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%.
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.
What patterns in plan design offerings have been seen in the marketplace during the first three years after the implementation of the Patient Protection and Affordable Care Act (ACA)? Individual market member projections exhibited a preference for lower-cost plans with health maintenance organization (HMO) plans and plans at the lower end of the allowable actuarial value (AV) range being the most popular. In contrast, small group membership projections shifted toward higher AV ranges within metallic tiers, which illustrates different preferences in the small group market.
By looking at trends in plan offerings, even at a macro level, insurers may be able to gain insight from emerging patterns in the market to help frame marketplace strategies in future years. Milliman’s Abigail Caldwell and Jordan Paulus offer more perspective in this paper.
Employer-provided medical plans have seen significant benefit design changes in the past few years, which is due to rising healthcare costs and the Patient Protection and Affordable Care Act (ACA). As actuaries analyze historical medical cost trend in order to forecast future trend and analyze the impact of benefit design changes, the effect of the member behavioral phenomena known as “benefit rush,” “benefit hush,” and “trend crush” should be considered. This cycle of behavior was explained by Joan C. Barrett in a Health Watch article called “Timing’s everything: The impact of benefit rush.”
As Barrett’s article points out, when notified toward the end of the plan year of impending reductions to their medical plans for the upcoming plan year, savvy members often “rush” off to get deferred elective medical care in order to take advantage of the current richer plan design. For example, if there is an elective knee surgery that needs to be done, the rational member will get this done in the plan year with favorable member cost sharing. The magnitude of this rush will depend on the severity of the benefit design change and how benefit savvy the member is. Small increases to copays will result in less rush than the plan implementing a full replacement high-deductible health plan. The timing of this rush will depend on when participants are notified of the impending changes. The ACA requires that notifications to participants related to benefit design changes be made at least 60 days before implementation. Further, this rush must be considered in conjunction with the mini-rush that occurs even without any impending benefit design changes. Mini-rushes are due to members satisfying out-of-pocket limits toward the end of the plan year and taking advantage of fully paid plan services before the cost-sharing limits are reset again in the next year.
Subsequently, if more elective medical procedures are performed in the last quarter of the previous year during this rush period, there is a slowdown or “hush” in medical care in the first few quarters of the new plan year. This hush is further magnified as participants get to know their new benefit plan designs before getting medical care. The magnitude of this hush must be understood and even quantified separately from the decrease in costs that is due to the actual reduction in plan benefits. In the second year of the new plan, as costs return back to normal levels there is a trend “crush” compared with the previous year because it’s compared with a lower base level of claims from the first year of the new design. The impact of this trend crush must be considered if the plan experiences higher trends in the second year of the new plan.
Figure 1: Benefit Design and Usage Patterns
As actuaries evaluate historical trend, this rush, hush, and crush cycle should be evaluated and normalized to estimate future trends. This cycle must be kept in mind as projections with impending plan design changes are made. Knowledge of this cycle is also useful when actual results are compared with initial projections. Further, this cycle must be explained to plan sponsors to help them make sense of their cost experiences and for actuaries to maintain credibility regarding their trend and projection estimates.