Summary: Although self-funding group medical plans has been around for a long time, the trend is moving toward smaller companies setting up self-funded plans. In this podcast, Darren Ambler discusses this trend, along with the advantages of self-funded plans and how they differ from traditional, fully-insured plans.
John Maher: Hi, I’m John Maher. I’m here today with Darren Ambler, managing director for Insight’s employee benefits practice. Insight is a human resources and employee benefits consulting firm based in Massachusetts with offices in Dedham and Danvers. Today we’re talking about the buzz around self-funding group medical plans. Welcome, Darren.
Darren Ambler: Thank you, John. It’s good to be here today.
Self-Funding Medical Plans – A New Trend?
John: Darren, I’ve been hearing a lot about employers self-funding medical plans. Is this a new trend for employers?
Darren: That would be yes and no. Yes, there is a lot of buzz around it. Employers really feel like they’re on a renewal roller coaster these days as they get their health plan renewals and they see numbers that are shockingly high. I would also say no because self-funding is not a new concept. It’s something that has been around for a very long time. It actually existed long before insurance did, in a way. Large employers typically self-fund.
In fact, for employers with more than 200 employees, more than half of those employers self-fund their claims. For employers with more than a thousand employees, actually more than 80% of those companies are self-funded. About three in five Americans are actually insured through a self-funded plan through their employer. It’s a very common practice.
John: Okay. If so many employers already sponsor self-funded plans, why is it considered a trend?
Darren: The trend is really amongst smaller employers. They’re willing to look at new alternatives that they haven’t seen before. Employers feel like they have very little control of their cost in that marketplace, especially for the employers that are in the under 50 employee market where their rates are regulated no matter how healthy their employees are or how low their claims could be; they’re still going to pay that same fully-insured premium every month. They feel like they have no control so they’re looking for alternatives that will help them with that.
As a result, the market has answered that call and new programs for companies with less than 50 employees, or less than 100 employees, are now available, and they’re actually constructed specifically for that marketplace with additional risk protections.
Advantages of Self-Funding a Medical Plan
John: Okay. What are some of the advantages of self-funding?
Darren: It’s really a cost advantage. At the end of the day, you’re taking out the excess margins and profits that might be built into a fully-insured premium rate. You’re taking out taxes; fully-insured premiums have taxes built in that go to the government. You can take out all or most of those depending on where you are in the country. Some states do have taxes for self-funded plans. The administrative costs are typically lower, so you’re reducing those costs.
You’re also gaining a tremendous amount of control over your plan design. The state-mandated benefits which can add cost to a fully-insured plan, employers can pick and choose which of those benefits they want to cover or the levels that they want to cover those benefits to. So by taking those out, they can reduce the cost of those programs.
They can also adjust the cost-sharing structures of the plans to better suit the behaviors that their employees experience within the plan. It’s also something where, if you have a company that has trouble with fully-insured plans because your employees are spread throughout the country — you don’t have specific concentrations of employees in any one place — a lot of fully-insured carriers don’t like that, if they’re regionalized carriers. Self-funded plans really help an employer to cross state lines and offer benefits to employees no matter where they live.
And then, it’s the access to data. The data that you can get out of a self-funded plan is typically unlimited. Having that data allows you to better structure a plan to suit your company needs but also to use that data to structure future plan designs and also wellness programs.
John: What type of data are we talking about in that case?
Darren: The claims data, the patterns of claims that your employees experience. Are they using the right types of care for, basically, their age, their demographics? Are they having an annual wellness visit? Are they getting the screenings that are recommended for them? Those are all very important things. With the self-funded plan, you can really drill down and see the exact patterns of those things that are happening.
What Does a Self-Funded Plan Look Like to Employees?
John: What does a self-funded plan look like to employees and their families?
