To gain control over the ever-increasing cost of employee health insurance, more and more employers are discontinuing their fully insured coverage and switching to self-funded models. Self-insurance is an unbundled approach separating all required functions—medical provider networks, carrier or third-party administrator (TPA), pharmacy benefit manager (PBM), stop-loss insurer, and consultants—subject to competitive bidding. Moving to a self-insured arrangement can result in significant cost reductions—5% to 10% are typical. The key benefits employers derive from transitioning to a self-funded program are:
- Enhanced cost benefit transparency into every aspect of the program
- Expense reduction
- Flexibility around plan design
- Access to claims data
- Better control of claims payments and investment income on reserves
This post will provide an overview of the actuarial components of the employer-sponsored program: projecting claims and expenses, and evaluating an employer’s budget and risk tolerance.
A significant portion of the annual premium increase under a fully insured arrangement is due to required taxes and mandated fees. These fees are typically required and only add to an employer’s burden.
- In 2018, the insurer fee of the Patient Protection and Affordable Care Act (ACA) was approximately 3.9% of premiums. We anticipate this percentage to be even higher in 2020.
- Another fee required as part of a fully insured arrangement is the premium tax of 2%.
- An insurer’s profit margins also add an invisible layer of fees to an employer’s healthcare expenses.
Combining the insurer’s profit with the required fees above (ACA insurer fee and premium tax), the employer’s fully insured healthcare program can easily raise the cost by 5% to 10%. Thus, exploring other market alternatives under a self-funded arrangement can potentially result in baseline savings of at least 5% to 10%.
Flexibility around plan design
Insurers offer a variety of set plan designs that may or may not meet employers’ needs. With a self-funded plan, employers can design every aspect of the program. There are no state-mandated benefits, and it is up to each employer to decide which coverages will work best for its employee population. You can select a broad or narrow network, design a program with multiple service tiers, implement a high-deductible plan, and offer wellness and disease management programs.
Access to data
One very important consideration associated with a self-funded program is access to data. Within a fully insured arrangement, the carrier receives all data to process and pay claims. While carriers will typically issue standardized reports, these standard reporting templates are typically inadequate for an employer desiring more insight into the population’s experience. Under a self-funded program there is an implied understanding employers will have greater access to their own claims data, allowing for more effective delivery of healthcare benefits to their participants. This information will allow an employer to determine how well its benefit strategy is working.
A self-funded program provides a better way to put the employer in control when paying its own claims and reserving for those claims. When self-funding, reserve amounts are held in an account until bills for medical claims become due. In doing so, employers can capture investment income earned on these reserves. Under a fully insured arrangement, the carrier holds these dollars in its reserve accounts and will collect on the investment income instead.
It is important to note that, even though an employer has more control of its cash flow, it also has to deal with the claims volatility associated with self-funded programs. Thus, risk management is critical to the success of any self-funded program. By “law of large numbers,” fully insured carriers are able to reduce total claims volatility and diversify the risk associated with catastrophic events. A self-funded employer will need to manage its risk through stop-loss insurance. The type and level of coverage will vary by employer and should align with an employer’s risk tolerance.
Because self-funded programs still carry fees and expenses, the first step for an employer is to evaluate its fully insured arrangement in a detailed feasibility study. The feasibility study should provide a side-by-side comparison between both self-funded and fully insured scenarios.
Components to consider within the feasibility study include:
- Claims cost projections where key components
such as historical medical and prescription drug claims, large claims
information, participant enrollment, and plan design information are evaluated.
Any significant changes in networks and demographic shifts of the covered
population should be incorporated.
- It is important to note that, if the group size is not large enough, or historical data is limited or unavailable, then an expected claims cost will need to be estimated using the group’s demographics and plan design information (i.e., manual rating) and blended in with the group’s actual experience.
- A difference in fees (i.e., fully insured versus
self-insured arrangement) should be evaluated and compared. Expense components
to be considered include (but are not limited to) administration or
administrative services only (ASO) fees, reinsurance/pooling charges (i.e.,
large claims risk management), carrier profit and risk margin, PBM fees,
network access fees, premium tax, and the ACA insurer fee.
- If actual fees are not available, we would recommend fees to be estimated based on market-comparable employer rates.
Self-funding may be a great option to managing the rising cost of fully insured premium rates. That said, self-funding may not be appropriate for every business. An employer will want to evaluate provider and network options under both self-funding and fully insured arrangements. Employers should also compare all fees and expenses under both programs. It is important to note that a fully insured quote may be available at a lower cost than a self-funded approach. Overall, it is important to work through a detailed feasibility study to evaluate the risk and fully understand the cost savings that may be available moving to a self-funded program.
This article first appeared in the October 2019 issue of Health and Group.
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