Small employers flocking to self-funding
When Ernie Clevenger suggested his company, CareHere, move to self-funded health insurance, there were a few people, including the firm’s chief financial officer, who had their reservations.
“[The CFO] had worked with smaller companies that were not self-funded, and she was concerned about catastrophic claims that might occur,” recalls Clevenger, CEO of CareHere, a provider of on-site health clinics based in Brentwood, Tenn. It has a little more than 800 full-time employees with locations in 27 states.
But as the self-funded health insurance option at CareHere took off, the CFO saw how the company benefited from the move, namely by low rate increases, very quickly. And now, three years in to the program, the CFO — along with many others at CareHere — has become a proponent of self-funded insurance and even seeks out ways to implement similar solutions in other areas of the company’s benefits package.
CareHere is among a growing number of small employers who have embraced self-funded insurance, as employers realize cost savings, plan flexibility and employee satisfaction that can manifest itself as soon as the first year after implementation.
Although self-insurance isn’t new — it began back in the 1970s with larger employers began exploring new ways to manage soaring healthcare costs — the movement has spread to mid-size employers steadily as costs continued to rise by double digits year after year. More recently, the passage of the Affordable Care Act gradually helped spread self-funding to small employers.
“The passage of the ACA had the indirect result of encouraging more employers to look at self-insurance,” says Michael Ferguson, president and CEO of Self Insurance Institute of America. “Generally speaking, we can say that the ACA has created increased pricing for mid-market employers and created uncertainty in the marketplace for employers who want to provide the benefit.”
Today, more than 90 million employees get health benefits through self-funded plans.
The trend today
A look at recent numbers for self-insurance reveals not only ACA’s impact, but also some interesting findings about the state of self-funding among employers. A February study by the Employee Benefit Research Institute found that the percentage of smaller employers with at least one self-insured plan increased between 2015 and 2016 while self-insurance in larger employers declined over that same time period. EBRI’s research also found that overall enrollment in self-insured plans fell from 60% to 57.8% between 2015 and 2016.
Breaking down the numbers a little further, EBRI found that the percentage of small firms, with fewer than 100 employees, offering self-funded plans rose from 14.2% in 2015 to 17.4% in 2016.
“When the ACA passed, the expectation was that more small employers would go the self-insurance route,” says Paul Frontin, director of the Health Education and Research Program at EBRI. “The ACA was expected to raise costs and the expectation was that was going to drive small employers to save money. That’s exactly what we’re seeing happen. It’s not taking off like the space shuttle, but it’s taking off like an airplane. It’s just barely off the ground. We might be seeing the beginning of a trend.”
Meanwhile, the number of midsized establishments (100-499 employees) offering a self-insured plan dropped slightly from 30.1% to 29.2%. Frontin notes, however, that during the two years before 2016, mid-size employers saw gains in the number of self-insured employers, noting that setbacks are common in long-term trends.
“A drop like this could be that we’re reaching cruising altitude,” Frontin says.
And, for large establishments (500 or more employees) offering self-insured options, the percentage declined from 80.4% to 78.5% over the same time period. Frontin warned not to read too much into these numbers at this time.
“I’m not convinced that’s the beginning of a trend,” Frontin says. “It’s hard to imagine large employers going back to fully insured in a major way. I would guess it’s a statistical anomaly, there’s not a rational reason to see a drop.”
The Telligen track
While the EBRI’s findings may show a bit of a dichotomy in recent self-insurance stats, the results couldn’t be more concrete for Telligen, a Des Moines, Iowa-based health management and wellness solutions company with about 700 employees.
Five years ago, the company decided to move to self-insurance. Their situation was somewhat distinct — Telligen is a 100% employee-owned company. According to Doug Ventling, Telligen’s vice president of health and well-being, the company had experienced double-digit increases in their fully insured plans for several years thanks to high-cost claimants, employee lifestyle and pharmacy costs.
To rein in costs, Telligen initially took the traditional routes to manage their fully insured plan. Management looked at plan design but found it only shifted costs to their employees. It also looked at how to manage the plan more efficiently and considered taking measures to improve employee health. But after consultation with benefits consultants, Telligen made the switch.
