61% of American workers are covered by a self-funded healthcare plan yet almost none of them understands that or the implications of that.
What are self-funded healthcare plans?
How might they impact employees and employers?
Self-funding Self-reliance in Healthcare
Employers have been caught between a rock and a hard place when it comes to providing affordable and accessible health insurance coverage for their employees. Most want to be able to give their employees healthcare benefits as a part of an overall compensation package. In competitive industries, health benefits, including comprehensive healthcare coverage, is a must to attract and retain the best talent.
As the costs of healthcare in traditional healthcare plans continue to climb, many employers are finding it more challenging to extend adequate healthcare coverage to their employees. Companies feel caught between foregoing healthcare benefits for their employees or breaking the bank to provide even the most basic healthcare plan.
Traditionally, companies provide healthcare coverage to their employees by contracting with or purchasing plans from a third-party health insurance provider. This is especially the case for smaller employers. By buying into a larger insurance risk pool, the idea is that companies will be able to gain significant healthcare savings. The risks are spread out over many employers and employees rather than borne by any one company. Furthermore, insurers with large pools of potential patients gain tremendous leverage over healthcare providers and can conceivably negotiate lower rates for medical goods and services. That’s how insurance pools are supposed to work. In reality insurance companies have been either unable or unwilling to contain healthcare costs.
The problem is the profit.
Insurance companies act as middlemen between employers and healthcare providers. Unsurprisingly, they realize a healthy profit by facilitating that transaction. This has introduced perverse incentives into the healthcare industry where higher prices benefit both insurance companies and large healthcare providers such as large hospital systems. Now that 70% of doctors are employed or subsidized by hospitals, this issue is magnified. Both the health insurance industry and monopolistic healthcare providers are seen as significant drivers of skyrocketing healthcare costs.
Hospitals keep charging higher prices for both their facilities and providers in anticipation of rising percentage "discounts" negotiated by insurance companies. Meanwhile, instead of passing on any savings that might result from these discounts to their customers, insurance companies have been padding their profits.
In 2017, second-quarter profits for the nation's six largest health insurers topped 6 billion dollars. That was a surge of nearly 30 percent over just a year previous. Somehow, even with profits booming in almost every sector of the healthcare industry, healthcare costs for employers and employees alike keep climbing.
That is why both employers and employees are all scrambling today to tear down the old system and innovate new ways to obtain quality healthcare at affordable prices.
Self-funding healthcare is a strategy with tremendous potential to be a game changer.
What Exactly Is Self-funded Health Care?
Self-funded Health Care (SFHC), is a form of self-insurance in which the employer or company not only pays directly for its employees' healthcare, it also takes on their healthcare risks. In doing so, employers do not contract with a traditional insurer for care. This is typically a viable option for an employer with 50 or more employees.
Why would a company forego contracting for insurance?
The risks are apparent. Should an employee become critically ill or develop a chronic disease, healthcare payouts and costs could be catastrophic with medical bills in the hundreds of thousands or even millions of dollars. However, the potential financial savings of self-funding are clear for larger employers and open them up to more options for cost containment.
As an example, companies who have mostly young and healthy employees see self-funding as an opportunity to stop paying ridiculous premiums to insurers while still providing their employees with adequate healthcare. By cutting out the middlemen, these companies have a better chance of negotiating a fairer price directly. More importantly, if claims are lower than expected, self-insured companies realize immediate savings since they don’t have to pay a set monthly premium.
This is precisely what three of the nation’s largest, wealthiest, and most successful corporations were thinking when they joined forces last year to create their very own health insurance risk pool. Their new healthcare venture named “Haven” will cover their combined more than 1.2 million workers. More importantly, the self-funded plans resulting from Haven will be free from any profit motive whatsoever, thereby reducing costs while still maintaining strong bargaining power over healthcare providers.
Another tremendous benefit of self-funding health care is having access to transparent claims data. This data allows companies to know exactly where money is being spent and, more importantly, target opportunities for saving.
Access to data also means fewer surprises. Under a traditional, fully-insured contract, most data and information are kept by the insurance companies who jealously guard their secret rates and negotiated contracts with healthcare providers. The apparent reason is that they do not want their customers to know how much profit is baked into their premiums and how uneven is the reimbursement for providers.
