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Large employers historically have enjoyed partial immunity from rising medical cost trends by self-insuring their employee health benefits, but a large percentage of employers with 50 to 1,000 employees still purchase traditional insurance—a less-efficient way to finance health care coverage in exchange for the certainty of transferring the risk off the company's books.
In many cases, the decision to continue fully insured financing of the risk is not borne of a thoughtful multiyear planning process, but rather from a lack of the required information to make a sound comparison of the risks and benefits of self-insurance.
As with other misaligned interests in health care, rising premiums often mean rising commissions for brokers and expanding margins for insurers.
While commission-based compensation derived from placing insurance may be a historic reason some brokers aren't advising their mid-market clients to consider self-insurance, numerous other factors also are at play.
Because self-insurance allows an employer to break out virtually every component of their health care claims and administrative expenses, it also enables them to hold every provider accountable for their ability to achieve better outcomes, whether it's more effective service, improved employee engagement or lower medical cost trends.
Because the calculus of self-insurance is clearly more complex than simply paying premiums, some small brokers may not have the sophistication or resources necessary to effectively unbundle and manage self-funded employee benefit plans. However, most chief financial officers and experienced human resource professionals can quickly grasp the nuances and advantages to financing one's own claims.
Before self-insuring, an employer needs a feasibility study using its claims experience and projections. An employer also needs to review provider network discounts to ascertain the subtle differences between each insurer-based network as well as independent third-party administrator-based networks. Employers also need to understand the nuances of provider contracting.
Unfortunately, many smaller agents and brokers do not have the technical means of conducting such provider network discount analyses, auditing self-insurance claims, reviewing and benchmarking administrative charges such as pooling, examining network access and clinical fees, or setting adequate claims reserves.
In fact, a large proportion of broker errors and omissions claims arise out of mistakes attributable to stop-loss and self-insurance. That may be why it is simply easier and less risky for some advisers to steer clients away from self-insurance. Only 25.7% of employers with 100 to 499 employees self-insure, compared with 82.1% of employers with 500 or more employees, according to the U.S. Department of Health and Human Services.
Similarly, most employers do not maintain the internal resources to effectively manage their population's health risks. In many cases, nor do their brokers.
A large percentage of mid-market employers are represented by brokers that generate less than $5 million in annual revenues. Few brokerage firms enjoy the critical mass or technical resources necessary to deconstruct claim data and use this data to provide better decision-support tools to employers. A weaker broker may not understand how to evaluate tiered provider networks to drive care to more cost-effective services, calculate pharmacy rebates, or attack sources of inflationary medical trends by identifying and reducing claims arising out of chronic illness.
Some questions an employer should ask a broker:
• What is the average size client that you serve? What percentage of your clients are self-insured? Ask for three references of self-insured clients of comparable size.
• What resources do you have to ensure my claim and reserve projections are accurate?
• What clinical resources do you have to evaluate our specific claims and help make recommendations on reducing modifiable risks?
• What forecasting tools do you use to help us understand future claims trends?
• Describe how you would assess the TPA or self-insured administrator's performance for claims payment accuracy, discounts, impact of clinical programs, fraud, etc.?
Some questions an employer should ask a TPA:
• If claims administrator is not a national carrier but a third-party administrator, how do your discounts compare to that of national carriers?
• What kind of performance guarantees will you offer to guarantee you can deliver single-digit medical trend (or lower)?
• Will you pay for a third-party audit to be provided each year to assess your performance against our agreed performance standards?
It is a basic precept of risk management that once an employer understands the drivers of risk, the employer can more confidently retain risk through self-insurance and, in so doing, reduce their cost of transferring risk through standard insurance.
Whether private or public, any middle-market company knows that every dollar saved can be applied back to the value of the firm as a multiple of earnings. Employers must look harder at their fully insured health benefit plan renewals and contrast these to what costs might have been in a self-funded arrangement. Yesterday’s conservative reserve built into today’s insured premium could translate into tomorrow’s reported earnings for an insurer.
Simply put, what midsize employers don’t know about self-funding may be hurting them. A fractured distribution system of small brokers, overworked and distracted employers, public-to-private cost-shifting, lack of claims transparency, unengaged consumers and a reduced field of insurers predisposed to selling higher margin insured products have combined to create a perfect storm fueling rising health care costs.
In a time of fragile economic recovery, it’s important for midsize employers to protect their assets, including their people and their bottom lines.
The first step mid-market employers must take to get their health care costs under control is to make sure they understand their risk-financing options.
Michael Turpin is executive vp at health benefits and property/casualty insurance broker USI Insurance Services L.L.C. in Briarcliff Manor, N.Y. He can be reached at Michael.firstname.lastname@example.org or by phone at 914-749-8507.