The Cost of Rising Health Care

Rising Health Care Costs
Could Self-Funding be the Answer?

According to the 2006 Kaiser Family Foundation Employer Health Benefits Survey, 55 percent of all U.S. companies partially or completely self-fund their healthcare plans.

An increasing number of employers have made the change to self-funding as a way to reduce costs. Self-funding may not be right for every organization. Employers considering a switch from fully funded to self-funded health plans should carefully consider the pros and cons before making the leap.

What is self-insurance?
When covered by a conventional insurance plan (fully funded), organizations pay a monthly premium, the cost of which includes the insurance company’s projected claim costs, overhead costs, profits, taxes, reserves, as well as various other charges. In exchange for this monthly premium, the insurance company assumes financial responsibility for claims filed on behalf of members based on the terms of the plan.

Self-funded plans, sometimes referred to as self-insured plans, offer an alternative to traditional health insurance plans. Employers can partially or fully self-insure their health benefits plans, typically health, dental and vision coverage.

Company size considerations
Most large employer groups self-fund their health benefits plans, assuming the financial risk for paying all employee health care claims out of pocket. Eighty-nine percent of employers with 5,000 or more workers self-fund, spreading their claims risk over a large employee population.

An alternative for smaller firms – generally those with 200 or more employees – is to partially self-fund their health benefit plans. The cost of a partially self-funded plan has fixed components similar to an insurance premium, such as administration fees and stop-loss premium. These and any other set fees charged per employee are referred to as fixed costs.

The employer sponsoring a self-funded plan also pays the claims costs incurred by the covered persons enrolled in the plan, and this cost varies from month to month based on health care use by the covered persons. Partially self-insured health plans allow a company to budget for small predictable claims while protecting the group against unpredictable catastrophic claims, through the purchase of stop loss protection.

Types of coverage
There are two principal types of stop-loss coverage, “specific” and “aggregate”. Specific stop-loss coverage is designed to protect against individual claims that exceed a predetermined limit. Aggregate stop-loss covers claims for an entire group and takes over when claims exceed a predetermined amount – either a dollar amount or a percentage of estimated costs. The amounts set for specific and aggregate coverage depend on the company’s size and cash flow capabilities.

While some large employers self-administer their self-funded group health plan, most smaller firms contract with a third party for assistance in claims adjudication and payment. Third party administrators provide these and other services, such as access to preferred provider networks, utilization review and the stop loss insurance market.

Advantages of self-insurance

• Flexibility in plan design – By self-funding, employers are able to design their own customized health benefit packages rather than a one-size-fits-all insurance policy.
  
  
• Far fewer mandates than state regulations – Self-insured plans are governed primarily by the Employee Retirement Income Security Act (ERISA) and are exempt from many state regulations mandating costly benefits. For multi-state employers, self-funding can help create national consistency by elimination of the need for state-by-state compliance.
  
  
• State Premium Tax savings – Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 2-3 percent of the premium dollar value.
  
  
• Additional cash flow – The employer’s cash flow is improved when money formerly held by the insurance carrier in the form of reserves, for unreported and pending claims, is freed for use by the employer.
  
  
• Carrier profit margin and risk charge eliminated – Carriers assess a risk charge for insured policies (approximately 2% annually), but self-insurance removes this charge.
  
  
• Retain reserves when the Plan has a good year – An employer saves money when his plan’s claims experience is better than expected. Their experience is only based on their own population, and not pooled with other employers, who may have poor claims experience.

Disadvantages of self-insurance

• Employer assumes risk – The biggest disadvantage of self-funding is the assumption of greater risk. A year that brings large, unanticipated medical claims can be devastating to employers with poor cash flow. Self-funding also can make budgeting more difficult because health care outlays will vary from year to year. In contrast, fully-funded employers know the amount they’ll need to pay out over a specified period of time.
  
  
• Asset Exposure – The employer’s assets are exposed to any liability created by legal action against the self-funded plan.

• Fiduciary Responsibility – ERISA imposes a fiduciary duty on employers who self-fund, making them responsible for administering their plans in a prudent manner that is consistent with the plan and in accordance with fiduciary obligations under ERISA.

Dental and Vision Care
Unlike medical services, dental and vision services are predictable and rarely catastrophic. Wide fluctuations in cost and use of services, typical in medicine, are rare in dental statistics. Instead of purchasing insurance coverage from an insurance carrier, an employer can create a self-funded plan where they assume the responsibility for paying employee claims. The cost savings experienced from moving from a fully insured to self-funded dental and/or vision plan can be substantial.

Is it right for your company?
Knowing facts, such as whether your workforce is mostly young or old, whether the majority of claims were due to chronic illnesses or one-time incidents, and the total dollar amount of claims, will help you budget for claims in the future. Self-funding should be viewed as a long-term strategy in which good and bad years average out in the employer’s favor. Self-insured plans work best for companies that have a strong cash flow or reserves. Understand what your cash needs are, so you have money available to make timely claim payments.

Self-funding is an important option for employers to consider. When deciding if self-funding is right for your organization, the most important step you can take to assure that you make the best decision is to have an experienced consultant assist you. By carefully analyzing actuarial cost factors for age, gender, area, plan design and claims, employers can weigh the risks and the rewards.