Diving Into Self Insurance
What is it about the Affordable Care Act that appears to be incentivizing small and mid-sized employers to look at self funding their health insurance? Put this question to different industry observers and you’ll get different answers. Some say it’s the fees placed on fully insured plans, especially the Health Insurance Industry Fee, which is a 2.5% tax on total premiums. Others point to the way the ACA has altered health insurance underwriting.
“If you think about the amount of time employees are at work, there is a lot of opportunity to influence behavior and educate them about maintaining or improving health.” — Cheryl DeMars, president and CEO, The Alliance
Whatever the case, a coverage avenue that was once pursued primarily by larger employers, especially those with at least 100 employees, is starting to pique the curiosity of smaller employers. Even before full implementation of the ACA, the percentage of covered workers in private-sector, self-insured health plans had grown to 61% in 2013, up from 49% in 2000 and 59% in 2010, according to the Kaiser Family Foundation. If the ACA truly incentivizes self-funded insurance in smaller businesses, those percentages could reach even greater heights by 2020.
In this look at the renewed interest in self-funded health insurance, we spoke to HR executives in two local companies that self fund, a client advocate for a local insurance agency that advises businesses about self-funding for health insurance, and the CEO of a Madison-based organization that partners with self-funding companies. They offer some compelling reasons for smaller businesses to consider self-funding.
1. Flagrant Acts of Management
In a self-insured plan, the employer assumes the risk of employee health care costs exceeding employee contributions; in a fully insured plan, an insurance company assumes the risk. For some employers, this risk is too great; for others, it provides all the incentive they need to actively manage their benefit program, and therefore their costs.
When employers self fund, they essentially become the population health manager for employees and their family members, and they are the ones shopping for the best values among providers and vendors. “If you think about the amount of time employees are at work, there is a lot of opportunity to influence behavior and educate them about maintaining or improving health,” notes Cheryl DeMars, president and CEO of the Alliance, a Madison cooperative serving member employers that self fund their benefit plans. “Beyond that, employers are also taking steps to source health care, if you will, in ways that they haven’t up until now.
“It’s up to us to create a market that recognizes and supports better value. Doing so not only improves the cost of care and the quality of care for our employees, but it also creates the market incentives that will stimulate greater improvement on the part of providers.”
Judy Peirick, vice president of human resources for Webcrafters, a Madison-based commercial printer that has been self funded for more than 20 years, believes the assumption of risk involved in self-funding gets companies more involved in their plan design, cost controls, and wellness programs. “If you want to be more involved in that and really make it part of your corporate philosophy and strategy, then you are going to be more actively managing it,” she stated. “With fully insured plans, you pay your premium and you kind of forget about it for a year.”
Perhaps the biggest pool of savings lies in population health and chronic disease prevention and management. Roughly 75% of all U.S. medical claims are from a chronic condition such as diabetes, according to the Centers for Disease Control and Prevention, and 70% of those claims are considered preventable and related to lifestyle.
Matthew Chadwick, an account executive with Cottingham & Butler Consulting Services, contends that the more successful self-funded employers, those that experience moderate and therefore more sustainable increases in annual medical insurance costs, have plans that proactively address preventable chronic conditions. “The fix of health care is not going to be through better discounts, network changes, or marketing the plan every year. True change is going to come from investing in preventable expenses,” he said.
Just how much should you manage? Peirick says her activity extends to managing partners entrusted with pharmaceutical benefits and insurance claims, and managing utilization review and case management so that she knows when employees are sent to the hospital — the most expensive care setting.
Self-funding is a real opportunity for human resources to demonstrate additional value. “That’s why it’s important to know that going in,” notes DeMars. “It’s not about avoiding a tax, it’s about making a decision to be more involved in proactively managing health and health benefits. Some of the benefits are only paying for what your employees actually use. You are not paying for an insurance company to hold the risk for your organization, and if you are actively involved in managing the health of your employee population, you and your employees reap the benefits of that.”
Tara Conger, vice president of human resources for Palmer Johnson Power Systems, noted that her company had already joined the Captive Insurance Group to be self funded for workers’ comp, auto, and dental liability. On Jan. 1, the company began self funding for health insurance, and while one or two large claims can throw an annual budget out of whack, so far the company is quite a bit under projected costs. “We had budgeted for a 120% [increase], and we’re at about 32.5%,” Conger stated. “Right now, claims are doing really, really well. It’s hard to say because you don’t exactly know how it’s going to go for the rest of the year, but we’re on track to save quite a bit of money by going from fully insured to self funded.”
