With the health care industry’s current state of flux, many companies are exploring the value proposition between self-funding their health plan versus a fully insured program.
Albert Ertel, chief operating officer of Alliant Health Plans, says there are similarities between self-funding and the traditional fully insured route, but employers should know the differences and educate themselves before making a decision.
“The basic functions are the same. It boils down to the appetite for risk the employer has,” he says.
Smart Business spoke with Ertel about how to determine which type of insurance is right for your organization.
What are the differences between a self-funded and fully insured plan?
The major differences between these options can be boiled down to risk and services included. In self-insurance, the employer becomes the health insurance ‘company.’ The employer is insuring its employees and their families. Providing health care for this population may be difficult to quantify. Additional coverage or reinsurance is available to insure against potential catastrophic losses.
In the fully insured world, the insurance company takes financial responsibility to pay eligible health care expenses and administrative expenses for that population. The insurance company takes the risk and responsibility to do it all: administration, eligibility, enrollment, ID cards, claim payment, customer service, coordinate care, etc.
In self-insurance you are the plan, the administrator and coordinator. You hire additional experts on your behalf to get it done. Potential savings comes from lower cost of administration. Self-funded plans are not subject to state insurance laws or taxes. However, as federal health care reform ramps up, that flexibility may be disappearing.
What does ‘unbundling’ services mean and how does it affect self-funded insurance?
Most services are included as a ‘bundle’ in fully insured plans. The insurance company is at risk, so medical management, care coordination and a basic wellness program are inclusive. By unbundling, self-insuring companies determine which services they will use in their plan. At a bare minimum, they are going to need a TPA (third-party administrator), provider network, and case management. Adding other services like wellness programs or disease management is up to the employer. Employers may consider other technology-based services offered in many fully insured programs including PHR (personal health record) and Internet access to claims and potential treatment costs (transparency).
Would employees notice a change in coverage if their plan changes?
In most cases, there should be little differences between fully insured programs and self-funding when comparing the ‘core services’ and paying claims for eligible health care. Fully insured plans will offer greater benefits and services. For example, Alliant has an incentive program to improve wellness. We provide a choice of incentives like gift cards to get covered members to use their wellness benefits, get their annual physical, stop smoking, and exercise. Self-funding companies may or may not want to add this additional expense. Once a company determines its employee benefit philosophy and tolerance for risk, each additional ‘value-added’ service will need to go through a cost-benefit analysis.
What are the cost differences?
An employer must understand that ‘a claim is a claim.’ If you look at the same population with equal health concerns, the medical care will be comparable. In self-funding, that care is paid for in two parts: administration (along with any value-added services), which is billed monthly, and medical services, which are paid as they occur. In self-funding, if employees don’t seek care, there is no money going out the door. Let’s say there is a million dollars accrued in a claim fund for the next year. If claims never happen, those dollars are saved for future use by the employer. Imagine a dollar bill representing your premium. It has two parts, fixed cost and claims. In a fully insured world, you pay that full dollar every month. In the self-funded world, you pay 15 to 20 percent for administrative costs to the TPA and hold onto the balance to use for claims, At the end of the year any portion of that dollar left, you keep. Yet if claims exceed expectations, then the excess costs will have to be absorbed. Self-funding is risk-reward. Your exposure is limited to the ‘whole dollar’ when fully insured.
How are self-funded plans administered?
Any insurance adheres to the law of large numbers. Whether it is self-funding or otherwise, you have to get as many people enrolled as you can. It lowers cost by spreading risk and eliminating potential adverse selection.
Self-funding requires you to define the benefits and services covered, eligibility, participating providers and administration. It usually begs the assistance of a professional adviser, agent or consultant. Most employers hire a TPA and expect that TPA to do all the things necessary to make a self-funded program work. But, ultimately, the financial and fiduciary responsibility lands on the employer.
How can executives determine which kind of plan is right for their company?
Many employers believe their work force is healthier than it really is. That may lead many mid-size companies to take the risk. In addition to the financial risk of providing health benefits, an employer and its executives must understand the fiduciary responsibilities. They must be willing to take on the potential liability for every claim that employees and their dependents have.
Whether an employer decides to self-fund or purchase an insured program, claims that are paid this year have an impact on future costs of coverage. In either case, the choice should not be taken lightly.
Albert Ertel is the COO of Alliant Health Plans. Reach him at (706) 629-8848 or email@example.com.