Part I of a three-part series
As we mentioned in this blog earlier in the year, the U.S. health care system is in crisis mode, despite historic changes under the Affordable Care Act (ACA). Health care spending will reach nearly $5 trillion by 2021 according to estimates from The Centers for Medicare and Medicaid Services (CMS). For employers trying to attract the best talent with a competitive group benefits package, those costs are a growing drain on their bottom line. And that’s driving them to search for solutions to keep health care costs down, including the public and private exchanges, increased cost-sharing measures, expanding wellness programs, and a host of other strategies. But even with these options, employers are still struggling to achieve any real cost savings with their group benefits programs. So this week we’re kicking off a three-part series on strategies that can actually help employers accomplish that.
Part I: The Plan
How you structure your group benefits plan is a crucial decision. You have two basic choices: fully insured or self-insured. Let’s review each one:
- Fully-insured is the most common type of group benefits plan. You pay a fixed rate premium to your insurance company every year based on how many employees are enrolled in the plan, employees pay a deductible or copay, and the insurance company pays the claims and assumes the financial and legal risk if claims are higher than projected.
While it’s true a fully-insured plan offers cost certainty, it won’t ever bring you true cost savings. Rates are set by the insurance company, your employees are set within a “pooled group” to determine renewal increases each year, and you get no real cost benefit from achieving and maintaining a healthy workforce. And while insured plans have more predictable costs for the year, high employee claim costs from one year can drive up future premiums.
- Self-insured (self-funded). Employers who choose to go the self-insured route operate their own health plan and take on the financial risk of paying for their employees’ health care. The employer sets the premium rates based on claims history and can make other plan design adjustments to the plan to lower overall costs. If claims are lower than projected, the employer can invest any savings and earn interest; if claims are higher, stop-loss insurance coverage can pay for excess costs.
Obviously, self-funding is a riskier proposition, but with risk often comes reward. When employees have few claims and few expensive illnesses, the self-insured employer can see an immediate positive impact on overall health care costs. On the other hand, if claims are more frequent and more costly than predicted, the self-insured employer incurs immediate expenses, possibly beyond what was projected, depending on the reinsurance structure in place.
Other benefits of a self-funded plan can include:
- Better cash flow
- Tax benefits
- More flexibility with plan design
- Lower administration costs
And, self-funded plans can avoid certain ACA provisions:
- They aren’t required to offer all Essential Health Benefits (EHB)
- The modified community rating doesn’t apply to small groups with self-funded plans. This is important for employers with 50-99 employees as they move into the small group market starting in January 2016 and will move from composite rates to a new individual rate for each member. On average, this change is anticipated to increase rates by 18 percent.
- Self-funded plans don’t have to pay the Health Insurance Industry Fee, which is estimated to increase premiums by 2.4 percent.
Is self-funding right for your company?
Self-funding isn’t a one-size-fits-all solution. Most employers with more than 200 employees self-insure some or all of their employee health benefits, and many with fewer than 200 employees also self-insure (although these employers need more stop-loss insurance protection). Employers with fewer than 100 employees generally go with a fully insured plan.
Bottom line: Most employers can benefit from self-funding as long as they accurately assess the costs they’re likely to face, set their premium rates accordingly, and delegate the administrative responsibilities. Of course, BeaconPath can help with this process.
Self-funded plans have another huge benefit: They give you the vital data you need to determine the health of your employee population, and take concrete steps to improve and maintain the health of all your members (employees and enrolled dependents).
That’s where we’ll pick up next week with Part II of this series: The Data. Be sure to subscribe to the BeaconPath blog in the upper right corner for more information about battling the high cost of health care.