Why Self-Funding is the Future of Health Care

Health Care costs have escalated at an average rate of roughly 10% over the past decade.   In an attempt to to maintain affordable health plans in the private industry employers have been forced to direct costs towards employees.  This translates to higher deductibles, higher co-pays, and a narrower network of providers, ultimately leaving everyone unsatisfied. 

Employers familiar with self-funded worker’s comp programs are quickly finding partially self-funded health plans to be a major asset in the fight against rising healthcare costs.  Fortune 500 companies have been using this tactic since 1974 when ERISA opened new possibilities for self-insurance.  Self-Insurance has gone from abstract to mainstream as major insurance carriers like Aetna, Cigna, and even Anthem have introduced proprietary self-funded models.

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Although you can quickly get into the weeds when discussing the finite details of partially self-funded plans to understand them better let’s start with a basic fully insured model and work backwards.  Fully insured plans typically are a HMO/PPO model.  After selecting an insurance carrier a group sifts thorough hundreds of plans to determine what benefits they would like to offer and what is affordable to the group.  The two biggest factors that affect a groups' cost are are plan design, ( deductibles, copays, & out of pocket max,) and the network, the medical facilities available within that plan design.  As the copays and deductibles go up the cost of the insurance goes down.  As the network gets narrower the cost goes down as well.  This is pretty basic and has been the primary method of control rising costs in addition to asking employees to pay a greater share of overall premiums.  To keep cost constant the group most always take something away from their employees.

With the advent of ACA there is now a line drawn in the sand when it comes to benefit plan design.  As of January 1^st 2014 employers must offer plans that covers a minimum of 60% of an employee’s medical costs and employers cannot charge the employee more than 9.5% of their annual salary.   You can quickly see that with this law in place at some point employers will no longer be able to transfer costs to their employees.  For more information on ACA and “Pay” or “Play” penalties visit our blog.

This law applies to companies with more than 50 full time or full time equivalents.

Fully insured plans charge premiums up front

In the fully insured world an employer selects a plan and applies for insurance from a carrier.  The carrier evaluates the company based on its current rate and rate history.  Underwriting assigns a risk to the company and applies a rate corridor usually 25% above expected claims.  Assuming normal plan utilization the insurer will come out ahead.  High utilization of the plan or poor underwriting can result in higher than normal rate increases for the group.  This model is set up as a pre-pay system.  The insurer estimates how much insurance the group will use then builds in profit margins and risk loads to determine a monthly premium.  The less insurance the group uses the more profit the insurer makes.  If the group uses more insurance than estimated
by the insurance company the insurer will raise rates the following
year to recoup losses. Rates never go down under this format.  It is worth noting that part of the healthcare reform now forces insurance companies to spend a minimum of 85% of premiums on claims.  Any premiums collected over that amount now must be refunded back to the group.

Self-Funded Plans vary in structure from fully insured plans in that the group pays claims as they occur rather than a set monthly premium.  This means an employer with 200 employees paying $100,000 a month in health insurance premium on a fully insured plan might pay $30,000 one month if employees aren't using the plan and $150,000 the next month if there is high utilization.  Again, under this format the group is paying claims not set premiums.  Claims are paid directly to the medical provider through a TPA (Third Party Administrator)  The TPA provides the group with a monthly report of all claims.  This claim report complies with HIPPA but allows the employer to see where medical dollars are actually being spent.  Once the claims are approved by the group money is transferred into an account for the TPA to pay the claims.  One major benefit of self-funding is complete transparency.  Claims information can be used many different ways to fine-tune the plan and cut expenses through wellness programs and PBM re negotiations. 

Renting a Network Maximizes Discounts

The next component of self-funding is the network and plan design.  Medical carriers like Cigna, Blue Cross, and Blue Shield will let an employer, “rent” their network.  Since insurance companies provide medical groups with a high volume of patients they can demand a discount in the range of 40%- 50% off all services provided.  The insurance companies will let a group rent their discount on a PEPM basis, normally around $15- $18 a month.   The insurance company is willing to accept this arrangement since it makes a small profit and assumes no risk since there is no insurance involved. These contracts are set up through the TPA.

Flexible Plan Design allows groups to determine benefits

Plan design is determined by the group.  Since the group is no longer buying standard insurance they have the flexibility to set co-pays and deductibles where they see fit, add services like chiropractic, or exclude certain high cost brand name drugs.   Often times this is a difficult concept for groups to grasp but since they are self-insuring they now have flexibility to take on some of the roles previously administered by the insurance company, one of them being plan design and network selection.  Self-funded clients are normally surprised at how little plan design affects overall cost. This of course allows groups to offer much richer benefits to employees.  

The 3 Major Components in a SF Model are Claims,
Reinsurance or "Stop-Loss," and Administrative
Fees.  Admin fees include the TPA & Network.

The final piece of the puzzle is reinsurance.  Partially self-funded plans have an element involved called stop-loss insurance.  This functions much like your car deductible.  Stop-loss comes in two flavors, specific and aggregate.  Specific sets a ceiling on each member of the group to protect against catastrophic losses.  This ceiling is generally set somewhere between $50,000 -$75,000 but can be set higher or lower depending on the size of the group.  Once the ceiling is hit the stop-loss carrier pays all claims past that ceiling.  This ensures that the plan won’t “blow up” because of one individual person with extraordinarily high claims.  It is quite normal to have two to four stop-loss claims hit the specific ceiling on any given year for every one hundred employees on the plan.  Aggregate stop loss or “worst case scenario,” insurance covers all claims incurred by a group.  This includes everything from the cost of normal checkups to major surgery.   The aggregate sets a concrete number on the maximum yearly cost of a plan.  If a fully insured group receives a self-funded proposal and their aggregate is the same or even slightly higher than their guaranteed fully insured cost that group is a good candidate to self-fund.  Only 2% of self-funded groups hit there worst case scenario on any given year meaning their their is a huge potential to save money even with average plan utilization.   

80% of employers are better off self-funding

Health insurance conveniently plays by the 80/20 rule.  Twenty percent of people account for eighty percent of medical costs.  Health Insurance is also geographically rated meaning that your next door neighbor is adversely affecting your rates even if your group is healthy.   Self-funded plans are self-contained meaning the group pays for the insurance they use.  Stop-Loss premiums are also calculated based the previous years’ exposure.  They have the unique quality of going up or down based on usage. 

Discovery Benefit Solutions has more self-funded clients in the range of one hundred to five hundred employees than any other locally owned health broker in Southern California.  Our clients have self-funded their plans for over 20 years a continually beat out fully insured rates.  In addition to flexibility in plan design and cost saving as much as 25%, self-funding creates leverage for negotiating with fully insured carriers.  For more information on self-funding visit www.discoverybenefitsolutions.com 

By: Andrew Oram