This imaginary case study illustrates a common practice in the insurance industry to maximize revenue through deception.
By Bill Rusteberg
A self-funded plan sponsor is considering a proposal from a major insurance company (TPA) to administer the group’s health & welfare plan. The TPA makes it clear that it would be to the financial advantage of the plan sponsor to bundle all services, including claim administration and pharmacy benefit management under one contract.
Here is how the deception is crafted:
TPA determines what they need to charge to administer claims. Let’s say they determine they need $40 PEPM as their TPA administration fee.
They then inflate this fee by $10 for a total TPA fee of $50 PEPM.
TPA informs the client that if TPA is allowed to package their Rx program with the medical plan, they will credit 100% of Rx rebates against the TPA administration fee. The TPA warrants and represents that 100% of Rx rebates will be the exact equivalent of $10 PEPM. In this case the $50 fee will reduce to $40.
TPA must be very good at predicting what 100% of the rebates will be prior to the beginning of the plan year before claims are incurred and paid.
TPA ends up getting the admin fee they needed in the first place and 100% of the rebates. Plus they get to develop the Rx formulary – you can bet it is stacked to generate the maximum amount of rebates available.
This charade is the equivalent to a car dealer giving a trade-in value off an inflated, arbitrary number, while selling the new car above factory invoice. The customer thinks it is a good deal. The car dealer ends up with a free used car and earns a profit off the new car.
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