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As plan sponsors search for ways to gain more control over their health care spending this year, some may turn to self-insurance after years of contracting with fully insured managed care networks.
Although no one views self-funding as a panacea to rising health costs, more large employers could make the jump to self-insurance for the first time this year or in 1998, experts say.
For most, this will in no way be a repudiation of managed care principles that have undergirded most fully funded insurance programs. Though self-funded, most employers will continue to embrace such cost-restraining practices as utilization and case management through a variety of partners, ranging from third-party administrators to physician hospital organizations or health maintenance organizations that permit employers to self-fund.
"The self-insurance market is mature," said Pat Campola, a vp with John Alden Life Insurance Co. in Miami. "The only opportunity for new entrants will happen if fully insured rates start to move upward."
That is a strong possibility. Late last year, HMO executives said they anticipated rate increases of 1% to 6% this year (BI, Dec. 9, 1996). With the specter that HMOs and other managed care networks will indeed raise rates, the possibility is increasing that plan sponsors will grow dissatisfied with fully insured programs and try something more innovative-albeit more risky.
The movement of employers, and especially large employers, to self-insurance has been a familiar long-term trend. According to a survey by benefits consulting firm A. Foster Higgins & Co. Inc., the percentage of employer-funded preferred provider organizations rose to 26% in 1996 from 22% in 1995 for all PPO sponsors surveyed. This compared with 21% in 1994 and only 6% in 1993.
For employers with at least 500 employees, the percentage of companies with self-funded PPOs was markedly higher: 72% in 1996, compared with 71% in 1995, 66% in 1994 and 52% in 1993.
In 1996, 70% of indemnity plans for large employers were self-insured, the same percentage as in 1995. Five percent of large-employer HMOs were self-funded in 1996, according to the survey, which has not previously reported HMO self-funding data. The percentage of self-funded point-of-service plans for large employers was 52% in 1996, up from 47% in 1995 (see chart).
"We've seen our (stop-loss) quote activity go up significantly in the last six months," said Scott Taylor, vp of SAFECO Life Insurance Co. of Seattle.
Clearly, in the past three years many employers focused their attention on staying with fully insured managed care products because of a soft market and, at one time, fear over potential wide-scale Clinton Administration intervention in the private health care system, he said. Now, however, more employers are developing an impatience with HMOs' shortcomings and apprehension about an erosion of their cost advantage, he said.
"Employers would prefer to self-fund," Mr. Taylor said. "Prices are going up." Employers increasingly are concluding that fully insured HMOs offer no advantage over a self-funded program with a TPA adding administrative services, he said.
The decision whether to self-fund is a simple economic one for most companies, Mr. Taylor said. "It comes down to cost," he said. "It's like when they go to get tires for their company trucks."
But employers don't look at price alone in deciding whether to self-insure, said Karin Landry, a health care consultant with Watson Wyatt Worldwide in Wellesley Hills, Mass.
"We see clients looking at their health care coverage in terms of value, not in terms of cost alone," she said. Some managed care systems are permitting plan sponsors to retain the advantages of cost control by staying in the network while also being self-insured, she said. Quality, access to the health care system and cost all figure into an employer's decision whether to stay in a network while self-insured, and which to select, she said.
In some cases, participation in a fully insured managed care plan may be fairly cost-effective, and the advantages of self-insuring may be few, Ms. Landry said. New mandates by the federal government that generally will require parity of mental health benefits with other medical benefits, for instance, will place the same burdens on self-insured plans as on fully insured plans, she said.
In other cases, a combination program-with, say, fully insured HMOs and a self-insured point-of-service plan offered to employees as options-may satisfy workers' desire for choice, she said.
In the case of Cincinnati-based Kroger Co., all but a few of the company's POS plans are self-insured, as is an indemnity plan, but an HMO is insured. "We are comfortable with our managed care selection process," said Mike Stoll, director of corporate benefits. The self-insured plans do not have stop-loss coverage. "It's more advantageous to self-insure and take that risk than pay someone else to take the risk," he said.
Whether self-insurance trends will accelerate this year is hard to predict, and will vary with region and market maturity, said Ed Ueeck, president of the Irvine, Calif.-based Self-Insurance Institute of America. But employers seeking self-insured plans definitely will be looking to buy PPO or point of service plans, this year, he said. "Very, very few plans don't have some form of managed care in them," he said.
Two-thirds of the employees in the nation now are covered by self-insured health plans, said Mr. Ueeck, managing director of Fountain Valley, Calif.-based Pacific Risk Management Services, a unit of PM Group Life Insurance Co.
More employers are expected to turn to self-funding, attracted particularly by the option of contracting directly with PHOs or exclusive provider organizations, he said.
Furthermore, Mr. Ueeck predicted that increasing numbers of employers will be turned off by HMO price pressures, less satisfied with customer service, and more intrigued by the possibility of "full accountability" obtainable through self-funding and TPAs.
"Employers, if they stay self-funded, can control accountability," he said. "As the price drives up over the next two years, more employers will realize that."
The industry probably won't notice a big boost in the number of employers opting for self-insured plans until January 1998 renewals, said Ken DiBella, president of Columbus, Ohio-based Harrington Benefits Services Group, a leading health care TPA. "Now these employees are becoming sophisticated enough to say, 'Why do we need them (HMOs) to take on all the risk?'*" he said. "We are gearing up for more business."
The money issue will be central, he said. "The employers are starting to hear they are being hit with increases," he said. "TPAs historically have run leaner shops than your fully insured shops, and thus have been able to pass on lower administrative fees."
The idea of comparing HMOs to TPAs is misguided, said Kevin Counihan, senior vp of sales and marketing of Waltham, Mass.-based Tufts Associated Health Plans, which owns HMO and POS plans and a TPA.
"To compare a TPA to an HMO is truly an apples-and-oranges situation, except that they both pay claims at some point," he said. Typical TPAs fail to provide managed care functions such as precertifications of stay, physician credentialing and provider education, leaving the employer to hire contractors to fill the voids, he said.
But it is important not to think of self-funding and managed care as competing systems, because they usually overlap, said Joseph McErlane, president of Minneapolis-based National Benefit Resources Inc., a reinsurance underwriter.
The attraction of self-funding isn't grounded in an aversion to managed care, nor even specifically in a wish to save money, he said. Rather, it typically stems from a desire to increase the plan sponsor's responsibility over its money by retaining funds within the company, until needed, rather than paying an HMO up front. "It's a matter of whether you want to prepay your VISA bill or wait until the bill arrives," Mr. McErlane said.
Self-funding is ill-advised for some employers, analysts say, including those prone to catastrophic exposures. In addition, small companies this year might avoid self-insurance if intimidated by rising TPA rates, Mr. Campola said. Small companies are not as likely to benefit from cash flow advantages and flexibility in plan design that larger companies derive from self-funding, anyway, so they may go in the opposite direction in 1997, he said.
"It could drive smaller employers back into fully insured plans," Mr. Campola said. "It's kind of an interesting tennis match."