Self-funded insurance plans have risen in popularity in this rapidly changing healthcare market because, for many employers, the numerous advantages they provide outweigh the risks also commonly associated with self-funding.
The advantages to self-funding a health plan are well-documented:
· Improved cash flow and reduced taxes
· Plan design flexibility
· Ability to unbundle services and vendors
· Access to more claims detail
· Stop-loss flexibility
· Reduced carrier fees
Paying your actual claim costs versus the carrier’s expected claim costs can also be an advantage if your claims tend to be less than the insurer’s projection. However, there is no guarantee they will.
Recently, a new advantage to self-funding has surfaced, and it may be due to many carriers’ slow responses in addressing high-cost drugs in their fully insured experienced rating formulas.
A bit of background: For decades, the experience rating formulas used by major carriers has included a stop-loss (or pooling) feature. Pooling is a necessary feature for small- to mid-size employer plans because it minimizes the effect of occasional catastrophic claims. Medical claim costs for covered members over a predetermined amount ($100,000, for example) are removed from an employer’s plan utilization before being projected into the new policy period. In essence, the excess amount does not impact the projected cost of the future period.
Instead, the carrier applies a pooling charge across its entire book of business to cover the excess amount on these catastrophic claims. Traditionally, that provision did not include prescription drug claims, since the term “catastrophic” typically meant long-term hospitalization expenses. But not so today. Today, a catastrophic claim could be due to the high cost of a specialty drug.
Specialty drugs are a constantly growing segment of today’s medical treatment plans for complex diseases, including cancer, multiple sclerosis, rheumatoid arthritis and hepatitis C. These specialty drugs cost an exorbitant amount; they now make up roughly one-third of the total U.S. prescription drug spend, according to the Congressional Research Service.
However, the costs have become secondary in the minds of patients because these drug treatments are successful. Employer-based medical plans with a basic employee copay design (where the drug copays typically cap out at $60-$75 per prescription) encourage this mindset.
It’s not uncommon to see two or three individuals’ prescription expenses for one or two specialty drugs represent more than half of an employer plan’s entire drug spend. And as a result, it’s also not uncommon for an employer plan’s prescription claim costs to increase 30-40% in one year. In many cases, this is an anomaly within the plan because the actual treatment is short term. For example, some employers have recently seen this scenario play out with a hepatitis C drug treatment whose one-time, 12-week treatment costs the plan $94,000.
If there is no provision within the carrier’s fully-insured rating formula to temper the effect of that one-time cost, the employer plan could see a major spike in their prescription drug premium rates at renewal.
Some fully insured carriers are already on top of this, and are including prescription claim expenses (along with the medical claims) when determining excess claim amounts over a stop loss limit within their fully insured rating formula. There are, however, still many fully insured medical carriers that do not.
This gives self-funded plans the advantage: When a company with a self-funded plan selects a stop-loss carrier and individual stop-loss coverage, they have the option to include drug expenses in determining high claimant costs subject to the individual stop-loss limit under their stop-loss coverage.
Self-funding advocates can tout this option as an advantage now, but it may be eliminated once fully insured carriers begin including drug expenses in the stop-loss feature of the experience rating formula.
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