The overall share of the U.S. economy devoted to healthcare spending reached almost 18%1 in 2015. As a result, methods for cost reduction are getting increased attention. The new administration under President Trump, identified provider price transparency as one of its key healthcare reform goals. Until now, disclosure of provider rates has been very limited due to the confidential nature of this information and concerns with provider collusion. However, rising trends, coupled with the demand for increased consumerism by employer plan sponsors, have started to move the transparency needle a bit. The following provides an overview of price transparency, including the primary drivers in the self-insured market and a short list of employer considerations.
What does price transparency means?
In terms of the self-insured market, price transparency means making information more readily available to consumers. This will allow them to make better-informed decisions based on their current health status. Several carriers and independent companies have created tools to assist employees with “de-mystifying” medical rates in a consumer-centric manner. These tools allow employees to price-shop for a given service by provider, as well as factor in current benefits to estimate their out-of-pocket cost.
What factors are driving the need for transparency in the self-insured market?
The proliferation of High Deductible Health Plans (HDHPs), reference-based pricing, and narrow or custom networks all place a greater burden of cost sharing and decision-making on the employee and employer.
Under a self-insured group health plan an employer shoulders the financial risk for providing healthcare benefits to its employees. Stop-loss insurance can help an employer mitigate the risk associated with high-cost or catastrophic health claims.
While large employers have customarily self-insured, small and midsized employers have increasingly weighed the benefits of self-insurance since the passing of the Patient Protection and Affordable Care Act (ACA), spurring growth in the stop-loss market. In this article, Milliman’s Mehb Khoja discusses the ACA’s impact on self-insurance and on stop-loss coverage.
Here is an excerpt from the article:
The stop-loss market is believed to be a roughly $15 billion industry, up from $8 billion to $10 billion pre-ACA. Its growth is related to the increased prevalence of self-funding along with the changes from ACA which increased premiums, plan enrollment, or both for stop-loss insurance carriers….
… ACA has considerably increased the need for and expanded employer interest in stop-loss coverage due to several factors:
• Removal of annual and lifetime maximums (prior to ACA, a cap on annual expenses on an employer-sponsored plan was common and allowed stop-loss insurance carriers to limit their exposure).
• Removal of pre-existing condition exclusions (prior to ACA, employers could temporarily exclude high risk members).
• The individual mandate and extending dependent coverage to age 26 have all increased membership in employer-sponsored plans.
• Expanded taxes on fully insured health plans.
The long-tail nature of professional liabilities and workers’ compensation claims make it difficult to gauge the effect that healthcare reform will have on self-insurance. A plan of action is needed though to help organizations value their self-insurance programs. Milliman’s Richard Frese recently authored an article in HFM magazine offering five strategies for lessening the impact of the Patient Protection and Affordable Care Act (ACA) on self-insureds.
Here is an excerpt:
Healthcare leaders will be better prepared to ensure that actuarial estimates will meet loss accruals and forecast needs by implementing these strategies.
Inform all parties of legislation updates and implementation. Although the components of the ACA have been determined, implementation has hit a few snags. Even with a strong effort to explain the proposed changes to the public, there have been multiple interpretations. Further clarification and revisions—and even repeal—are possible. Healthcare leaders should focus on keeping all parties—including the broker, actuary, auditor, third-party administrator, outside defense counsel, and captive management—involved in the self-insurance program apprised of any changes. In return, these parties also should communicate any changes with each other and with the organization’s senior leaders.
Gather opinions from various sources. Senior leaders of each provider organization may not share the same views as leaders of other organizations regarding how the ACA may affect their organization’s role and function. The leaders of each organization will want to ensure the organization’s service providers are on the same page and are working toward its goals and directions, particularly if strategic goals and directions have been revised because of the ACA. During these conversations, leaders also should share their interpretation of what is occurring in the industry.
Monitor loss activity. Healthcare leaders should work closely with risk managers, third-party administrators, and other claims personnel to track any changes in frequency and severity of reported claims. Service providers should be alerted immediately about any noticeable changes. It should be noted whether such changes are believed to be due to the ACA or a different cause, such as a change in claims handling. It will be critical to determine whether any loss change reflects an actual trend and is expected to continue or whether the change is related to a one-time event. Internal meetings also might be held more frequently to better monitor activity.