2. Leverage Your Data
Self-funded plans can enable organizations to see how they measure up because companies have access to their own claims data, which can be hard to come by with fully insured plans. Claims data will help employers identify issues with their employee population and discover where the money is going. “If you’re in a fully insured program, it’s very difficult to get that claims information from the carriers,” says Bethany Anklam, a client advocate for the Murphy Insurance Group. “Without that information, you can’t understand your cost drivers or the underwriting problems in your group.”
Added DeMars: “What are you spending money on that might be impacted by prevention, health promotions, chronic disease management, and so on? Having access to claims data allows employers to understand the utilization of their employees and family members, and look for ways to either improve the value of the dollars they are spending or look at the cost. One of the ways that’s emerging now for employers is to create incentives in their benefit plans to encourage employees to use better-value providers — physicians and hospitals that are high quality and low cost.”
3. Don’t Just Wish for Wellness
Part and parcel of health management is a well-managed, consistently refreshed wellness program. Wellness programs fall short when they are allowed to languish, but it’s difficult to manage population health if employees, especially those with chronic conditions, have no financial incentives to adopt good health habits.
The ideal would be to prevent chronic conditions through health-promotion activities, but if someone does have a chronic condition, self-funded employers must ensure he or she is well managed to avoid costly complications downstream — costly both in terms of individual well-being and health care claims.
One way to help such employees is through a value-based benefit design, which waives copays and deductibles for care and supplies that are associated with managing the chronic condition. “Someone with diabetes wouldn’t pay for the medications that they need to control their blood sugar and the supplies they need to test their blood sugar,”
DeMars said. “Removing barriers to highly effective care is one of the ways that employers, particularly in a self-funded environment, can use the flexibility of that to control their plan benefit design and promote health improvement.”
Due to the strong incentives, it wouldn’t surprise Peirick if the most effective corporate wellness programs reside in self-funded companies. “We’ve really partnered closely [with The Alliance] and always try to stay on top of creative things we can do,” she says. “They’ve even helped us find local vendors, and every Wednesday, we have fruits and vegetables right here on the property, for sale, and we helped the food vendor with their marketing because we’re on a busy street.”
Every employer knows the difficult challenges involved in getting employees to adopt healthier lifestyles. To get people more engaged, Webcrafters has done everything from giving dollars away for the right answers to questions in meetings, to packing the company newsletter with tips on how to be a better consumer and practice preventive care. “We also do some things that are a little unusual in that we do annual health risk assessments for the early identification of problems, and now we do onsite health coaching,” Peirick added.
Starting in 2015, Webcrafters will have incentives in its premium structure to participate in a health risk assessment. “If your score is high, you are one and done,” she explained. “But if you have a very low score, you probably have things you need to be working on — exercise, diet, or smoking cessation. And so then you’d have more sessions and you will work with a coach who is going to look you in the eye and say, ‘Hey, what can you work on? Let’s pick a goal.’ And then you are accountable to that person.
“If they refuse to do coaching and their score doesn’t improve, or isn’t above a certain level, then they will pay a higher premium because they are saying, ‘I don’t care about my health, I’m going to just do whatever I want.’”
Another approach, especially for companies that don’t have a good grasp of their claims history, is to implement a wellness program with biometric screenings. “Robust biometric screening can give the employer very good insight into their underlying health risk within the group,” Anklam stated. “Having that as a basis, you’ll be able to tell whether this is going to be a good group for self-funding right now.”
4. You’re Not Alone
Since there are a lot of moving parts to a self-funded program, there are some necessary partners, including the network, the pharmacy drug program, and the third-party claims administrator. In Madison, 213 employers representing 90,000 employees and family members belong to the Alliance, which re-prices claims, negotiates deals with local providers on behalf of its members, and shares best practices information among members. Self-funded organizations also partner with a pharmacy benefits provider, which tries to get the best deal on prescription drugs and specialty medications and educates employees on the use of lower-cost alternatives such as generic drugs.
“One of the things we learned through the Alliance is the variation in pricing,” Peirick stated. “On magnetic resonance imaging, there is wide variation in the cost of MRIs in Madison and Dane County and actually throughout the state. So we incent our employees to go to a lower-cost provider because it’s skin [in the game], and the same group of radiologists is reading them, whether they go to their local clinics or they go to the Midwest Open MRI Center or to Turville Bay [MRI & Radiation Oncology Center].
