Arizona Healthcare Dollars for Employer Market Segments by Payment Source, 2002 - 2010

PEPM or PMPM?

As illustrated in some of the charts on this web site, health care costs can look very different depending on how they are displayed. In particular, it's important to understand the distinction between costs expressed on a "PEPM" (Per Employee Per Month) basis and costs expressed on a "PMPM" (Per Member Per Month) basis. Both can express the concept of health care costs associated with individuals covered under employer-sponsored health coverage, but on the surface they may seem to tell different stories.

Let's take the example of John Doe's Grocery Emporium, a business that employs 100 individuals who all participate in the employer-sponsored PPO. 44 of those employees purchase single coverage, while the remaining 56 employees purchase family coverage. Altogether 240 employees and dependents are covered through the plan, which means the average number of persons covered per covered employee is 2.4. Last year the plan's total costs (employer premium contribution + employee premium contribution + out of pocket expenditures) were $800,000.

To express last year's health care costs PEPM, we divide the $800,000 by the number of covered employees and then by 12 to take us from an annual figure to a monthly figure. Thus, average monthly per employee health care costs were $666.67 ($800,000 / 100 / 12).

To express last year's health care costs PMPM, we divide the $800,000 by the number of covered members and then by 12 to take us from an annual figure to a monthly figure. Thus, average monthly per member health care costs were $277.77 ($800,000 / 240 / 12).

Seems simple enough, right? Well, it can get more complicated! Look at this chart that expresses health care costs PMPM-on average, small employer health care costs are higher than large employer health care costs.

The next chart shows the same information expressed on a PEPM basis-now it appears that small employee costs are very similar to large employer costs!

How can they both be right?

The statistics provided above for John Doe's Grocery Emporium are pretty typical of a large employer, but small employer health care coverage tends to look somewhat different, leading to the confusing results shown in the two charts. If we go next door to Betty's Coffee Shop and Internet Café, we might see that of Betty's 20 employees, 12 purchase single coverage and 8 purchase family coverage. For the small employer, 60% purchase single coverage instead of the 44% we saw in the large employer. Altogether 40 employees and dependants are covered under this health plan (2 per employee versus the 2.4 per employee in the large employer). Last year total health care costs for this group was $144,000. That's a PMPM of $300 ($144,000 / 40 / 12) and a PEPM of $600 (144,000 / 20 / 12).

Expressed as a per employee cost, small group health care costs appear lower, but that's because on average, fewer people are covered!

Which is better?

If showing both PMPM and PEPM costs is so confusing, why do we show both? Which is better?

Generally, comparison on a per member (PMPM) basis is better because it provides a more comparable basis. Further, if you want to compare costs between employer-sponsored insurance segments and non-employer segments, PMPM is preferred because PEPM has no analog in some other segments, like Medicaid.

PEPMs are often used by employers because they tend to think of health care costs by the cost per employee rather than cost per person covered. Also, many news articles and media sources such as the National Survey of Employer-sponsored Health Plans, conducted annually by Mercer Health and Benefits LLC, will show costs on a PEPM basis. Thus, we have included PEPM information here for comparison of Arizona to these national benchmarks.

The key is to understand what each data source you are reviewing is actually showing, PMPM or PEPM, and to use the appropriate interpretation of the results.

Notes:

Small employers are those employers who employ 50 or fewer employers. Remaining employers are classified as "large employers."
Out-of-Pocket (OOP) expenses relate to costs the individual pays when a healthcare service was provided; for instance, annual deductibles, co-payments, and coinsurance.