The idea of funding your own company’s health insurance plan may seem riskier, but this alternative funding method is actually no riskier than participating in a fully funded plan. With alternative funding, your company — not the insurance company — benefits when the plan shows a profit, says Steve Freeman, president of USI San Francisco.
“The benefits are twofold,” says Freeman. “If you implement any type of claims savings strategies, you, as the employer, get to participate in those savings. And second, you get the underlying claims data that you don’t typically get under a fully insured plan, which can allow you to better manage the plan to meet your employees’ needs.”
Claims data includes the number and length of hospitalizations, frequency of emergency room visits, outpatients visits, pharmacy usage and any other useful information.
Smart Business spoke with Freeman about why self-funding an insurance plan can be a smart move for companies with as few as 50 employees.
Isn’t it risky for a company, especially a smaller company, to use alternative funding for its health plan?
The available products have taken those risk elements out as far as monthly claims fluctuations, large claims and termination of the program. The insurance company provides cost limits insurance for any large catastrophic claims to cover that liability, and if you want to get out of the program, it also provides insurance for that. Liability under a self-funded program is no more risky than that of a fully insured program.
What are the cost benefits of alternative funding?
The alternative funding programs that are available allow smaller employers to self-fund while providing safeguards that the overall premium will be no more expensive than in a fully funded plan. And if an employer has good demographics, encourages wellness and for its employees to be smart consumers of health care with consumer-driven health care solutions, the resulting claims savings have a direct impact in reduced premiums. You don’t have to wait until the end of the year to see what the entire pool has done and how it will impact premiums.
If you have a group that’s fairly healthy and your employees are taking care of themselves, but they’re in a fully funded insurance pool, they are supporting groups that aren’t healthy and are paying the same rate as those groups. But being healthy drives the cost down, and in a self-funded program, the employer pays less immediately in reduced premium.
It also eliminates the surprise of large rate increases, because the employer is aware of exactly what is going on in the plan. With fully funded, you wait until 60 days before renewal and your insurance company delivers the rate increases. With alternative funding, there are no surprises because you know how the plan is running during the year, so there’s more predictability as to what your pricing is going to be year to year.
What are the other benefits of alternative funding?
Employers have access to underlying claims data, which provides information on how employees are using the health plan without disclosing specific employees’ or dependents’ information as protected under HIPAA.
Having access to that data allows employers to really understand the underlying costs. And based on that information, an employer may decide to install a wellness program, or laser in on the conditions that affect employees, allowing it to customize the health plan for its population. Another benefit is the elimination of state mandates, which can account for 5 to 10 percent of premium costs. If a state mandates coverage of bariatric surgery and you have a young, healthy population, the flexibility of plan design can help you avoid that mandate. You can also reduce your premium tax, as the tax will only be based on about 25 percent of the premium, versus the 100 percent in the case of fully insured premium, allowing that savings to come directly back to the employer.
Finally, because you’ve unbundled the components of the plan, the insurance company is showing you the actual cost of each component instead of having it all rolled up into one rate.
Why are more smaller businesses choosing alternative funding?
Employer groups are spending a lot of money per employee for health care, and a lot of them are facing large increases and asking why. Employers are saying, ‘I don’t understand it. My employees don’t go to the doctor, no one’s been hospitalized. I want to see the data that shows actual utilization, and I want to see the underlying cost of what is driving the rate increase.’
It’s like the difference between your electric bill and your cable bill. With the cable bill, you pay the same amount regardless of usage. But with utilities, you can control your usage and you only pay for what you use.
What should a company consider when deciding whether to self-fund?
Regardless of industry, a company should look at its underlying claims cost, whether it has a high-risk business or low-risk business, whether its employees are older or younger.
If you’re fully insured, the insurance company will apply a certain creditability to your claims experience, so if you have had bad claims, the pricing in the next year will be higher than normal. If your claims have run favorably, they may be less than the average.
Self-funding works the same way, except you don’t pay the average rate. Once CEOs understand how this works, the usual reaction is, ‘This makes all kinds of sense. Why would we not do this?’
Steve Freeman is the president of USI San Francisco. Reach him at (925) 472-6772 or [email protected].