By Kathy Ruff
Since 1970, health care spending has grown an average of 9.8 percent annually, 2.5 percent faster than the economy, according to the Kaiser Family Foundation. The numbers also show annual spending on health care grew from $75 billion in 1970 to $2 trillion in 2005 and experts estimated that spending to reach $4 trillion last year.
Employers who provide health insurance for their employees know first-hand how that exponential spending continues to boost health insurance premiums.
Family premiums have grown 155 percent for small firms and 180 percent for large firms since 2000, according to Kaiser. Since 2010, average family premiums have grown another 25 and 28 percent for small and large firms, respectively.
What can employers do to reduce or mitigate these costs? Instead of paying monthly premiums to an insurance company, many companies are instead choosing to hold on to those funds and pay employees’ medical bills directly, essentially becoming their own insurers. Self-funding has become a viable solution for some employers.
“Employers have been looking at self-insurance more now because of the added uncertainty in the health insurance marketplace and the spikes in the health insurance premiums,” said Michael Ferguson, president and chief executive officer of Self-Insurance Institute of America, Inc. (SIIA), based in Simpsonville, South Carolina. “You control your own destiny if you go self-insurance. You are ultimately in better control of your financial risk going forward. If you are relying on health insurance companies, you are at the whim of the larger healthcare marketplace that those health insurance companies are working in. If they are feeling uncertain about their situation, they are going to be hiking rates; the policies are going to offer fewer options.”
Creating the specific options desired for your employees makes self-funding a more attractive alternative. To keep employees healthy and reduce costs, companies with older employees might invest more in prescription-drug benefits and chronic-disease management, while those with a younger workforce might invest in family-planning benefits, wellness and prevention programs.
The City of Pittsburgh recently decided to switch to self-funding. It expects to save $7 million this year by switching its 3,700 public employees to a self-insured health plan.
Locally, the City of Scranton continues to reap the benefits of a self-funded medical and pharmacy plan for its 500 employees that it has had in place for more than 20 years.
“We tend to view the program through the general industry rule: The industry standard of savings is well over 20 percent in the first two years of a self-funded program,” said David Bulzoni, business administrator for the City of Scranton. “Additionally, the city has realized considerable savings based on some of the cost-containment initiatives we put in place. Hence, our initiatives have included a pharmacy carve out, EGWIP (employer group waiver) program for seniors/retirees, continually managing the medical usage and targeting high cost claimants for stronger medical management.”
The city’s third-party administrator aggressively manages its plan, which results in long- term benefits to both the city and its taxpayers.
“We have realized many of the Affordable Care Act initiatives have caused healthcare expenses to increase,” said Bulzoni. “The city chose to grandfather their plans to try to control the additional burden of these costs.”
Controlling the burden of rising health care costs represents a primary motivation in the decision to self-fund.
“The two major advantages of self-funded plans that are run well, generally are more cost-effective over time and, secondly, you’re able to customize your plan design to best meet the needs of your workforce,” SIIA’s Ferguson said. “You don’t have to buy a one-size-fits-all policy from an insurance carrier.”
Those savings come at a price, more risk and a commitment to access, review and analyze claims data to manage the plan going forward for efficiency and cost-effectiveness.
Many employers who self-fund recognize the critical component of hiring a competent and connected third-party administrator (TPA) to help manage the plan.
The Pocono Mountain School District (PMSD), which has self-funded its health insurance program since the mid to late-1990s, employs between 1,300 and 1,500 people.
“When you are self-insured, you end up having a third-party administrator (TPA),” said Joseph P. Colozza, PMSD’s chief financial officer. “That third-party administrator will handle all the claims for the individual and deal with the different hospitals, physicians and care facilities. The TPA has to negotiate significant discounts.”
Professional third-party administrators garner buying power throughout the whole state and even nationally because of their networking reach.
Similar to premium-based insurance, self-funded administrators negotiate with health care providers and facilities to secure the best prices so clients, such as the school district, pay the least amount possible for benefits, while still offering good-quality benefits for employees.
“When you think of self-insurance, the main thing is the buying power of deals with the network and not having to pay that administrative charge,” Colozza said. “You are paying the actual claims not cost plus, like you would with a premium-type product. When we switched TPAs, we ended up saving approximately $12 million in discounts. Where we were going to budget over $30 million, I have been able to hold it at $20 million the last couple of years.”
Colozza credits the district’s TPA with keeping costs contained to yield the desired benefits and savings.
Yet self-funding may not be the right option for some, including employers with fewer than 25 employees.
“As a practical matter, the more employees you have, the more likely self-insurance is going to be viable because you have a larger risk pool to spread risk around,” said SIIA’s Ferguson. “The decision to self-insure, is in large, a balance sheet decision. What I mean is that, do you have good financial stability? When you are self-insured, when a claim comes in, you have to write the check.”
However, more small and medium-size business gamble with those risks.
“The benefits are the potential savings an employer can realize by doing self-funded plans,” said Jerry Calistri, president of Swift, Kennedy & Associates Inc., an insurance broker with offices across Pennsylvania, including Wilkes-Barre and Williamsport. “What we are seeing, the largest growth area at this point is those smaller employers that couldn’t or wouldn’t be advised to go self-funded in the past. Because of the Affordable Care Act, the way things are rated, you are seeing more and more employers going to level (self) funded plans.”
Today more employers weigh the risks against the benefits and opt for self-funding. Some, including the City of Wilkes-Barre, choose not to self-fund. “We actually researched it a couple years ago,” said Greg Barrouk, city administrator for the City of Wilkes-Barre. “It’s one thing for current employees, but once we get into the older-age groups it becomes much more costly. There was too much risk involved. The numbers look good at first but when you start playing it out, it takes a couple people to have serious surgeries and it will blow the savings away real fast.”
Calistri agrees.“It’s not for everybody, but most employers, if they realize they can save 10 percent or more on premiums, it’s an interest,” said Calistri. “The risks associated with it are obviously if your claims are substantial, you could end up having to pay more for your health care dollars.”
Self-funded employers typically offset that risk with a stop-loss insurance policy that would cover claims over a pre-determined amount.
“When you get into a self-funded plan, you control your costs but you still have to pay your claims,” Calistri said. “These claims will fluctuate month to month, but you are controlling your cash flow.”
According to Calistri, level-funded plans operate similarly to a fully-insured program. Plans project the maximum funding scenario for the next 12 months but offer a twist compared to using a traditional health care plan.
“Maximum funding basically states that we’re going to give your group worst-case scenario at 115 or 125 percent of your claims projections for the next 12 months,” he said. “We are going to put a rate to that claim and your administration charges and we will bill you a monthly premium like a fully-insured carrier would. At the end of those 12 months, if you perform better, most companies will give you back the reserve. Some will want to split it.”
For example, if you pay $1 million in premiums and pay $750,000 in claims, the self-insured employer may get either a credit or a reimbursement of the $250,000 difference. However, if claims total $1.2 million under level-funded plan, you don’t owe the difference but may see an increase in your renewal based on your claim trends.
Calistri said employers generally realize savings in management and administration fees when using a third party administrator instead of an insurance carrier in a fully funded policy.
“It’s not for everybody, however if you have a broker or a consultant that understands the inner workings of it, it certainly can be a huge advantage for those smaller companies down to as small as 20 (employees) for them to get into a self-funded or level-funded plan,” he said. “There are certainly some advantages premium-wise. There’s a lot of work involved with it. Now you are getting data, you are reviewing claims. You’re trying to figure out projections and where your plan is going in the future. It’s definitely a longer-term commitment.”