“Those increases were beginning to impact our competitiveness,” Ventling recalls. “We clearly saw a direct impact on our financial results.”
So far, Telligen has realized an overall reduction in health insurance costs. In fact, the year after they implemented the plan, the company had a 3% decrease in health plan costs after an adjustment for a phenomenon known as the “run-out” — a period of time where employees make claims on the old plan. Without the run-out, Ventling says, costs would have decreased 9%. The next year — 2015 – Telligen saw a 4% decrease in health costs.
In 2016, however, Telligen hit a speed bump — health costs spiked 11.2% due to some high claims.
“That happens with self-funded,” Ventling says. “We’re at the whim of statistical chance. Sometimes, a super-high claim could affect our results. We had some very complex claims situations. But you have to look at the long-game in self-funded. You’re going to have good years and bad years. With proper reserving, you can weather the bad years relatively easily.”
The following year — 2017 — Telligen’s costs continued their downward trend with a drop of 15%.
“We were so tickled with our results last year that we gave our employees a premium holiday in December,” Ventling says. “Becoming self-funded enabled us to directly share the results back with our employees. It was kind of nice.”
Telligen’s decision went beyond dollars and sense, too. Ventling says part of Telligen’s strategy was to improve employee health. Along with the move to self-funding, Telligen initiated a robust wellness program — a model the company helps install for its clients. Initiating such a plan in a fully insured environment would have been more difficult, Ventling says.
“As long as we were looking at fully insured, we were unable to improve employee health,” Ventling says. “With a fully insured plan, we didn’t have the flexibility that would change the trajectory of our health population. When we evaluated moving to self-funded, we considered the financial risks and weighed the opportunity to deploy health management and wellness solutions to improve our employees’ health. We knew there was financial risk but we had to break free from being fully insured to deploy our health management solutions.”
Because Telligen is employee-owned, the company sought input from its stakeholders and openly communicated with the workforce throughout the decision-making process. Telligen executives used transparency to explain why it was important to cut costs. They also shared what the health benefit would look like after the move to self-funding.
Ventling says that after implementation, costs were reduced significantly enough that the share price for the company rose, too. For Telligen employees, the increase in share price equates to an increase in their retirement plan. Telligent continues to be transparent with its financials related to the health plan.
For Clevenger’s part, the move to self-funding provided cost savings as well. CareHere was able to pay a greater share of his company’s family option. Clevenger also says the self-funded health insurance plan at his company allows him build health benefits across the nation, which helps his company compete for employees in all their markets.
“Because we are national in scope, we have to be competitive within pockets of the country,” Clevenger says. “Benefits in Chicago are different from benefits in Denver which are different than benefits in Butte, Mont. We can tailor our plans to meet more of the national norms.”
Clevenger added that self-funded plans allow for more flexibility to offer and remove benefits. CareHere, for example, is adding a telemedicine benefit for its employees. Such a move, he says, would take more time and cost more in a fully insured environment.
Turning toward self-insurance
Any employer considering self-funding will have several challenges to contend with. A move from fully insured programs means employers will largely be free of state regulations, but will take on responsibility for compliance with several sets of federal regulations, including ERISA, HIPAA, the ACA and protected health information, or PHI.
Employers also will need to select appropriate stop-loss policies and strongly consider the organization’s risk tolerance. Regulations pertaining to self-insurance also require disclosures to employees and regulatory authorities.
Clevenger says employers should also assess their approach to dealing with volatility.
“You may have three great years and then one year with a lot of claims,” Clevenger says. “If you make a decision year by year by year, that’s kind of like timing the market and thinking you can pick stocks better than the market. You have to look at the return over time.”
Ventling recommends partnering with finance departments early in the process and be prepared to audit the plan regularly for compliance with regulations and the stop-loss carrier.
“The biggest change or consideration was how we managed the plan and analyzed our data from a claims as well as financial perspective,” Ventling says. “Being self-funded, we had the responsibility to ensure we were selecting the appropriate stop-loss levels — individual and aggregate — and assessing our own risk tolerance. Also, there’s a whole new set of terminology you need to learn as well as data points available. But positively, with more data comes the ability to make better informed plan design decisions as well as more focused health management interventions. You have an opportunity to spend your money more wisely.”