It's no panacea for the problem of rising health care costs, but if you're willing to assume the risk for covering the actual costs your employees incur, you might consider a self-funded plan. With a self-funded health plan, you pay the actual costs incurred by your covered employees, plus a fee for administration of the plan, instead of paying a monthly fixed premium.
The American College of Emergency Physicians estimates that 40 percent of all group coverage in the United States is through self-funded plans. Other estimates indicate that 70 percent of all employers have at least a portion of their health coverage under a self-funded arrangement. While self-funding tends to work best for employers with more than 500 employees, smaller groups can structure plans that can cut costs as well.
Insurance companies charge clients to assume their risk. The more risk they assume, the more they charge. With a self-funded health plan, the employer assumes some or all of the risk for providing health care benefits to its employees.
The employer can control the assets of the plan, put them in trust and invest them to its advantage. And, to exercise more control over its costs, it can employ measures that will improve the health status of its workers, such as smoking cessation courses or diet and exercise programs.
J.D. Turco, vice president of St. Barnabas Health System, says the health system initiated a self-funded plan several years ago to rein in its costs, which were increasing at double-digit rates annually. St. Barnabas faced having to pass on a larger share of its insurance costs to its employees and risked them leaving the health system for jobs where less expensive coverage was available.
St. Barnabas, which had already self-insured some of its other risks, including general liability and professional liability, decided to take the health insurance cost issue into its own hands.
"We said, 'Let's control our destiny and put our faith in our managers,'" says Turco.
St. Barnabas isn't alone in facing cost pressures. A survey by benefits consultant Hewitt Associates of more than 500 major U.S. organizations reveals that the maximum added cost for health insurance that employers can absorb over the next five years is 8 percent annually. Hewitt points out, however, that companies are expecting a 15 percent increase in 2004, leaving a 7 percent gap between what employers report they can afford to absorb and the cost increases they anticipate.
St. Barnabas retains Highmark as the administrator of its plans, with Highmark handling the claims and paperwork required. St. Barnabas pays on a "cost-plus" basis -- the health system pays the actual costs of its employees' health care, plus an administrative fee to Highmark. St. Barnabas pays claims on the basis of Highmark's negotiated discounted fee schedule with providers.
Turco says the savings achieved by self-funding its health care plan has allowed St. Barnabas to maintain its level of benefits while holding the line on costs, with estimated savings of $300,000 to $500,000 annually over what it would have spent on a fully insured plan.
To mitigate the risk of a catastrophic loss ballooning costs, employers can purchase stop-loss insurance that kicks in when claims reach a pre-determined level. Individual stop-loss covers any single claim that exceeds the limit, while aggregate stop-loss protects against excessive losses across the entire employee group. HOW TO REACH: St. Barnabas Health System, www.stbarnabashealthsystem.com; Highmark, www.highmark.com