Preferences for the three primary medical benefits funding arrangements — fully insured, self-insured or level funded — have shifted. Alternative strategies like self-funding and level funding are on the upswing with mid-sized and small employers, says Joe Roberts, area vice president at Gallagher.
Smart Business spoke with Roberts about the benefits and risks of alternative health benefits arrangements.
How does self-funding differ from fully insured benefits plans?
Compared to fully insured plans, the most obvious and immediate cost-savings advantage comes from eliminating insurance margins, fees and state taxes. When health care is less costly than under a fully insured alternative, the surplus belongs to the employer. This arrangement also minimizes regulatory requirements and allows for greater plan design flexibility.
The overall price paid for health care 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. For example, data integration and analytics might identify patterns of opioid misuse that began with a dental prescription. The employer could then manage the prescription plan more stringently to address this outcome.
What are the risks of self-funding?
Knowing the organization’s risk tolerance threshold is essential. Large claims, such as specialty prescriptions or cancer treatment continue to grow in size and frequency, leaving employers susceptible to catastrophic costs. The lower their risk tolerance, the higher the amount of stop-loss insurance they need to adequately limit exposure to higher-than-expected claims.
One risk is having the wrong stop-loss contract, which can potentially delay 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 the increasingly common rewards-based accountable care organizations or bundled payment contracts.
The administrative complexity must be considered, as well. Plan management involves compliance, documentation and alignment with the stop-loss and claims administrator contracts, as well as handling claims issues as they arise.
Where do captives come into play?
A captive arrangement provides a unique self-insured opportunity for like-minded employers to share health care 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 startup costs, this approach can be worth considering.
What are the pros and cons of level funding?
Level-funded plans are similar to self-funded plans. Offered by insurance carriers and third-party administrators, these plans are underwritten and may appeal more to smaller employers, especially those with relatively healthy populations. The employer pays a set amount monthly to cover claims and fixed costs like stop-loss insurance. Unspent funds are kept in the account for future costs, and the stop-loss insurance covers claims that exceed employer funding. Essentially, this allows for the savings and other benefits of self-insurance without the cost instability. If an employer has a high-claims year, however, the monthly cost the following year may increase.
Because medical and other health care benefits costs continue to rise, revisiting the funding options is a sensible step. With 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.
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