan cost for covered services. Financial savings to the health plan will exclude member cost share savings.
Self-funded groups. Savings driven for self-funded groups will benefit the groups’ financials but not the health plan’s financials. Experience rated, large, self-funded employers that engage in savings programs will benefit from the value of lower annual health care funding expense in future rating periods.
Length of measurement. Financial management is interested in the immediate impact of savings due to yearly enrollment changes and repricing of products. Value story may shift the time horizon, depending on use.
Program cost. Including the cost of programs will offset savings and should be considered for financial impact. Value story may focus only on the gross savings driven by programs.
Quality outcomes. Programs maintaining or improving quality may not have immediate claim cost savings to measure for health plan financial impact. Value story will try to quantify the longer-term savings tied to quality and highlight the impact of quality on member experience. Additionally, quality programs can impact health plan revenue tied to national or state quality incentives, which may be estimated in value story.
Additional Considerations
You will want to consider several more detailed nuances when measuring savings. The following considerations will help ensure appropriate calculations and avoid misinterpretations or misuse of model outcomes.
Normalization. Consider the impact of membership growth and mix as well as how to normalize. For example, look at per member per month changes to neutralize for year-to-year volume changes.
Trend and pricing impact. When reporting the impact of measured savings to trend and budget, consider whether pricing and trend expectations already include those savings.
Persistence. Members and groups may change coverage throughout the year or annually when eligible. Apply a member persistence assumption on savings that may not be realized due to disenrollment.
Line of business mix. Member benefits and behavior differ significantly by line of business. Measure separately or monitor mix impact as well as applicability of actuarial assumptions by line of business.
Regional mix. Consider regional differences and normalize them when comparing programs in different regions.
Return on investment. Savings may increase with greater program investment (cost), but return on investment (ROI) may decrease. Monitor the balance of changes in gross savings growth, ROI and quality outcomes.
Duplication of savings. Health plan members who are eligible for one program are often eligible for multiple programs. Check whether members can be enrolled in multiple programs. If so, have a plan to mitigate or eliminate the risk of savings duplication from member overlap among programs. In addition to health plan–driven programs, keep in mind the potential overlap of value-based payment providers and their programs’ impact on managing the cost of attributed members’ care.
Collaboration. Collaborate with other subject matter experts such as data scientists, analytics professionals and clinical teams. Partnering with and leveraging their experience will give the savings modeling team more credibility when rolling out program savings reporting.
Questions and feedback. Ask questions to confirm that your modeling is capturing program goals and expectations. Stay open to feedback when the results of modeling differ from expectations. Reviewing results is a great opportunity to correct misunderstandings and help program teams maximize their economic impact while maintaining quality of member care and experience.
Summary
Rarely is there only one right way to measure program outcomes. By managing the considerations given here and collaborating with other program stakeholders when reviewing measurement approaches, you will be more likely to measure savings and quality outcomes accurately and appropriately for the intended end users.
Statements of fact and opinions expressed herein are those of the individual author and are not necessarily those of the Society of Actuaries, the editors, or the respective author’s employers.
Zachary Nelson, FSA, MAAA, MBA, is a manager of actuarial services at Excellus BlueCross BlueShield. Zachary can be reached at Zachary.nelson@excellus.com.