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Defined contribution health care pairs with self-insurance

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New health care plan models brought about by the health care reform law are challenging employers to find options to rein in costs. Joseph Berardo Jr., CEO of health care services company MagnaCare, discusses how self-insuring health care and moving toward a defined contribution model can help curb spending.

In the battle against rising health care costs, employers are seeking new ways to seize control over the cost and management of their health benefits. At the same time, health care reform has triggered a major shift from the employer-driven payer model to a model that involves and engages plan members.

Self-insurance is viewed by many as a key strategy for curbing rampant health care costs. This approach enables employers to exert a higher level of control over plan design than traditional fully insured plans typically allow.

In the past, large employers have been much more likely to self-insure. Faced with mandates to provide richer benefits with less cost-sharing, however, a growing number of small and midsize employers also have opted to self-insure. It is estimated that the average self-insured plan covers 300 to 400 employees and that 59% of U.S. companies self-insure part of their health care plan.

Furthermore, the availability of private exchanges has prompted employers to take strong interest in a defined contribution arrangement. In this model, employers give a set amount of money to employees, who then choose a health plan from participating payers on a private exchange. This industry change echoes similar moves over the past few decades from employer-managed retirement plans to employee-directed 401(k) plans.

Employers can take advantage of these strategies — and curb health care costs —by focusing on four key features of self-insured plans:

• Control over plan design

• Cost reduction

• Transparency

• Health consumerism

In the health care reform era, these factors are critical for long-term business sustainability.

Control over plan design

Switching to a data-driven self-insured plan puts the power back into employers' hands. Besides having fewer requirements imposed on them by the federal health care law compared with fully insured plans, self-insured plans enable employers to access their own health population data, including prescription claims data. This allows them to understand plan health risk and gain insight into potentially catastrophic conditions in their employee population.

Based on population data, employers can identify high-cost, high-risk chronic conditions such as diabetes and cardiovascular disease, tweak plan designs and launch prevention campaigns to mitigate risk.

Targeting health issues that specific members can be identified under, rather than simply implementing a general health and wellness program, is essential for cost control. By partnering with health care service companies and provider groups, employers are taking advantage of deep discounts and giving employees greater access to coordinated care. Within this model, health care data analytics play an important role, providing information relevant to population health management, such as determining the chances of a relapse, the likelihood of noncompliance and the progression of chronic disease.

Cost reduction

Self-insured employers pay for individual employee health claims out of cash flow rather than as a monthly fixed premium to a health insurer. Costs are based on actual health care services as they occur and only if they occur.

Self-insuring eliminates health insurer profit margins and risk charges. It also provides the kind of practical and economic advantages that curb costs, such as generating as much as 3% immediate savings by being exempt from the federal health care law's health insurance tax.

Many employers mitigate the financial risk of self-insurance by purchasing stop-loss insurance, which limits risk for specific and aggregate claims, and provides a crucial financial buffer when, for example, an employee is diagnosed with cancer.

Transparency of claims data is one of the biggest advantages of self-insured plans. Companies that partner with a health care services company can gain access to detailed medical claims and pharmacy costs — information that is vital for curbing costs and altering member behavioral patterns. Data analysis serves as the backbone of benefit strategies, including wellness, disease management and productivity programs, which can reap direct savings.

Health consumerism encourages patients to take ownership of their own health education and decision-making, with an emphasis on prevention of chronic disease. Defined contribution is the new frontier in this movement by further empowering employees to make decisions from a wider array of choices, including options to pay higher premiums for richer benefits or lower premiums for higher-deductible plans.

As more employers lean toward defined contribution plans, they will have the opportunity to reduce health premiums by up to 50% in some markets. This model caps costs, and employers are able to eliminate a certain amount of benefits administration, which would be automated through the health care exchange.

Employers who want to make the change will need to fully understand how it will affect their bottom line, as well as how to best make the transition, design the plan and discern which of the available private exchanges best matches their needs. They should also understand how a defined contribution plan affects their employees. Education, communication and change management will be critical for success. Currently, about 150 million employees receive a defined contribution from a self-insured or commercial plan.

Like self-insuring, defined contribution arrangements enable employers to get a better handle on health care costs. Employees are given more insurance options and incentive to purchase less expensive, less comprehensive coverage, while employers benefit from predictable health care costs.

Down the road, private exchanges that preserve a self-insured group model may become a key strategy for employers that want to maintain some control and customization.

Preparing for the new opportunity

The market is gaining a better understanding of self-insurance and how health benefits now revolve around the idea of ownership: Individuals have more choice, but also assume more responsibility for managing their own health benefits. This represents quite a shift over past decades' mindset where the employer played much more of a “parent role” and decisions were largely made for the employees.

Large employers self-insure to gain control over benefits and lower costs. Smaller businesses want these same advantages and also recognize that by self-insuring they can avoid new health care reform requirements, such as providing richer benefits, and pricing rules that could increase costs for groups of healthy workers.

At the same time, the concept of defined contribution through private exchanges is gaining ground as an effective way for employers to cap costs, and continue to offer benefits rather than setting employees adrift on the public insurance exchanges.

Ultimately, employers are seeking and finding new ways to stabilize rates, keep management of health care dollars in-house, gain the tools they need to help shape the health and wellness of their employees, and determine the future of their company.

Joseph Berardo Jr. is CEO of MagnaCare, an administrator of self-insured health plans for employers in New York and New Jersey. He can be reached at jberardo@magna care.com and 212-867-3606.