“We give [employees] $150 if they go to one of the preferred providers to get that done because we save, and they get money as well. So it’s a win-win situation for everyone, and they are still getting a high-quality, high-value service.”
5. You Can Protect Yourself
Another reason self-funded health insurance is swimming downstream to smaller companies is the availability of stop-loss insurance, or reinsurance. There are two types of stop-loss coverage: One is called specific stop-loss coverage, which acts like a deductible on individual employees. “You might have a $1,000 deductible on your health plan for you, but it’s the employer having a deductible on an individual,” Anklam explained. “So let’s say a group has a $30,000 specific stop-loss deductible. Basically, that means the employer is on the hook for the first $30,000, and anything after that is reimbursed to them by a reinsurance carrier.
“An employer can decide what they want that [deductible] level to be. Obviously, the lower your deductible, the higher your premium is going to be.”
Another type of stop-loss insurance is aggregate coverage, which protects against multiple catastrophic claims. Hypothetically, a company with 100 employees and a specific deductible of $30,000 could be hit with multiple claims of $29,000 that the employer is on the hook for, which would be catastrophic. “So what we put in place is called aggregate coverage, and that basically is a number that moves up and down with the number of people on your plan,” Anklam explained. “So if you do have that $29,000 per 100 employees, there is going to be a cap on that so you don’t actually have to pay all of those claims. It’s more of a catastrophic coverage for the unexpected things.”
According to Anklam, it is because of the reinsurance now available on the market that smaller and smaller companies are able to consider self-funding. Previously, the specific deductible limits were so high that a group of 50 employees could not look at it “because they would not be able to stomach paying that specific deductible for that specific group of employees. Now, we have carriers that go down to as little as $10,000 [for the deductible].”
2018 Model Cadillac
Complicating matters is a tax that hangs over employers like the Cadillac of Damocles. In an attempt to slow cost increases, the ACA contains a financing mechanism in the form of a 40% excise tax on high-cost (aka Cadillac) health plans. Scheduled to take effect in 2018, the tax would be assessed on the cost of coverage for plans that exceed $10,200 for individuals and $27,500 for family coverage, and the annual limits would increase each year.
Self-funded plans are in the crosshairs right along with fully insured plans. Peirick is certainly tracking Webcrafters’ costs because unless the company makes changes to its plan, it will be driving a Caddy in 2018.
What’s a self-funded company to do? One thing it can do is roll out a health plan option that features significant deductibles and pretty much forces individual employees to be cost-conscious health care consumers. Such a plan could be structured with minimum and maximum deductibles to reflect variances in ability to pay and differences in the demographic makeup of a workforce.
“For young people, it’s really a good option,” says Peirick, whose company has established an optional plan with a minimum deductible. “Employers provide a little money to reach that deductible, but [employees] are building money up for later on.”
No Room for Zero Tolerance
Peirick is somewhat envious of companies with young populations because they can offer these types of plans, which are attractive because people are saving money and rolling it over, and the employer isn’t putting a lot of money in. “They are lucky in general just because they have a low-use population, and they can get low rates, but they can also put some plans out there that really help people be prepared for that terrible situation that could arise,” she remarked. “They financially have the wherewithal to handle it because they have been planning, and they become so much better consumers when they are spending their own money than when they have got no deductibles, just a copay.”
That helps explain why a company would not move to self-funding. For a workforce with health issues, it’s probably not worth the risk. But even if a business has a healthy population, it must have what Peirick calls a tolerance for variability, and the ability to take the long view, because you’re on a roller-coaster ride.
“If you’re in a self-funded plan, and if you get a transplant one month or have a bad car accident, or somebody has a stroke or heart attack, your claims can really fly around,” she warned. “So you have got to have the attitude, ‘Okay, I can live with the roller coaster because I know that, over time, I’m going to be better off than I will be if I pay somebody else to do this.’”
Whatever your tolerance for risk, DeMars suggests approaching self-funding as part of a long-term strategy in response to the ACA in its entirety, not the taxes contained within. Said DeMars, “The long-term strategy involves really being in control of your plan design and thinking strategically about health benefits and what you want to accomplish with your health benefit offering.”
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