With the persistent rise in health care costs, U.S. employers of all sizes are focused on controlling costs while also making health care more affordable for employees.
Respondents to the 24th Annual Towers Watson Survey expect total health care costs (employer and employee) to rise 4.9% in 2020 after plan design changes, up nearly a full point from 4.0% in 2019. According to findings from the Towers Watson Financial Benchmarks Survey, the average cost of health care is $13,087 per employee per year (PEPY) in 2019 and is expected to rise to $13,728 in 2020. By point of comparison, the U.S. inflation rate is expected to average 1.8% in 2019 and to increase to 2.0% in 2020. Without plan changes, cost trend would be 5.0% in both 2019 and 2020.
Fortunately, the rapidly changing health care marketplace has presented employers with various frameworks for achieving cost savings. As more employers adopt outcome-based health plans and restructure their focus on workplace wellness, one shining solution has come to the forefront: self-funding. But what is it, and why is it winning favor with employers?
What is Self-Funding?
In self-funded health plans, employers adopt the financial risk for their employees instead of paying a premium to an insurance company. Typically, employers contract with a TPA to administer the plan and to manage costs.
How do Self-Funded Health Plans Differ from Traditional Fully-Insured Plans?
- The most obvious difference is in the investment itself. Whereas fully-insured employers pay a premium to cover an unknown risk, self-funded employers only pay to “cover the care employees actually receive. (1)
- In fully-insured plans, insurance companies keep any savings for themselves. In self-funded plans, all money stays within the plan.
- Self-funded plans are consumer-centric, meaning instead of working with a health insurance provider, employers design their own health benefit plans depending on their company's specific needs. Plan design and administration provides more flexibility than in fully-insured plans, which are often standardized and non-negotiable, which can lead to unmet health needs.
- Whereas fully-insured plans are bound by state-mandated benefits and the new federally-required coverages (which amount to higher costs), self-funded plans are only subject to the federal provisions.
How are Self-Funded Health Plans Effective?
Self-funding is not just about savings; it's about control. Self-funded employers along with their advisers maximize control of the plan design, claims data and especially healthcare delivery.
While most employers and their brokers stop at plan design and claims data, the real savings happens when there is greater managing of the the supply chain of healthcare that employees purchase, e.g., doctor visits, prescription drugs, surgeries, and hospitalization. In self-funded plans, employers along with their benefit advisers are managing the healthcare supply chain to reduce the year-over-year cost of healthcare by 15% or more (2).
Self-funded plans benefit companies of all sizes, although the best candidates have high claims frequency and low claims severity. According to Healthcare Solutions Group, a Tulsa-based TPA, self-funded plans derive cost-efficiency in the following ways:
- Self-funded TPAs serve to help you save money rather than mislead you to spend more. They lower administration costs and facilitate a redirection in premium taxes because they provide access to “a large network of hospitals and health care professionals with competitive discounts without sacrificing quality or availability.” (3) Predictably, this translates to cost savings.
- They improve cash flow because any unspent money remains as plan assets that will help pay for future costs. This removes the threat of an insurance company arbitrarily dropping or rejecting a claim and allows employers to gain greater control over their finances. Using the TPA’s reports, the employer can review how much money is being spent and where.
- The customizable structure of self-funding allows employers to easily adjust the plan accordingly. Employers can use this information to evaluate how effective the current plan is in achieving cost-savings and meeting the employee’s needs.
- Employers pay for claims using their own funds, but often at a lower cost. This is because self-funded plans include strategies that reduce overall claims, such as health and wellness programs, chronic disease management, preventive care, and on-site clinics.
- In self-insured plans, every party involved has a “unified interest” of cost-efficiency, which makes compliance with employee-benefit laws much easier to perform, and thus spares them from money lost to expensive plans or penalties for non-compliance. In fully-insured plans, a severe conflict of interest exists between the insurance company, who values money, and the insured, who values quality health care. This has created a double-edged sword. Employers become non-compliant in order to avoid the high cost of providing care. However, they still have to pay a penalty for doing this.
- Self-funded employers enjoy benefits that are insulated against conflicting state and federal mandates. More specifically, they are exempt from 1,100 state mandated health benefits "such as toupees in one state and hair implants in another." They are also exempt by insurance premium taxes, "which are generally 2-3 percent of the premium’s dollar value." (5)
Here is the bottom line: If you want to deliver year-over-year reduction of the healthcare spend, it begins with self-funding.
Self-funded plans give employers greater control over cost and health plan design, and they build more informed, socially responsible consumers of care. On average, an employer can save 4% to 12% per year, depending on the differences between insured and self-insured benefit plan design and on the level of stop-loss insurance chosen. Also, in years when actual claims are less than expected, the employer saves the amount of the surplus. Put simply, they are the most cost-sustainable risk-protection programs that promise significant payoffs and rewards for your company.To learn how on-site clinics blend with this strategy, visit www.careatc.com, or download our guide below: