Are Smaller Companies Poised to Self-fund Health Care?

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The percentage of U.S. workers covered by health plans that are at least partially self-funded by their employers has been rising gradually for many years, reaching 61% in 2014, compared with 44% back in 1999, according to the Kaiser Family Foundation.

Based on anecdotal evidence and current events and trends, the pace of that growth may pick up in the near future, some corporate benefits observers say. But there’s a caveat: Because the vast majority of large companies are already self-funded, new growth has to come further down the size spectrum.

“There are advantages for employers in self-funding, so we see the [growth] trend continuing, but largely among midsize and smaller employers, in the range of 100 to 1,000 covered lives,” says Brad Nieland, vice president of stop-loss at Sun Life Financial.

Switching from a fully insured health plan to a self-insured one reduces an employer’s health-care costs because health-insurance pricing builds in a risk premium and the insurer’s profit margin. Benefits consultants say that the savings, absent any other changes, is typically 5% to 8% for large companies, and in many cases even more for others. In return for those savings, of course, self-funded employers assume more financial risk than fully insured ones do.

Historically, the cost savings haven’t been enough to sway typical small or midsized companies, as their smaller work forces leave them exposed to potentially disastrous health-care costs in a year of excessive catastrophic claims. Although stop-loss insurance may significantly mitigate that risk, it doesn’t eradicate it.

But some factors are afoot now that may change the economic equation. For one, the Affordable Care Act imposed a new tax on providers of group health insurance starting in 2014 that, depending on the insurer, amounts to about 2% or 3% of plan premiums. Insurers have passed on the cost of that tax, which is scheduled to increase in increments through 2023, to their group customers in the form of higher premiums.

“When you look at what insurance would cost on a fully insured basis with those taxes, versus a self-insured plan with stop-loss insurance costs, the line of where you’re big enough to self-insure suddenly got lower,” says Steven Horowitz, CFO of CareCentrix, a home-health-benefits manager that switched to self-funding last year.

CareCentrix is a fast-growing company that could have been expected to switch to self-funding anyway, having reached a head count of about 1,300 at the time it made the move. But even some very small companies are going the self-funded route rather than see their insurance premiums spike.

“Staying with regular insurance was going to mean a 20% to 30% premium increase for us in 2014,” says Luigi Buffone, CFO of specialty-ingredients maker Avatar Corp., a company with just 60 employees that is additionally hampered in the health-insurance arena by its relatively older work force. “So our broker included a self-insured option. We went with that, and our costs only went up 2%.”

Avatar’s health costs are up significantly more than that this year, by about 15%, because “two or three” costly claims last year triggered a steep hike in the company’s stop-loss premiums for 2015. But that increase “is less than it would have been if we’d been in a fully insured product,” says Buffone.

CareCentrix had a similar experience, absorbing a series of high-cost and medium-sized claims — not catastrophic events or chronic conditions that will keep draining costs for years, but one-offs. “It was a disappointing result,” says Horowitz, “but while we would have been way better off in 2014 if we were fully insured, our 2015 premium increase would have been through the roof.”

This year is looking a lot better on the claims front, Horowitz adds. “Every few years you might have an anomaly with a lot of claims, but things will even out over time,” he says.

Size Matters Less
For more fortunate companies with fewer unexpected claims, stop-loss premiums have been edging down recently. Stop-loss providers, also called reinsurers, “are getting more comfortable supporting smaller organizations,” says Jason Dinger, CEO of Mission Point Health Partners, an accountable care organization in Tennessee that assists companies with population health management. “They’re also getting more comfortable reinsuring at smaller amounts,” he adds, referring to claims thresholds at which stop-loss insurance kicks in (see chart).

Most of those clients are midsized companies, all of which self-fund, according to Clay Phillips, director of provider relations and communications with Blue Cross Blue Shield of Tennessee, which serves as the third-party administrator for employers that contract with Mission Point. State regulations applicable to employer-insurer relationships make the population-management arrangement more difficult for fully insured employers, he says.

Nieland of Sun Life confirms the trends Dinger pointed to. “Historically, there’s been some reluctance from stop-loss carriers to insure the smaller organizations that are moving to self-insured plans, as they typically don’t have sufficient claims data to use for pricing and evaluating risk,” Nieland says. “But stop-loss carriers now see the growth potential of the smaller-market segment, and in wanting to capitalize on it, many are finding ways to open their programs and offer competitive coverage.

“Additionally,” he notes, “medical cost inflation has slowed in recent years, which has had a favorable impact on stop-loss premiums, making it more attractive for companies to consider a move to self-funding.”

Whether the increasingly appealing cost factors will push large numbers of midsized and smaller companies to self-insure remains to be seen. Some companies shy away from self-funding because they dislike the year-to-year cost volatility that it invites. Others demure simply because of inertia: they don’t want to bother doing something different.

Still others don’t want the administrative burden and culture shock of making the change and then being responsible for paying off claims themselves, which demands a more vigilant, proactive approach to keeping costs in check. For them, the growing number of population health managers like Mission Point, which provide a wide range of services designed to both lower cost and improve care outcomes, may offer a good option.

But while it takes more effort to be self-funded, there are much greater cost-saving opportunities that derive from data analysis. Before switching to self-insurance this year, Interactive Health, a provider of wellness programs with 400 year-round employees and a couple thousand seasonal ones, had relatively little access to its claims history, says CEO Cathy Kenworthy.

“It was an extremely empowering move for our company,” she says. “People talk about consumerism in health care, and this is the corporate version of that. Call it corporate-ism.” As a result of the data access, which showed that Interactive’s employees are on the healthy side (the company enthusiastically promotes its own internal wellness program), it’s covering 10% to 15% more of its total workforce this year “at what we hope will be an equivalent cost to what we spent last year,” Kenworthy says.

Two Ways to Go
There are two variations of stop-loss coverage: specific and aggregate. Specific stop-loss pays a benefit when an individual’s annual claims costs exceed an agreed-upon threshold. Aggregate stop-loss benefits kick in when the employer’s total annual claims costs exceed another threshold. Employers can buy either or both types.

CareCentrix opted for just the specific coverage. “We had heard from external advisers that it’s pretty hard to hit the aggregate threshold without hitting a bunch of individual thresholds,” says Horowitz. So buying both “is like wearing both a belt and suspenders.”

Nieland, though, says a large majority of Sun Life’s stop-loss customers, especially those with fewer than 1,000 covered lives, buy both coverages. The odds of having an aggregate claim are less than those of having a specific claim, so aggregate coverage is less expensive. “It is low-cost relative to the total cost of a benefits program, but it does provide meaningful risk protection,” says Nieland.

For Dinger’s part, self-insurance is not much different from buying an insurance plan from a carrier. “Everybody has always thought about premiums being the driving factor behind moving to self-funding, but in reality what we’re seeing is that stop-loss coverage does the same thing for you as a fully insured plan does, especially with the costs coming down.”

Putting the same concept in different terms, Horowitz says that CareCentrix is “not completely self-insuring, since we’re capping our exposure with stop-loss. Self-insurance sounds scarier than it really is.”