An employer’s decision regarding whether to insure its short-term disability (STD) plan depends on several factors, including the employer’s size, risk appetite, historical STD experience, desired plan design, cost considerations, and available resources. Milliman’s Tasha Khan provides more perspective in her article “Short-term disability: To be or not to be (self-funded)?”
Here is an excerpt:
STD plans typically pay a portion of lost income when an employee is disabled due to illness or injury. Usually STD covers the period of time between when sick leave/paid time off runs out and when long-term disability (LTD) benefits begin. Compared with life insurance or LTD insurance, STD is a high-frequency and low-severity benefit (i.e., there are many claims with relatively low benefit amounts, similar to most medical claims). This means that even smaller employers can quickly develop meaningful historical experience. Insurers generally consider STD claims experience to be fully credible at roughly 500 to 1,000 lives (varying by insurer and by benefit waiting period). This means that for a group with 500 or more employees, the insurance company will estimate the group’s future claims based primarily on that group’s past paid claims. This does not mean that future claims will be exactly equal to past claims; it means only that past claims are stable enough to be a useful predictor of future claims.
Due in part to this stability in claims experience over time, larger employers tend to be more likely to self-fund their STD benefits than smaller employers. For an employer with, say, 50 lives, STD claim payments could swing dramatically from year to year, making budgeting for these costs difficult. An employer with 5,000 lives, on the other hand, may expect claim payments to remain fairly stable from year to year.
Another consideration is the employer’s tolerance for risk. Even with a large and fully credible group, STD claims experience will change from year to year due to random volatility (as well as for other reasons, such as a particularly nasty flu season). With an insured plan, on the other hand, the premium to be paid is determined in advance, so the employer knows exactly what it will pay for STD coverage. The annual volatility risk is borne by the insurance company (although longer-term experience trends will ultimately be reflected in the premium rates charged by the insurer).
When choosing to self-fund, an employer should monitor its STD plan experience over time. Periodic experience studies help the employer understand how its plan is performing and make adjustments as needed. Such modifications may include revising the rates charged to employees or groups for the coverage, adjusting the liability calculations for claims that have been incurred but not yet fully paid, and reevaluating plan design and claim management practices. These types of studies may require the help of actuarial and financial resources. With an insured plan, the insurance company handles these functions….
Healthcare reform, mergers and acquisitions, expanding regulatory requirements, and downward pressure on reimbursement and margins create a challenging environment for healthcare management. Although self-insurance can help control total insurance expenses, staying up to date on the financial reporting requirements for this option can be difficult.
This article offers guidance on the key financial reporting issues for medical professional liability (MPL) self-insurance programs. Here is an excerpt:
The following practices will help in keeping on the right course toward full compliance in financial reporting.
• Update the key parties whenever you make changes. Frequent conversations are beneficial. At minimum, you should have annual conversations with the actuary and auditor. If changes occur, in either the program or your loss experience, it is important that all parties understand all of the program changes that have been enacted by management, as soon as possible. Table 1 shows some common questions.
• Create a checklist of requirements. The best way to stay “on top” of the requirements may be to use a single source that lists all of the requirements and indicates when each is due. In addition, it may make sense to determine who will complete each task and to have a strategy in place for efficiently completing the task.
• Seek timely advice. Guidelines are best interpreted by experienced professionals who have the skills needed to understand the current practices and communicate any change from the past. Auditors and actuaries make every effort to update management on a timely basis of any changes that would affect the financial reporting of the entity’s liability, but you can help out by proactively asking for advice for any changes you find out about.
• Request more frequent evaluations. When a program experiences adverse or favorable loss activity or undergoes multiple changes during a fiscal year, you can always ask for an interim actuarial study. You’ll need to determine your comfort level with the program’s current amount of activity, with the goal of reducing year-end “surprises.” Additional analysis may also be helpful during an audit.
Reprinted from the First Quarter 2013 issue of Physician Insurer Magazine, Physician Insurers Association of America.