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.Continue reading