Self-funding used to be exclusively for big companies that had a solid cushion of assets, plenty of cash flow and a large employee population across which to spread risk.
In the past few years, however, more small and midsize employers are finding that self-funding gives them the flexibility they are looking for in health care benefits for employees.
With the continuing rise in medical care costs driving fully insured premiums higher and more options available to take the volatility out of risk, today more employers are looking at self-funding as an escape hatch to avoid the anticipated consequences of the Patient Protection and Affordable Care Act.
Under PPACA, insurers face new, costly requirements like providing free preventive care and covering young adults through age 26. They also will operate under restrictions, such as no annual or lifetime caps, and the requirement that they spend 80% to 85% of premiums on health care services.
At the same time, insurers will continue to build a profit margin into their products; they will structure coverage to suit their marketing strategy, rather than an individual company's needs, and will present employers with already-contracted provider networks of their choosing.
None of these factors will lead to lower premium costs. In fact, Aon Hewitt estimates that premiums will rise 8.8% in 2011, the highest increase in five years.
To get out from under these costs and gain the flexibility to create a benefits program they can control, many employers are taking a second look at self-funding.
Today, self-funded plans cover almost 41 million workers - 59% of the private-sector workforce, according to federal statistics. Taking into account family members, self-funded plans cover about 70 million Americans.
It's also worth noting that the 2010 Kaiser Family Foundation survey on employer-provided health benefits identified a jump in small and midsized companies turning to self-funding. Between 2008 and 2010, the rate of companies with fewer than 200 workers that self-funded health care rose from 12% to 16%, while the rate of companies with 200 to 999 workers increased from 47% to 58%.
When an employer decides to self-fund, there are two options to consider. The first option is to self-fund on their own; to do that, most companies purchase medical stop-loss insurance.
By setting a ceiling for individual costs, aggregate costs or both, an employer can draw a line in the sand to make sure unexpected expenses do not exceed the resources to pay them. Stop-loss insurance is an economical way to protect against the unpredictable nature of health care costs that comes with having a small pool of workers.
One of the newest options in self-funding is to join other small and midsized self-funding companies in a captive insurance structure to pool risk and provide economies of scale. Because the structure often takes a regional approach, local provider networks can be arranged that make sense for each employer.
Best of all, the captive structure returns excess premiums to members of the captive on a pro-rata basis, rewarding employers that do an effective job of managing health risks.
Overall, the benefits to a self-funded captive include:
* Plan design flexibility.
* Protection to large groups by pooling the most volatile risk.
* Cohesive plan administration.
* Tiered structure of costs that allows employers to choose varying degrees of member services and interventions.
* Eliminates the requirement and cost to interview, select, monitor and coordinate multiple vendors necessary to effectively manage health care risk, services and cost.
* Retained carrier profits (positive experience).
Options to control risk
One reason companies used to steer clear of self-funding is the danger in any one year of high medical costs. With smaller workforces, there are fewer healthy people to dilute the costs if someone needs expensive care.
Today, however, there are a number of options to make self-funding less of a gamble, while still retaining plan flexibility and cost-effective care:
1. Provide for organ transplants separately. The number of organ transplant recipients is increasing, with more than 180,000 people living with a transplanted organ by the end of 2007. With costs from surgery and post-operative care that can quickly exceed $250,000, employers can protect their budgets by buying organ transplant insurance.
2. Control specialty pharmacy costs. As drugs become more expensive - especially for treatment of cancer and chronic diseases - many employers are contracting with pharmaceutical benefits management experts. They can reduce costs by arranging for discounts, eliminating the added costs charged by doctors who purchase drugs and then administer them, and using rigorous utilization review.
3. Manage dialysis treatment carefully. In 2007, 365,000 people were undergoing dialysis at a cost of $35 billion. With the cost of treatment ranging up to $50,000 per month, using dialysis management specialists is one way to make sure patients get the treatment they need in the most economical way possible. Among their strategies are vetting invoices against usual and reasonable rates, arranging for home dialysis when appropriate and obtaining discounted drug prices.
4. Focus on chronic conditions. Diabetes, heart disease and other chronic conditions can become costly when patients do not follow their doctor's advice. By arranging for patient-focused case management or providing incentives for workers to comply with treatments, an employer can not only reduce costs, but also help their workers live healthier lives.
5. Use administrative audits. Periodic pharmaceutical and medical audits can identify anomalies, such as double-billing and inappropriate treatments. They can also be used to identify trends that can be addressed through wellness programs and other strategies to lower health care costs.
While the full scope of changes required under PPACA will not be clear until all of the regulations are written and put into place by 2014, most experts agree that the next few years will be a time of rising health insurance costs.
For employers who see their health benefits as an important tool for attracting and retaining a talented workforce, it is important to find cost-effective strategies for continuing to provide coverage. By exploring self-funding options, including joining a captive structure and taking steps to mitigate risk, employers can position themselves to take control of their benefits and rein in costs.
Samuel H. Fleet is president of AmWINS Group Benefits, a wholesale broker and group insurance administrator. He has more than 20 years of health and benefit experience. In 1991, he founded National Employee Benefit Companies Inc., now a division of AmWINS Group Inc. Fleet is responsible for overall business development, client acquisition and operations.
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