Self-funding for health care provides the control and flexibility employers crave, but does require a tolerance for financial risk
by Sean P. Johnson
Everything always looks obvious in the rear view mirror.
But when it comes to company leadership considering a switch from a traditional, premium-based model to a self-insured model, the road ahead never seems very clear.
Even companies that have used a self-funded model for workers’ compensation claims can be reluctant to make the switch when it comes to the employee health insurance plan.
It involves risk, no doubt. And employees are often pretty comfortable with the plan they already know, even if they complain about the annual rate hikes and limited networks.
But with costs continually escalating, and with leadership and rank-and file having little insight into what drives those costs, the time may seem right to chart a different path. It’s a decision that will carry financial risk, but the exchange is greater flexibility in plan design and control of costs.
Once they have made the switch, company leaders often wonder why it took them so long to see self-funding was the right path.
“It might appear to be easier to stick with the status quo, but it can be a costly choice both in terms of short-term and long-term health care costs as well as your ability to positively impact the health of your employees,” Melina Kambitsi, senior vice president, business development & strategic marketing for The Alliance, said.
“Self-funding lets an employer use plan design to come up with the right strategies for their business.”
Indeed, many companies that have made the switch to a self-funded health plan have found that having increased flexibility provides for options and greater cost controls has allowed them to offer additional options to employees they could not provide before.
At the recent NOVO Health Annual Conference, self-funded employers that took part in a panel discussion gladly reported health cost savings of $200,000 and more in a plan year.
Many use NOVO Health’s Direct Medical Market to connect their employees to best in class specialists, with costs known up front and up to 40 percent less.
What they really like discussing was what that savings allowed them to do, ranging from holding employee costs flat for multiple years to adding onsite and near site clinics to providing less traditional services such as financial counseling and other coaching designed to help with outside issues that could affect an employee’s health.
While each reported a learning curve in terms of management and employee education, they also said their management of costs is improved by the detailed information provided to manage care for employees – a unique option with self-funded plans.
“To run a successful business, employers must have full control over all aspects of their operation. And yet, with commercial fully-insured health plans, employers surrender all control of one of the highest single expenditures to the carrier,” states a self-funding guide from the Self Insurance Education Foundation. “Your employees are a major investment, and making and keeping them healthy is a smart way to manage that investment.”
The number of firms adopting a self-funded strategy has been increasing steadily as employers seek a model to gain greater control over costs, quality and access to health care. In fact, recent stats show that a majority of U.S. companies now use some form of a self-funded plan from health care, growing to 61 percent of all employers in 2018, up from 44 percent in 1999.
A self-funded plan, one in which the employer assumes direct financial responsibility for the costs of enrollees’ medical claims, have been available for more than 40 years, made possible by the passage of the Employee Retirement Income Security Act (ERISA) of 1974 by Congress.
The self-funded model is often perceived as the purview of large companies which had the financial resources and talent expertise to better shoulder the risks. But company size should not be seen as a deterrent, Kambitsi said.
While the traditional rule of thumb for an effective self-funded plan has been 100 covered lives, Kambitsi said her organization has helped companies as small as 50 covered lives create successful plans.
The not-for-profit cooperative serves more than 240 clients with self-funded plans, ranging in size from 50 covered lived to more than 8,700.
But you don’t just flip a switch and become self-funded. There are several important steps a company must take and key partners that need to be secured.
“We believe the sweet spot is an employer who is tired of the status quo and is willing to take action to control costs for their company and provide quality health care for their employees,” Kambitsi said. “It’s an employer who is willing to take on risk to make a positive change.”
Perhaps the best place to start for companies considering a move to a self-funded plan is by looking at historical claims and analyzing if there were better quality and more affordable options for the care that was delivered.
This can be a challenging task, especially since traditional insurance companies often will not share this data. But, a relationship with a good broker can be key, as they can often obtain the data.
If the data show the company can benefit financially while also offering employees more options, then it’s time to get to work. A successful transition will require planning and securing several key partners. The design of the plan and the scope of offerings will drive the number of strategic partners, but some essentials include: a third-party administrator to administer the plan, an agent/broker to evaluate the plan and develop solutions, a provider network and a stop-loss carrier to protect against financial loss from high-cost claims.
While the task can seem initially daunting, the rewards provide a great return, Mark Xistris, chief strategy officer with Wisconsin-based Health Payment Systems (HPS), said. Some of those include paying only for the health care your company uses, not paying the insurance companies profit margin and the financial benefits of good management.
“But I think one of the biggest benefits is choice,” Xistris said. “You can choose what is covered and how. You can choose best in class providers and centers of excellence. That provides creativity to that leads to a better plan, a healthier workforce and stable rates.”
Other benefits noted by Xistris and Kambitsi include:
- Improved Cash Flow. Groups can manage the cash flow in a self- insured plan and the related interest income because claims are funded as they are paid. Fully-insured premiums constitute a form of pre-payment.
- Elimination of Most Premium Taxes. State taxes on most self-funded plan costs are eliminated amounting to a 1.5-3 percent immediate savings from a fully-insured arrangement.
- Carrier Profit Margins and Risk Charges are eliminated. This amounts to a plan savings of 3-5 percent annually.
HPS negotiates with providers and is a network partner for many self-insured employers. They have also developed an explanation of benefits product, Super EOB, that consolidates medical costs from an episode of care into a single statement that resembles a credit card bill, making tracking and paying medical bills much easier for patients.
In addition to the cost savings and the flexibility of plan design, the ability to access and analyze the data from your plan is a benefit that should not be undervalued.
By examining trends and cost drivers, employers can take steps to maximize benefits and invest the savings in additional employee health and productivity.
For many companies, the first priority is stabilizing employee premiums and out-of-pocket costs. Employees seem willing to embrace the cause.
“Self-funding can help build a ‘we’re in this together’ attitude among employees,” said Kambitsi. “Those employees are now more empowered to make decisions about health care.”