Darren: If it’s structured correctly, it should look and feel very much like a fully-insured plan, because the major differences are really behind-the-scenes. The employees are going to have a card in their wallet that looks the same as the card that they may have had with a fully-insured plan. Typically, unless the employer told them that they had a self-funded insurance plan, they may not even know it because, a lot of times, they’re using the same company that they had as a fully-insured program. For instance, local carriers such as Blue Cross or Harvard Pilgrim, or Tufts Health Plan, they all offer self-funded programs.
So, you’re using the same network of providers. You can offer the same benefit design. As I said, you could structure it differently than you might have to in a fully-insured environment, but you can also offer it in the same fashion so that the same covered benefits exist. Also, their ID card looks the same. So when they go to the doctor, it looks and feels the same, and that’s really the way it should be.
John: Right. The doctor is not saying, “Oh, what’s this crazy-looking self-plan that you have here?” It’s just a regular card from, like you said, from Blue Cross or one of those other places.
Self-Funded Health Plans – Differences for the Employer
John: How is different from the employer, then?
Darren: From the employer standpoint, it really has some different components to it. When you think about a fully-insured program, to some degree there’s just the insurance component and that encompasses everything. But you’re paying that fully-insured premium every month. It’s a fixed cost that will only change based on how many people are on the plan each month. Typically, it’s a flat number throughout the year.
With the self-funded plan, you do have more moving parts. You have three major components. One of those is the administration. You’ve got to hire a company to administer the claims for you. That company would also provide your employees with access to a network of providers and your claims would be given the discount-level that that network has. They’re also paying the claims for you and then billing you for that, so that takes care of that process. Then they handle all of the other administration functions such as disease management programs for the chronically ill employees or family members that might be on the plan. They’re also providing the member services, PO processes, very much like a fully-insured plan which is why a lot of times that administrator is one of the fully-insured carriers that’s local.
The other components are actually insurance components. Self-funding doesn’t necessarily mean that you have all of your risk on the table. You do actually generally back it up with risk products such as stop loss. The two primary stop loss components are specific stop loss insurance which actually protects the employer from any one plan member having significant claims. So when that particular plan member gets to a certain point of claims, the insurance carrier will actually take over and pay the additional claims. If you set your stop loss limit at $100,000, once the claims for that particular member get to $100,000, all claims in excess of a hundred thousand would be paid through that insurance.
For example, a self-funded employer needs to sleep at night. If they know that the employee had a baby, and the baby was premature, that is a very expensive claim. That baby needs round the clock intensive care. It’s a very fast growing claim cost. That specific insurance, that specific stop loss is what provides that additional protection from, what could be potentially a million-dollar claim, hurting the plan.
You also have aggregate stop loss. When you think about the specifics, it’s on each member of your plan. The aggregate is on all members of the plan. You have really adjusted for what you think might happen, what you’re comfortable with in terms of your total claims across your whole population. But if it gets to a certain point above that, your comfort level disappears. The aggregate stop loss kicks in at that point. So, if you expect to have a million dollars in claims over the course of the year but you get to 1.2 million dollars in claims, that might be your –
John: And again, this is across multiple people.
John: So it’s this person with some illness and it’s $50,000 worth of bills and then it’s this person, like you said, with the premature baby and it’s $400,000 worth of bills. All of those people adding up across all of your employees can hit over that limit.
Darren: Exactly. You set a point where you’ve decided to transfer that risk and on the aggregate if it hits that $1.2 million mark, 20% above what you’re comfortable with, or maybe 25% depending on the design, the aggregate stop loss insurance begins to pay. That’s what really helps the self-funded employers sleep at night.
Now, not all employers need that risk protection. The larger a company is, the higher their tolerance for risk is. They’ll set specific stop loss limits that might be quite high. Maybe they’re comfortable actually going at $200,000 per person, maybe they’re not and they want a specific stop loss at only $30,000. It’s really how you structure that insurance. On the aggregate side, quite often, the larger employers with larger plans have such a predictable risk that they’ll actually go without aggregate coverage. They’ll take that risk.
