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California Needs to Innovate on Health Care

This article first appeared on the North Bay Business Journal.

Health benefit costs are rising two times the rate of wage increases

After working in the employee benefits industry for the last 12 years, I am shocked that we are so far behind the rest of the country in controlling health care costs.

Aren’t we the state of innovation and ideas?

On average, Californians spend 26% more in health care premium than the rest of the country. According to the Kaiser Family Foundation, the average monthly premium for single coverage in the United States in 2018 was $574. The California Health Care Foundation reported that the average premium for single coverage was $726 for the same year.

This means that we are spending nearly $2,000 more annually than our neighbors to the East – before we even set foot in a provider’s office. Just as alarming, health benefit costs are rising at two times the rate of wage increases and three times the rate of inflation, according to the Society for Human Resource Management (SHRM).

In fact, when employee and dependent costs are averaged together, SHRM reports that employer spending will exceed $15,000 per year per employee in 2020. As a result, employee benefits spending has become a top line item on the profit and loss calculations for most companies.

While there are certainly many contributing factors, part of the answer can be found in the way that California employers’ structure their health plans compared to the rest of the country. As a state, we are mostly approaching this large expense as retail buyers. The rest of the country has long since accessed wholesale and even institutional level pricing.

The Kaiser Family Foundation polled more than 4,000 employers in 2018 and found that 61% nationally are utilizing an alternative funding approach for their medical plan. This includes 91% of employers with 5,000+ employees and 87% of employers with 1,000-4,999 employees. Even half of employers with 200-999 employees are choosing to fund their plan in a non-retail way. In sharp contrast, only 30% of all California employers have an alternatively-funded plan. This represents an enormous opportunity for employers to reduce one of their largest expenses.

There are two primary ways alternatively- funded plans can reduce an employer’s costs. First, employers can eliminate many of the taxes and fees that have come about since the inception of the ACA (wholesale pricing). Second, employers can take control of the vendors that make up their health care supply chain and make sure that only the very best and most efficient are part of their plan (institutional pricing).


Significant savings can be obtained just by changing your relationship with your existing carrier. By transitioning to an administrative service only contract (ASO) a company can shed many of the taxes and fees that make up a growing portion of their fully insured premium. According to Milliman, one of the world’s top actuarial firms, these fees are increasing (again) from 10% to 13% of an employer’s health care premium in 2020.


The Institute of Medicine reports that 30% of health care spending is waste. Employers can address this when they “unbundle” their plan. These employers choose to work with a third-party administrator (TPA) so that they can manage the supply chain that is delivering health care – just like they do with all their other business units. Vendors are selected for their quality and efficiency.

Also, they are required to operate with fiduciary responsibility to the employer and the plan. It is no longer an option for them to allow an insurance company – whose fiduciary obligation is to its shareholders – to control the supply chain without transparency. When done properly, the waste, fraud and abuse that make up 30% of retail health care costs can be eliminated.


While the average per employee per year costs are surpassing $15,000, companies that take an alternative approach achieve results that are often below $10,000 per employee per year – while improving the benefits offered to their employees. This is a simple calculation of total premium divided by the number of enrolled employees in the plan.


The actual cost of care has only been going up 2.7%/year and the cash price for many expensive procedures have gone down (according to the centers for Medicare and Medicaid services national health expenditures data). Firms that take control of their plan experience increases that are in line with real costs.

As we head into the sixth straight year where costs will rise by more than 5% it is time for California employers to implement the innovation and ideas that are already working for the rest of the country.

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