This is the third in a series of four articles targeted to human resource, benefits, and financial professionals responsible for the management of the health & welfare plans for their organization.
The current healthcare environment has forced employers of all sizes to ask important questions about the coverage they provide to employees. Since many employers regard health coverage provision as a key competitive advantage, rising costs stimulate employers to uncover new and more effective ways to limit increases and maintain employee morale as well as constrain costs. For employers new to the market or those offering a fully insured plan, there is a strategic opportunity to decrease costs and achieve savings anywhere from 5% to 15% by self-funding or partially self-funding their health plan.
Why Consider Self Insurance?
There are many benefits to self-funding, including plan design flexibility, cost transparency, and savings. For those employers willing to aggressively manage their costs, moving to self-funding can reduce costs immediately while implementing health interventions that can create a long-term positive affect on health care trend moving forward.
In addition, self-funded employers can benefit from:
- Escaping the Health Industry Tax – These taxes can load fully insured premiums from 3% to 4% per year.
- Avoiding State Premium Taxes and State Mandated Benefits – Many states include a premium tax of between 1.5% and 3% depending upon the state. This tax is passed along to fully insured employers in the form of higher premiums. Also, each state has it’s own list of mandated coverage that fully insured plan must provide which can add significant costs to the program.
- Eliminating Insurance Carrier marketing and Retention fees – Health insurance premiums charged to employers include provision for expenses for new business, marketing, and current client retention.
- Understanding the administrative costs of running the program – In a fully insured plan, administrative cost (i.e. costs to pay benefits, maintain a network, etc.) can run from 10% to 12% of premium. In a self insured environment, expenses are more transparent as they are paid directly to a carrier or TPA as flat dollar charge giving employers an opportunity to negotiate multi-year agreements with the most cost effective providers of services in the market.
- Keeping and Investing Reserves and Benefitting from positive claim experience – In a self-insured plan, the money for claims comes from the operating income of the employer rather than paid as a portion of the premium charged by the carrier and in years where health costs are below expectations, the dollars saved flow directly to the bottom line.
- Receiving a cash flow advantage – Moving from a fully insured to a self- insured plan creates a cash flow advantage as the new plan matures. The run-out of claims from the fully insured plan will be paid by the previous carrier while new claims will be going to satisfy the deductibles, etc. under the new plan. During this period companies can use the excess cash to create a book reserve for claims which have been Incurred but not reported at all time under the new plan.
- Understanding the cost drivers for their population – In a fully insured plan, carriers do not consider the data employer property. Under a self-insured plan, employers have access to all population health data which gives employers the opportunity analyze the conditions and chronic disease which are relevant to their population.
How Do Medium Sized Employers Control the Risk of Self-Funding?
Many employers of all sizes are assessing the benefits of self-insuring but are concerned about dealing with the risk and volatility. Typically, the employer contracts with a carrier to provide stop-loss insurance to minimize or eliminate the risk of both large claims incurred on an individual basis (called “individual stop loss”) and/or purchase insurance to place a cap (called an “attachment point”) on the company’s maximum exposure (called an “aggregate stop loss”).
Under an aggregate stop loss policy, a self-funded company contracts with a stop loss insurer to pay when claims reach a pre-determined level. For example, an employer may purchase an aggregate stop loss policy that would cover all claims above 125% of expected cost. Assuming a company had expected claims for the year of $300,000:
- The first $300,000 would be the responsibility of the company
- The next 25%, or $75,000 would also be the company’s responsibility and is called the risk corridor
- When aggregate claims reach $375,000 the company has reached its maximum claim liability and from that point forward, claims will be covered.
Individual stop loss works in a similar manner but on an individual basis. Assuming a company purchases individual stop loss with a $50,000 attachment point, and an individual incurred expenses totaling $250,000. The first $50,000 would be paid by the company and the remainder paid by the stop loss carrier. Additionally, only the $50,000 would count towards the aggregate claims number.
Choosing the right levels of Individual and Aggregate stop loss is a function of the employer’s size, nature of the business, financial experience and of their tolerance for risk. However, employers that take the time to properly evaluate this can structure a program where the benefits of self-insuring far outweigh the risks.
Using Captives to Minimize Healthcare Costs
Many medium sized employers who wish to self-fund may want to take the additional step of self-funding all or a portion of the stop loss insurance by participating in an employee benefit group captive. A Captive functions essentially as an insurance company that is owned by the employers who participate. The intent is to act as a buffer and provide protection from risk and volatility by creating a larger group of employers to insure or reinsure the risks of the participating companies. The general structure of the risk financing would be an initial layer that the Employer would retain on a self-insured basis, expected losses above the first layer (incurred by member companies) would be paid by the Captive up to a level that would be paid by the stop loss reinsurer. The major advantages of a Captive is that the profit and control remain under the employer’s oversight and that they are designed to limit the large increases that sometimes occur in the stop loss market as well as eliminating the ability of stop-loss carriers who may on a year by basis exclude high risk claimants from the coverage (called lasering).
Is Self-Insuring Right For My Company?
As you can see, there are many considerations in making the move to self-funding and it is not right for all companies. Generally speaking, companies with inadequate financial resources and/or poor cash flow would not be good candidates for self-funding. Additionally, employers with a short term view of health cost management may not be a good fit as self-funding deals with risk transfer and financing of the program but does not deal with the underlying opportunities available in plan design and health initiatives that will have give you the long term success in managing your program. Asking the right questions of your advisor to help you make sense of all the options out there is critical to the overall success of the program.
Our final article will be focused on putting it all together and creating a roadmap for your employer’s health care management program. If you would like to discuss some of these options and their applicability to your organization, please contact us at consult@ubf.consulting.
Allan Phillips is a Managing Principal at UBF and has over 25 years experience as a senior health care and pension consultant. He has worked with Fortune 50, 500 and mid-size companies to assess, develop, and implement integrated benefits programs for global organizations.