Most employers and far too many brokers think that once they begin to self-fund their health plan they have achieved Nirvana, the Promised Land or the End Zone.
Nope. No way, no how. You’ve just started on your journey.
Look at the chart below, which illustrates how self-funding works. Throughout the year your employees and their providers submit claims (the red vertical bars). Some are big; some, most are small. But they all add up.
When you look at those claims you, as an employer, have two worries:
- Am I going to get crushed by some hugely expensive illness?
- What happens if my people overuse the health care system and submit an avalanche of small claims?
No problem. That’s why you buy “stop loss” insurance. You usually buy two policies, a “specific” stop loss policy and an “aggregate” stop loss policy.
The specific policy (pretty expensive because any one claim CAN be very large) is the horizontal line across the chart. You start by choosing a level of claims risk that you’re willing to pay yourself so as to avoid the insurance company markup.
The bigger you are, the more risk you can afford to pay directly, but at some point you reach your tolerance level. So you pay that premium so that the stop loss carrier will pick up those two red bars that pop up through the line. You’ve just limited one source of financial loss you face.
There’s another possible source of loss … that avalanche of smaller claims. For that you purchase aggregate stop loss.
An actuary figures out what your claims are likely to add up to. That’s a function of geographical location, age of the employee, your industry, etc. That amount is the actuarially expected claims level. The aggregate stop loss policy says, “We’ll add 25% to that amount (the gray area on the chart) and agree to pick up claims over and above that level.
So That’s Strategic, Right?
Sorry, Charlie, it’s tactical. All you’ve done is “define” your maximum loss. You haven’t yet addressed the real cause of health care losses — claims themselves. Here’s why. Let’s look at the costs of a health plan and compare fully insured with self-funded:
In this case we’re looking at the actual typical cost share of the claims and their nature, i.e. either fixed costs (blue) or variable costs (orange).
The fixed costs vary, as a percentage, based on the size of your employee base. The larger you are, the lower the fixed costs, but this is mostly because you can afford to carry more claims risk yourself. This illustration is based on a smaller company with just under 100 employees on the plan.
The fully insured plan is all fixed costs. The carrier takes all the risks; the carrier reaps all the rewards.
Look now at the orange bar. Big isn’t it? That’s your target-rich environment in which to become strategic instead of tactical.
The description of all those targets is a long, involved, sophisticated discussion that we won’t get into here, but THAT is where you begin to execute a strategy and to lower your health care costs.
You will surely note that the “worst case” cost is higher than the fully insured cost. That’s because this is what you will probably see in year #1. Right now, all the stop loss carrier has is an educated guess about what the health of your population looks like. They’re not in the business of losing money, so they price the risk factors cautiously.
But you will also notice that the “expected cost” is below your fully insured cost. That’s the insurance company profit (and don’t buy into the nonsense that because every Massachusetts carrier is a “non-profit” that there aren’t any profits … there just aren’t any taxes on those profits) that you’ve now made available to yourself.
This Is Where the Strategy Starts
As you move forward and discover your company’s employees’ particular needs and illnesses and misuse of the health care supply chain (and they ARE misusing it), you will be able to tweak the design.
You can reward good behavior with lower costs for the employees (trust me – you’ll save much more than your reward to them will cost). You can discover areas of abuse by supply chain components (Rx, providers, ancillary service sources, downright thievery, etc.) and you can implement strategies to reduce or eliminate those wasteful practices.
You will get to a point where the hospitals and doctors and labs and facilities taking care of your employees’ needs are no different to you than the vendors who supply you with your raw materials for your corporate activities. You will treat them the same, and like your production-oriented vendors, you will get the best outcomes from the providers available to you.
But Be Strategic About Your Strategy
But it’s not enough to just jump into self-funding and start being strategic. Every employer is different. Different experiences, different employee health profiles, different employee level of sophistication, your personal comfort level … and more.
And specifically, you don’t want to jump into the water blind. It may be a hot early summer day at the beach in New England – the water will still be cold enough to turn you blue.
So be strategic about your strategy. Here’s a simplified summary of how any employer might approach the situation. The red and blue bars aren’t meant to be proportional, but rather, to be symbolic.
Moving from left to right, the increasingly taller blue bars are representative of more management of your employees’ access to the health care supply chain.
Under a fully insured plan, they can do pretty much anything they want – they’re really only required to get carrier pre-certification when referred to a specialist or hospital or what have you. And the truth is, all the carrier wants to assure that the doctor is in the network and that the referral is consistent with your doctor’s diagnosis.
But on the far right you require your employees to be pre-certified not by a profit-hungry insurer but by a quality-care-obsessed medical professional. You never stop your people from going wherever they want to go, but you make it expensive for them to make costly, stupid decisions.
As the level of control and management and reward-for-good-decisions increases, your claims cost (red bars) decrease. The more you control, the lower your claims.
How much difference can there be? One of our vendors (whose average medical costs decreased 2.8% from 2016 to 2017) categorizes management as loose, moderate or well-managed. The average per-employee-per-year 2016 medical claims are:
- Light management – $10,897
- Moderate management – $8,306
- Well-managed – $6,750
Could you use a profit infusion of $4,200 per employee per year? The key is to jump into the strategic process outlined above at the appropriate point and move through the steps at the appropriate speed. It will be different for you than for your fellow business owner, but the end point will have the same approximate outcome.