NEW YORK (TheStreet) -- Companies looking to trim costs might want to consider moving to a self-insured health care coverage plan. These plans come with added risk but give employers flexibility on cost and allow for negotiations over bloated medical bills -- and it could also be an important step in preparing a company for acquisition or initial public offering.
"Health care is one of the top five cost drivers for any organization," said Steve Kelly, CEO of ELAP Services, a company that provides the service of helping companies that are self-insured lower their medical bills.
Healthcare costs in the U.S. are projected to hit $3.207 trillion this year alone.
One reason so much is spent in the U.S. on health care is a lack of transparency in medical billing and that everyday items often cost patients far more when purchased in a hospital rather than a pharmacy. For instance, on hospital "gross charges," one ELAP audit found a $29.99 charge for a gauze pad that can be bought at a drugstore for $1.99.
This is a problem that self-insured organizations can tackle with the help of firms like ELAP. Here's how it works:
Organizations that are self-insured pay their employees' medical bills as they come, rather than paying premiums to an insurance company, which then pays the bills. Companies like ELAP act as a middleman and negotiator. When the bills come in, they are audited carefully and scrutinized for charges that are beyond their actual costs, as reported to Medicare. From there, medical providers are allowed to keep a fair margin above cost, typically 12%-to-25%, with the savings returned to the employers.
"As soon as the bill comes in, we immediately re-price the bill and the savings would occur instantaneously," said Kelly, adding that the average case sees a 20% reduction in long-term health care expenses.
The city of Marion, Ind. was facing a $5.2 million budget deficit. The municipality employs 265 employees and saw health care costs growing out of control. According to Mayor Wayne Sebold, switching to self-insurance and engaging a firm to manage the individual bills freed up $2.7 million in the budget along due to a 50% reduction in long-term health care costs. The move led to a Standard & Poor's bond upgrade from near-junk status to A- in one year.
While self-insured companies pay no premiums, they are open to the risk of extremely high bills from catastrophic medical events. To protect against this, companies can purchase what is known as "stop-loss" insurance, which would cover them for claims above a specified dollar amount.
Switching to this kind of health plan could help companies preparing to be acquired or for an initial public offering trim a significant long-term cost, which could help boost a company's valuation, according to Philippe Burke, founder of Apache Capital, a New York City hedge fund.
"Let's say total expense is $100 and health care is $10 and you can reduce the $10 by 20%," said Burke. "Now it becomes $8. That means your overall earnings increased by $2."
Shriram Bhashyam, co-founder of EquityZen, a marketplace for investing in pre-IPO companies, said developments like these can impact trade value under certain circumstances.
"If revenues are increasing in proportion to expense management, that should increase valuation," said Bhashyam, a former bonds trader and securities lawyer. "If you're able to cut expenses in a way that doesn't impact revenue generation or revenue-generating efforts, then that should increase stock price, all things being equal."