John: Because they’re averaging it out over so many employees that it’s going to average out eventually even if they have a few people that go over a limit.
Darren: Yes. You are spreading it out over a large population. You have track record. As I said, you have that data. It’s tremendously valuable when predicting that risk, but also, there’s the additional cost that you could possibly avoid if you’ve predicted that risk. You really have to look at self-funding at least on a five year basis, and know that over that course of five years, you’re probably going to have three very good years. You might have a year where you’re in the middle. But one of those years is likely to perform poorly.
If you look at self-funding on a year to year basis, you probably shouldn’t be in it. It’s something that you have to look at over a longer period of time to understand how valuable it can be.
Self-Funded Health Plans for Smaller Companies
John: Okay. What about some differences when you have a smaller company?
Darren: Smaller employers, as I said, there are new products that are entering the marketplace. They are specifically designed for smaller employers. Typically, they actually look and feel even more like a fully-insured plan, because the products package everything together. Your administration and your risk, your stop loss risk protection, are really all from the same company and they’re packaged with a much lower risk tolerance level.
Traditionally, they actually come out with a level premium, so you’re paying the same amount per employee each month. Again, the cash flow is very similar to a fully-insured plan. What happens at the end of the year, those rates that you’ve been paying are based to some degree on a worse case scenario, and hopefully you’ve done better than that, and you’ll actually get a return on that some of that premium, and that’s your savings.
If the plan runs very poorly, you’ve reached your maximum exposure by paying that premium each month. If it really ran poorly, you can walk away and go back to fully-insured programs.
Self-Funded Plans and Workplace Wellness Programs
John: Okay, interesting. Since the employer is the payer of the claims, are they more likely to implement things like workplace wellness programs?
Darren: Yes. In my opinion, when you’re in a self-funded program, it makes all the sense in the world to take advantage of that and create a better workplace, a healthier workplace, because that’s going to direct more directly impact your claims. If you’re in a fully-insured plan, you have limited impact on the ability to save money through claims with wellness programs.
It is there, but it’s not going to directly help you as much as it helps the insurer in some cases. The larger the employer, the more likely it is to help the employer in a fully-insured plan, but that’s the employer who’s usually in self-funded program anyway. As I mentioned, the data is there. When you have a fully-insured plan, you have more limited data, especially the smaller you are, the less data that you’re going to have.
You’re not going to know the exact problems that your employees and your plan members might be experiencing. You may actually be targeting the average common risks in America with your wellness programs, and at the same time, you might actually be putting in wellness programs that target problems that your population may not even have, or has a more limited amount of.
But maybe they have a chronic illness issue that’s more prevalent in your population than the average population. It’s really creating a rifle accuracy versus a shotgun approach, and zeroing in on the exact problems that your group has, so that you can better structure that program for your employees in the exact problems that the family members and those employees have.
One of the other advantages of having the data in a self-funded health plan, is to know the people that we often refer to as “time bombs”. Time bombs are participants in your plan that, maybe they are people who have not had a wellness visit with a doctor in more than two years, or perhaps they have a chronic illness that they are avoiding medication, or avoiding treatment for, or they could be somebody that hasn’t had the certain screening and they’re well past their due time based on their age and gender.
These are people that can be specifically identified very quickly in a self-funded plan, because of that data that you’re given.
Using Data in a Self-Funding Health Plan
John: Okay, interesting. Anything else in terms of the data and what it does to help you?
Darren: Yes. When you’ve structured the plan, the way that you think it should work to create new behaviors amongst your population, you can also create incentives around that by — knowing where your employees go for care is very important. And you can structure the networks to a very high degree to incent care at lower cost facilities, and to also incent care at higher performing facilities that actually keep your employees healthier longer and get them healthier faster when they become sick.
John: All right. Well, that’s really great information. Thanks again for speaking with me today Darren.
Darren: Thank you John.
John: For more information, visit insightperformance.com, or call 781-326-8201.