Preferences for the three primary medical benefits funding arrangements — fully insured, self-insured or level funded — have recently shifted. While many employers still take a fully insured approach, self-funding has been on the upswing since 2016.¹
The likelihood of self-funding increases with employer size because this model allows for better risk management. However, it’s becoming increasingly prevalent among midsize and even small employers. Requirements and fees associated with fully insured plans under the Patient Protection and Affordable Care Act (PPACA) have made the self-funding value equation more favorable overall.
Funding options evaluation
There are distinct pros and cons of fully insured, self-insured and level-funded arrangements, but the differences are nuanced. A sound choice requires careful comparison of the benefits and risks — led by a funding evaluation that includes the plan’s historical performance and claims experience. With this data as a reference point, employers can forecast the impact of each arrangement with the highest degree of predictability. And once a decision is made, a compliance review provides a final check that helps avoid unwelcome surprises.
Self-funding risks
Determining the organization’s risk tolerance threshold is essential in deciding whether self-insurance is a good fit. And if this option does come out on top, the next choice is how aggressive the plan’s
financial protections should be. Large claims such as those for specialty prescriptions or cancer treatment continue to grow in size and frequency — leaving employers susceptible to catastrophic
costs, especially midsize and small organizations. The lower their risk tolerance, the higher the amount of stop-loss insurance they need to adequately limit exposure to higher-than-expected claims. Notably, a self-insured employer with a major claim experience may not be able to find a fully insured carrier to take them on — because that selfinsurance could become too risky or otherwise undesirable.
One risk of self-funding is having the wrong stop-loss contract in place. In this situation, there’s the potential for delayed reimbursement of large claims and a benefits offering that’s misaligned with the
contract. Also, some contracts pay providers bonuses when they meet certain metrics — adding cost. These include rewards-based accountable care organizations or bundled payment contracts, which
are increasingly common.
The administrative complexity of self-insurance must also be part of the decision-making process. Plan management for a self-insured employer involves compliance, documentation and alignment with
the stop-loss and claims administrator contracts, as well as handling claims issues as they arise. These responsibilities — and possibly others — may require the staff to do extra administrative work.
Self-funding advantages
The sum of self-insurance benefits outweighs the risks for many employers. Compared to fully insured plans, the most obvious and immediate cost-savings advantage comes from eliminating insurance margins, fees and state taxes. And when healthcare is less costly than premiums would have been under a fully insured alternative, the surplus belongs to the employer. This arrangement also minimizes regulatory requirements and allows for greater plan design flexibility than a fully insured plan.
An important point to keep in mind is that the overall price paid for healthcare depends on population usage. By proactively managing physical and emotional wellbeing with effective health initiatives, employers can directly reap the reward of lower claims activity among healthier employees.
Two related self-funding benefits are the transparency of claims data and the visibility into improving employee and organizational wellbeing. More self-insured employers are partnering with data warehouse vendors to uncover health plan inefficiencies and population health needs. Ultimately, this leads to a strategy for investing most appropriately in better management of benefits spend. Say, for example, data integration and analytics identified patterns of opioid misuse that began with a dental prescription. The employer could then manage the prescription plan more stringently to address this outcome.
Captive arrangement
A captive arrangement provides a unique self-insured opportunity for like-minded employers to share healthcare risk and reduce costs by pooling populations. Similar to a licensed commercial insurer, a captive assumes the risk generally associated with an insurance company. But pricing within a captive arrangement reflects the experience of the member companies — not the broader market. While there are downsides, such as bearing an increased administrative burden and investing in start-up costs, this approach can be well worth considering.
Level funding
Level-funded health plans are very similar to self-funded plans. Offered by insurance carriers and other third-party administrators, these plans are underwritten and may appeal more to smaller employers, especially those with a relatively healthy population.
Under a level-funded arrangement, the employer pays a set amount each month that covers claims as well as fixed costs like stop-loss insurance. Unspent funds are kept in their account to cover future costs, and the stop-loss insurance covers claims that exceed employer funding. Essentially, this plan structure allows for cost savings and other benefits of self-insurance without the cost instability. However, if
an employer has a high-claims year, the monthly cost in the following year could increase.
Importance of keeping evaluation top of mind
Medical and other healthcare benefit costs don’t appear to be trending downward anytime soon, and revisiting funding options is a sensible step for many employers looking for ways to curb spending. Because the choice of funding has important implications for organizational risk as well as costs and fees, a sound decision can only be made by carefully evaluating the full spectrum of current and alternative strategies.
This article is an excerpt from our 2019 Organizational Wellbeing & Talent Insights Report – U.S. Edition.
Contributors:
Kevin Cipoletti
Vice President, Sales & Marketing, Western Region
Kevin creates and drives organic growth strategies by working with clients to enhance their organizational wellbeing. In guiding the teamwork of branches and consultants, he helps them connect with and leverage all Gallagher capabilities for the utmost benefit of their clients, including better employee engagement and productivity.
John Edgerton
Vice President, Underwriting, Great Lakes and South Central Regions
John provides strategic direction for his underwriting teams, and helps drive consistent processes across the division. Under his leadership, they provide underwriting, financial analysis, technical support and stop-loss services to a diverse group of clients.
Endnotes:
¹Arthur J. Gallagher & Co., “2018 Benefits Strategy & Benchmarking Survey,” November 2018