COVID-19 highlights limitations of fully insured health plans

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Choosing a self-insured health plan model has always offered employers some advantages, including better transparency and more control over their healthcare spending than is possible with a fully insured model. This year’s worldwide COVID-19 pandemic has further highlighted the reasons why employers should consider a self-insured strategy over a fully insured model.

Key differences
In a fully insured model, the insurance carrier covers risk. The carrier determines the employer’s premium rates based on age, demographics, and underwriting factors. Often, the insurer must pool risk among several employers to create a larger population. When risk is blended with the populations of several other employers, premiums do not reflect the specific risks of any one population. If your employer group has a particularly healthy year, you pay the same premiums as less healthy groups in your risk pool. The insurance company largely recoups the rest as profit.

In recent years, health insurance companies have accrued so much market power that there is little transparency in how they make decisions about premiums and how those dollars are used.

By contrast, with a self-insured or self-funded model, the employer group assumes the claims risk and pays only for the actual costs of care, plus a small fee to the plan’s third-party administrator. By pairing the plan with stop-loss coverage, risk from incurring one or two massive claims during the plan year (major accidents or illnesses) can be further reduced. Most importantly, self-insured plans provide the claims transparency that is essential for employers to control costs and drive quality.

COVID-19 and unpredictable premiums
Health insurance companies have booked record profits during the pandemic as utilization for elective care dropped dramatically while premiums stayed the same for fully insured plan sponsors.

Conversely, self-insured plan spending correlates to actual utilization. As utilization went down during the pandemic, so did health care costs for self-insured plan sponsors.

Uncertainty is the rule with fully insured plans. As they eye 2021, carriers may offer modest premium increases because of reduced plan utilization or they may issue ACA-mandated premium rebates — but they will likely take a conservative underwriting approach as the U.S. faces the possibility of a prolonged recession, lower group membership from job losses, and a spike in rescheduled elective surgeries. Insurers have many levers to pull to maintain profits, and unfortunately premium unpredictability is present even under normal circumstances and presents an ongoing budgeting challenge for plan sponsors.

Self-insured plan arrangements are the best way to plan strategically for the long term, and the current environment is underscoring the need to transition. Of course, because self-insured employers pay claims as they come, they potentially can be hit hard by one or two expensive interventions, but the best TPA partners include advisory services to help guide clients in obtaining reasonable stop-loss coverage.

Traditionally, self-funding has been perceived to be suitable only for large employers, but smaller groups can take advantage of a hybrid option, called level-funding, and become partially self-insured with capped monthly premiums as a transition tool. Administratively, such hybrid arrangements feel fully insured but are self-funded.

Take back control
Insurance carriers determine coverage and services for each of their plans at a global level — which means fully insured employers are subject to the insurer’s decisions for its entire book of business and those decisions may not meet any specific population’s needs. In contrast, self-insured employers have the authority to make informed decisions and changes to their covered services at will, ensuring their members receive the care they need, particularly during an unforeseen crisis like COVID-19.

For instance, while fully insured employers were waiting on guidance from carriers about whether testing for the virus or its antibodies was covered, self-insured employers could make those decisions. An effective TPA will also assist its employer groups by providing communications and guidance on how to access such services far faster and more economically than national insurers covering multiple markets.

Similarly, in a fully insured plan, the insurer controls all points of access in the health care value chain. For instance, fully insured employers are subject to the insurer’s formulary or, increasingly, restricted to using their networks or owned subsidiary companies that provide health care services directly. Conversely, self-insured employers, with help from their TPA, select their own pharmacy plan benefits and unique medical partners. This allows TPAs to help match unique capabilities to specific client needs rather than assuming one size fits all.

Further, self-insured plans are not subject to certain Affordable Care Act fees that are automatically included in fully insured plans and can make up as much as 2% to 3% of the plan’s annual expenditures.

Data transparency
Increased transparency is a major advantage of self-insured plans. Unlike fully insured employers, self-insured employers have direct visibility into the claims they pay. This transparency frees self-insured sponsors to use their data to guide them to timely and targeted decisions that can improve their members’ health and well-being and control costs, in part by identifying high-risk populations and targeted care strategies to keep members healthy. TPAs also offer data transparency, which helps identify cost trend drivers from both pharmacy and medical lines, and all groups, regardless of size, could benefit from better management of chronic conditions and guiding patients to high-quality, low-cost facilities.

Of course, there are challenges to making the switch. Groups new to self-insurance must properly assess and underwrite their risk, and this is difficult to do without the data on the population’s claims, which may not be accessible from the insurance carrier. However, TPAs can work with employers and their underwriter to rate and assess risk appropriately using population census tools and self-reported medical history questionnaires from plan members.

The perception of added administrative complexity from switching to self-insurance can also be frightening for decision-makers, but an experienced TPA won’t leave employers to fend for themselves, and the savings can reach as high as 14% to 16% compared to a fully insured plan with similar benefits. For the self-insured the value of the model is unquestionable — in our 30 years of experience working exclusively in the self-insured market, we’ve seen that most plan sponsors after just one year as a self-insured employer would never consider going back to a fully-insured model.

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