Many CFOs feel stuck with rising health plan costs. Premiums and claims go up every year, compliance gets more complicated, and the usual answer at renewal is to pass more of the cost to employees. There is a better way to run the plan, and it starts with treating it the way finance treats every other large line item. This playbook grew out of the Ethos Benefits webinar of the same name, which featured Brenda Kruse, CFO of Axiom Healthcare Services, on approaching health care as a purchaser.
Why is the health plan a financial line item?
For most employers, the health plan is one of the largest costs after payroll, and one of the least predictable. When it grows faster than revenue, it takes money that would otherwise go to hiring, raises and investment.
Yet the plan rarely gets the discipline a CFO gives to other spend of the same size. There is no multi-year budget, no quarterly variance review, and no competitive bid on most of the vendors. The decision happens once a year, at renewal, often within a few weeks of the deadline.
Does the health plan carry fiduciary exposure?
Yes. Under ERISA, the people who decide how a health plan is run and how its money is spent are fiduciaries for those decisions. ERISA section 404 requires them to act solely in the interest of participants, for the exclusive purpose of paying benefits and defraying reasonable plan expenses, and with the care and skill of a prudent expert. Under section 409, a fiduciary who breaches those duties can be personally liable to restore the plan’s losses.
That makes paying more than necessary a fiduciary question as well as a budget question. Employee contributions are plan assets, and overpaying a vendor spends employees’ money too. For a fuller look at what the duty requires, see the fiduciary standard. For recent claims brought against employers, see ERISA health plan litigation.
What should a CFO measure every quarter?
A CFO does not need a hundred metrics. These five show where the plan’s money goes and whether the plan is on track.
| Metric | What it tells you | What to ask |
|---|---|---|
| PMPM cost and trend | Cost per member per month, medical and pharmacy, and how fast it is rising | Is trend above or below our target, and why? |
| Large claimants | How much of total spend sits with a small number of members | Are these claims priced fairly, and is care being coordinated? |
| Pharmacy share | Drug spend as a share of total plan cost, and its growth | What does the plan pay per drug compared with what the pharmacy was paid? |
| Vendor fees | Every administrative, network, PBM and advisor fee, in dollars | What does each vendor earn from our plan, directly and indirectly? |
| Stop-loss | Premium paid against reimbursements received | Is the deductible right for our size and claims history? |
Each of these depends on one thing first: access to your own claims data. A plan that cannot see its claims cannot benchmark, audit or negotiate them. Large claimant reporting and stop-loss decisions should be reviewed with care for member privacy, using only the detail the decision needs.
Questions to ask your advisor and vendors.
The answers to these questions show quickly whether your plan is being managed for you.
Ask your broker or consultant:
- How are you paid on our plan, by whom, and how much, including indirect pay from carriers, PBMs and other vendors? ERISA section 408(b)(2) requires brokers and consultants who reasonably expect $1,000 or more in compensation to disclose it in writing.
- Do we own our claims data, and can we get it in a usable format?
- What alternatives did you consider before this recommendation, and how did you benchmark them?
- What is our three to five year plan, and how are we tracking against it?
Ask your carrier, administrator and PBM:
- What does each fee cover, and what other revenue do you earn from our plan?
- Can we audit claims, and who chooses the auditor?
- For pharmacy, are rebates and fees passed through to the plan, and how is “rebate” defined?
- When does the contract renew, and what does it cost to leave?
If an answer is vague, that is information too. For more on disclosure rules, see broker compensation disclosure. For pharmacy, see how to choose a PBM and PBM reform.
Where do a committee and a 3 to 5 year plan fit?
ERISA judges fiduciaries on process, not outcomes. The question a court, regulator or auditor asks is whether the plan’s fiduciaries looked at the alternatives, followed a sound process and can show it. A renewal decided in an email thread rarely meets that test.
A benefits committee does. Most retirement plans already have one. A health plan committee, usually finance, HR and an executive sponsor, works from a written charter, meets on a set calendar, reviews the five numbers above against targets, and records each decision with its reasoning. It also spreads decisions across a documented group rather than resting them on one person.
The committee needs a plan to manage against. A three to five year plan sets the direction for funding, vendors and plan design year by year, so each renewal is one step in a strategy instead of a fresh negotiation under deadline. That is how the Ethos Fiduciary Framework™ is built, with four committee meetings a year covering governance, documents and vendors, compliance, and strategy. Ethos sets up and runs that committee work through its fiduciary governance service.
What it looked like at Kalos Services.
Kalos Services, a family-owned HVAC and trades company with about 400 employees in Central Florida, ran its plan this way. It started by getting access to its own claims data, then marketed and contracted its network, administrator, PBM and stop-loss separately. Its employees saw lower deductibles, and copays were removed for mental health, imaging and mail-order prescriptions.
As published in the Kalos Services case study, measured from October 2022, when Kalos moved to its current plan:
- 42% below national benchmarks on cost per employee per year
- $13.5M in claims savings since October 2022
- 70% lower pharmacy cost per member per month, now $17
- 81% discount on $16.7M in medical claims billed, with no balance bills
Every plan starts from a different place, and these figures describe one employer’s results, not a forecast for another. What carries over is the method: own the data, measure the plan, and manage it as a budget.
Where to start.
Start with the data. Ask your advisor and vendors for your claims data and your compensation disclosures, set targets for the five numbers above, and put the next renewal on a calendar your committee controls. A plan that is measured every quarter is far easier to defend, and to improve, than one decided once a year.