Is Your Organization Ready to Commit to a Self-Funded Medical Plan?

By Dan Cunningham

Because of our experience in the insurance carrier risk side of self-funding, we are often asked to analyze whether or not a client is a good candidate for moving their organization from fully insured carrier-provided health insurance coverage to self-funding. Our company is highly experienced in the insurance carrier risk side of self-funding.

As most employers know when investigating self-funding, there is insurance carrier coverage known as stop-loss insurance, which is used to protect a self-funded medical plan in case of a single catastrophic employee medical claim or multiple catastrophic medical claims.

When our company has presented a case, the scenario goes something like this: “Dan, we’ve received a thirty percent rate increase on our medical plan renewal. Can you give us a self-funded option? ” Our answer is always the same: That depends.

There are three main points employers should consider before taking the step to self-funding:

• Unlike jumping from carrier to carrier, it’s a long-term commitment to take over management of a health plan yourself, because it takes some planning and commitment to the process.
• It’s all about your group and whether or not you’re better than the pool of businesses you’re leaving.
• Do you have the commitment to running your own insurance company—which is basically what you’re doing, because self-funding is about managing your plan, not just bidding it.

A stop-loss insurance carrier analyzes and underwrites a client’s risk exposure. However, a carrier is not the only one who should be underwriting the company’s risk level. An employer moving from fully insured to self-funding should also be underwriting themselves and deciding if self-funding is a good long-term option for their organization. How do you accomplish this?

Obtaining proper employee medical information is the only way to really know if your organization is a good candidate for a self-funded medical plan. The common frustration we encounter when we start talking about data accumulation to prospective self-funded organizations is that the insurance carriers won’t release data to the client.

However, let’s be clear on this issue, as it’s not a universally true statement. Generally, carriers won’t supply data on accounts with an employee population of fewer than five hundred employees. If you’re above the five hundred employee level and not getting data, you’re not trying hard enough.

You do have options to obtain the data you need from the insurance carrier.

Threaten to switch carriers unless data is produced, or request from your insurance carrier some type of cash-flow product line option.
It gets more complicated if you have fewer than five hundred employees. For the most part, you will probably be stonewalled when requesting monthly total claims (aggregate claims) and individual large claims (specific claims).

Without any really good employee medical claim data to base your decision on as to whether to move from fully insured to self-funded, we recommend you don’t move. What we do recommend, however, is to open an underwriting file on yourself. An employer can take the first step to self-funding by changing their plan to a high deductible program, using health savings accounts (HSA) and health reimbursement arrangement (HRA) products to cover first-dollar claims.
It’s the safest way to take some extra risk without taking on too much exposure. Will doing this save you from your thirty percent rate increase? Possibly and possibly not.

What it will do is the following:

It will set up a system whereby, next year, you can figure out why you do or don’t deserve a high rate increase. The large single claim, or continuing claim, that the insurance company paid should be finished. It probably wasn’t just a whim by the insurance company to increase your premium by thirty percent. There was probably a driver. Large claims over the past ten years have increased fifty-fold because there are a lot of costly medical procedures out there.

It will get you used to funding mechanisms other than the traditional one, which is to pay the insurance company.

It will help you get an understanding of how many total claims are within the initial higher deductible area versus how much the insurance company is charging for handling the balance costs of the plan.

With that basis of knowledge, you’re on your way. You then can utilize a number of developmental techniques to build your knowledge base. For example, the human resources department will know who is on disability, sick leave, and medical leave. There are medical management organizations that can produce predictive models of member illness potential costs. Brought together, the puzzle pieces produce a picture of your organization’s comprehensive health status.

At that point, decisions can be quantitatively measured. A self-funding support model can be organized, and the proper third-party administrator and network of providers can be chosen. Stop loss cost models and rate equivalencies can be calculated. Rate equivalencies are the actuarially developed single/family cost projections that you would compare to your single/family insurance carrier renewal rate offering.

At that point, the decision of staying within the carrier relationship or moving to the self-funding alternative can be made. There will be a lot of questions that your program consultant or broker will need to address. For example, here’s a few we would expect to be brought up:

Will my doctor be in the plan?

Am I too small for self-funding?

What if we have a very large claim and the stop loss company loses a lot of money and raises my rates?

There are a lot of changes to come in the near future. What won’t change, however, is the need to reduce costs by any method within the healthcare arena. Self-funding can help a lot of employers, but you have to cut through the barriers to information to help yourself.