With increasing health care costs, smaller employers are exploring innovative approaches to fund their employee benefit plans to save money. Risk retention groups (RRGs) or “captives” can generate savings for some larger employers that self insure their plans. Captives are now catching on with smaller employer groups between 25 and 500 employees. Smaller employers are becoming more educated and starting to understand how risk management works with their health plans. By pooling their employees and risk with other employers within a captive, it can be a creative way to save.
Now, smaller employee groups are gaining access to those same cost reduction strategies that were only being provided from larger employers through these risk retention groups, or group captives, says Steve Freeman, president of USI in San Francisco.
“For employers that want to influence their claims and have a direct impact on their total cost, a captive may be a great alternative,” says Freeman. “However, if employers are risk averse and are fine with paying premiums with no underlining data or guarantee of the next renewal, this is not for them.”
Smart Business spoke with Freeman about how a risk retention group can give employers more control and create greater transparency in their health insurance plan.
How does a risk retention group work?
An RRG is a liability insurance company owned by its members, which are employer groups. These captives are now being developed for groups of smaller employers, which allow them to self-fund and to participate in the profits of their stop loss premiums. Variability in smaller groups is higher and predictability is lower, giving smaller employers the opportunity to pull themselves into a larger group to reduce their risks.
For example, a company with 10 employees has a 10 percent chance that claims in a given year will exceed the expected amount by at least 70 percent. With an employer of 100 people, that number falls to 5 percent, and, at 1,000 employees, that risk is less than 1 percent. By banding together to create a larger pool, smaller companies can reduce their risk.
How can a company get started?
Employers have established these captives with other employers that are typically in the same industry, share similar risk characteristics, or that are located in the same area. If a company is part of an association, it can start there. Because captives are fairly new, the association may not be aware of one, but the employer can ask whether there are any other employer groups of the same size and industry that would be interested in self-funding, and thus starting a captive.
Obviously there are laws governing RRGs since you are creating an insurance company that you are a member of and that you own, so there are risk and reserve requirements. You have to work with someone who understands those laws, how the RRG should be administered and how profits are paid to participating members. It is critical to work with someone who’s done this before and who understands the laws regarding these programs.
How can an RRG help create transparency and lower costs?
The real premise behind the popularity of these programs is that they allow smaller employer groups the ability to pool themselves into a larger group, self insure and obtain data on their claims utilization, allowing them to influence employee behavior, which drives down health care cost.
Smaller employer groups typically don’t get claims data and have no idea what their underlying claims experience is, so can’t act to influence it. Transparency allows employers to see the actual use of their health plan. For example, the volume of inpatient and outpatient claims, the number of office visits of primary care physicians versus specialists and types of ER visits. If the ER is being overused, you can provide motivation for employees to seek other methods of more efficient and cost-effective care. Employers also can see the types of drugs being used, and whether employees are using brand name drugs versus generics. If there is a high number of individuals with chronic conditions who are not enrolled in disease management programs, an employer can provide incentives to enroll folks, which will improve employee health, productivity and absenteeism rates and lower costs.
At the end of the day, if you can reduce your claims, you will reduce your costs.
How can employers determine if this is right for them?
If employers are looking for short-term cost reduction, a captive isn’t for them. Employers need to have a commitment to the long-term success of the captive. This is not a one-year solution or a short-term view. A captive is not for all small businesses.
It’s all about risk management and being able to manage your claims. The largest piece of insurance premiums — 85 percent — is claims. So if you can impact claims up to a certain level, you can reduce costs.
Within the captive, you may have a 50-person employer that can only take on $20,000 of liability per person, and a 200-lives employer that can take on $100,000. Each employer wants to make sure that the risk corridors are properly set for their risk tolerance, and premiums will be based on the amount of risk that each company adopts. Each employer group is underwritten independently at a different rate, depending on the level of risk it wants to take, demographics and plan design.
As employers seek cost-effective ways to continue offering health care benefits to their employees, RRGs, or captives, are becoming a more attractive option. A captive allows employers to share the cost of their liability for funding their benefits plans by pooling costs with other employers. And by providing transparency, it allows employers to target wellness and disease management programs right for their population, resulting in a healthier work force.
Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or email@example.com.