Self-funded plans aren’t perfect.
Self-funding companies with employees who experience catastrophic health emergencies, such as cancer, or who develop costly chronic diseases, such as diabetes, are on the hook to pay their employees’ healthcare costs. In response to this risk, companies couple a self-funding strategy with stop-loss policies purchased from insurers. Specific stop-loss and aggregate stop-loss policies protect companies from high medical bills that exceed a certain threshold. It is a catastrophic coverage for the employer.
Components of a Self-Funded Healthcare Strategy
It is essential for companies to know and understand the components of a successful self-funded healthcare strategy. Many of the components of a self-insurance approach, such as the designation of a responsible fiduciary, are required by law. The federal Employee Retirement Income Security Act (ERISA) law sets standards of conduct for those in charge of overseeing employee benefit plans and the assets for those plans.
Necessary components for any self-funded plan include:
Adequate cash flow or cash reserves
Stop-loss insurance ensures that companies are protected from unpredictable, catastrophic claims. This is particularly important for small companies who may not have adequate cash on hand to cover high medical bills in the event one or more of their employees experiences a medical emergency.
Another crucial component of a self-funded approach is the designation and retention of two essential administrative persons or entities: the benefits administrator and the fiduciary. Both play a vital role in any self-funded plan.
The benefits administrator or third-party benefits administrator (TPA) processes insurance claims for a company. The traditional insurance companies frequently provide these services for self-funded plans. While your insurance card may bear the logo of an insurance company like Aetna, odds are high your employer is self-funded and is using Aetna to process the claims and is buying access to Aetna's provider network.
Meanwhile, the fiduciary, which can also be a person or entity, oversees the plan’s operations. Fiduciaries are required by law to act in the financial interest of their clients, not in their interest or the interest of third-parties. Much attention is being focused on these duties in the current climate. As employees pay a larger percentage of healthcare cost, the duty to assure the plan is aligned in the best interest of these employees is rising.
Finally, smart financial planning is vital for a self-funded strategy to succeed. Companies that opt to self-insure set aside some money in reserve in case of unexpected claim fluctuations. For a smaller company there may be dramatic variation in month-to-month claims.
Looking for Savings? Consider Self-Funding
So instead of paying for coverage, an employee might use, in a traditionally insured plan, a self-funded employer only pays for coverage that is used. That difference alone can result in 12% savings. In a tight labor market, that 12% can go toward providing better and more financially accessible care (subscription based or in house primary care, a lower deductible, etc.).
Healthcare is usually the second largest line item expense for a company behind payroll. Every CEO, executive, CFO, and business owner should take a long hard look at self-funding its healthcare. Not just because of the direct savings, but also because it opens the door to customized and creative plans that can further and more dramatically decrease cost and improve quality of care with options including direct primary care, on-site clinics, direct provider contracting, and zero out of pocket or low copay bolt on plans for nonemergent services.
Since having a self-funded plan is essentially handing an employee a company credit card rather than an insurance card, there is an opportunity for sharing savings from the plan with the employees or incentivizing them to use lower-cost options with gift cards and other rewards.
Jeff Bezos, Warren Buffett, and Jamie Dimon have all done the math and decided that self-funding is the best way to go. Every company is different, and strategies that work for some may not work for others.
What does work for both employees and employers is paying directly for non-emergency medical services like diagnostic imaging? Traditionally insured employers can educate employees about shopping for care or direct them to lower-cost care through a navigator since most are unlikely to meet their deductible and are in essence, cash pay shoppers. Self-funded employers with a traditional TPA can add an affordable imaging network as a bolt-on plan (like vision or dental) to direct employees away from high-cost hospital owned imaging centers with a zero out of pocket or low copay incentive, and self-funded employers with an independent TPA can write an affordable imaging network into their customized plan as a preferred provider.
If we’re all paying for healthcare, why not exert agency control over how we spend that money outside of medical emergencies? Don’t give away power to a health insurance company. Instead, skip the middleman when possible. Shop around for medical services and pay healthcare providers like independent doctors and medical facilities, directly. Often, the direct price or the cash price is the best price and their care the best care.