Rising health care costs are putting more and more pressure on employers every year. Providing a desirable plan has become an enormous expense, but companies still need to offer health insurance benefits to stay competitive and recruit.
“Health insurance is no longer an employee benefit; it’s a cost of doing business,” says Albert Ertel, COO of Alliant Health Plans. “You have employers trying to find a balance between what they can afford and what the employees desire.”
Smart Business learned more from Ertel about how employers can find that balance.
What options do they have to keep the costs manageable while also offering a quality benefits program?
One of the mistakes employers make is looking at their health plans on a year-to-year basis instead of using a long-term, multi-year approach. There used to be 10 to 15 insurance companies employers could get quotes from that would compete for their business. There are only a handful of competitors in the business now, and options tend to be homogenous. Companies don’t look at the true cost of changing carriers.
What should employers look for in a health insurance carrier?
They should look at the price point and the availability of services. One universal truth is that health care is local. Looking at the provider directory may not provide solutions. Look for a company that wants to work with you over the long haul. This opens the door to develop that multi-year or long-term approach. Too many people just say, ‘Here’s the low rate this year; it’s time to move.’ Disruption adds to the cost of changing carriers. Once you change carriers four or five times, you’ve gone full circle and not accomplished anything positive for your employees.
In the real estate market everyone looks at location, location, location. In the health insurance business, people have a tendency to be very short-sighted and look at rate, rate and rate. Health insurance is a product for which you truly get what you pay.
Besides price, what should employers consider when looking at health insurance?
The basics are the price, the benefits and the network that employers have a tendency to focus on. After those three factors, you should consider the true level of customer service, level of employee education, hands-on service and no-cost, value-added services guiding people to healthier decisions. If you only compare the basics, you’ll have a tough time differentiating one carrier from another. Although employees aren’t involved in the decision of where to buy coverage, every employer out there knows that a benefit is no longer a benefit if it’s a ‘hassle.’ I’m talking about picking up a telephone and talking to a person. You need a focused point of contact — those touch points that are truly hands-on, truly person-to-person.
Employers want to do the right thing for their employees. But the amount of information most employees know about their health insurance is printed on their ID card. That’s about as in-depth as they go until they need it.
How can employers educate their employees about their health insurance?
Let’s ask the right question: What do my employees really need versus what do they want? Most employers rarely ask. Now you’re providing value, so give them the opportunity to learn about what they’ve got. The annual enrollment period is a great time to educate and inform employees about their benefits. Unfortunately, a lot of employers just get an application filled out. But what does a new application mean to an employee and his or her family?
One idea that works well is to invite the employees’ spouses in for these meetings. Why? Seventy-seven percent of health care decisions are made by women. So involve the spouses.
What is the benefit of educating employees about the plan?
The biggest benefit is truly imparting the knowledge of the cost of medical care and the value of the insurance plan the employer is providing to them. Most employees don’t understand how much it costs. All they know is how much is being taken out of their check.
The other thing they know about the cost of their health insurance is the co-pay. If their doctor’s visit only costs them $20, then why is the company taking so much money out of their account? You have to help them understand their cost is only the tip of the iceberg.
What are some of the factors contributing to high costs?
When you look at the process of pricing health insurance for a company, you look at the demographics of the group: age, sex, family participation in the group, the plan design they are interested in, where they are located, the health of the group, whether it’s through claims experience or health histories. Then the bargaining starts. The risk is determined and benefits may be modified.
How can employers marginalize those factors?
I’m a big believer in personal responsibility. People want to work for employers that take the time, not just in an enrollment meeting, but with a truly educational total approach to employment and benefits. Large or small, the companies people want to work for are ones that give employees the tools to make their own decisions. If you give people responsibility, eight out of 10 of those people are going to rise to that occasion and many exceed it.
In the health insurance business, the best way to bring down costs is by being healthy. That is why preventive care and wellness programs are so important and need to be considered.
Albert Ertel is COO of Alliant Health Plans. Reach him at (706) 629-8848 or firstname.lastname@example.org.
Every employer is struggling with health insurance costs. How much can we afford and how much will employees share? For many people, health insurance equals peace of mind. But you have to look at the total cost of care — insurance plus cost sharing (deductible, co-pays, co-insurance).
“A lot of people are under the impression that if the doctor says you need it, the health plan should pay for it,” says Al Ertel, chief operating officer for Alliant Health Plans. “Many figure, under a worst-case scenario, they might be out a few hundred to a few thousand dollars and, overall, they think they have complete protection. Most people don’t understand their responsibility or, in numerous cases, their financial exposure.”
Smart Business spoke with Ertel about why it’s important to be aware of your financial exposure when purchasing health insurance, and how employers can pick a plan that works for their employees and their bottom line.
Why have financial exposures gotten so large?
As premiums increase, employers must look for ways to offset the cost. They can raise the employee contribution or change benefits by raising the deductible or co-pay amounts. Each time an increase occurs, it shifts the financial obligation onto the back of the employee or plan member. That seems to be the fairest way for employers to continue to offer benefits and engage the members in an ever-changing health care environment. By changing benefits there may be no increased cost on the premium itself.
How does this cost shifting impact employees?
For example, the employer increases the physician office co-pay from $25 to $40. If you are healthy and see a doctor once or twice a year, that increase may be no big deal. If you are chronically ill and need to see a doctor frequently, that change may have added $500 or more to the cost of care in the new year.
What are the dangers of not understanding your exposure?
Many decisions are made by looking at co-pays and whether your physician is ‘in-network.’ People think, ‘I’m not going to be in the hospital for a week, or have any outpatient surgeries. I’m going to pay $25 to see my doctor, $10 for my prescription (and my monthly premium).’ But that isn’t the total picture. In many plans, co-pays apply for prescriptions and physician office visits. Then there are the tests, labs, x-rays or other outpatient testing, CT scans or MRIs. What about an outpatient procedure or surgery or an extended hospital stay? The deductible and co-insurance applies, but to what and how much? Statistically, most people do not have enough claims to reach their deductible. Those that do may end up meeting their deductible and the co-insurance out-of-pocket maximum ($5,000 to $10,000.)
How can these exposures occur?
Let’s say eligible expenses from the hospital are $20,000. You immediately owe the deductible. For this example, consider a $2,000 deductible. There is 20 percent co-insurance on the next $18,000. Or $3,600 is still owed by you. You’ve paid $5,600, and it’s assumed that once out of the hospital you’re healthy and can go back to work. This is not likely as there are usually residual costs associated with rehabilitation that may require co-payments. Those costs are determined by the plan. The actual items covered are explained in the information provided by the insurance carrier or the benefit booklet from the employer in the case where the health coverage is being self-insured. The point is the information is usually available before benefits are required. Employers must continue to communicate and educate employees about the health coverage being offered.
How can employers determine what level of exposure is best for their health plan?
The higher the cost sharing or risk being moved to employees, the lower the premium you will have to pay out. What is ‘fair’? The hard part is how to strike a balance when deciding. Employers are making financial decisions for the company. Yet the new benefits will apply to them and their family. The total financial exposure has to be considered. If the benefits remain ‘rich,’ premiums increase as benefits are enhanced or added. Many employers are looking to offer a more complete program that includes employee responsibility for wellness or at least health improvement. If you practice healthy behavior, out-of-pockets or premium sharing may be reduced.
How can employers ensure they are making the right choice?
Employers struggle with this. What is the most cost-effective and best value for the company and in the best interest of my employees? In simplistic terms it is an economic decision for the company. But we want to take care of our employees and recruit for the best and brightest. One of the answers is choice. Offer a couple of benefit plans.
Employers are freezing contributions. By defining their contribution now and in the future employers are limiting their exposure. That means greater responsibility to educate and communicate available options to the employ. What does the health coverage include — deductible amount, out-of pocket maximums, co-pays, drug cards, physicians, hospitals and exclusions? Any required activities that may lower employee costs — smoking cessation or exercise? Any additional value-added programs? Employees tend to look at health coverage differently than an employer and especially if there are specific health care needs.
The right choice is the one determined by you. Each employer’s specific needs and circumstances are different. And with the unknowns created by health care reform, it’s bound to get just plain crazy.
Al Ertel is the chief operating officer with Alliant Health Plans. Reach him at (800) 664-8480, ext. 234, or email@example.com.