Investing in insurance is about hedging financial risks, whether for your home, car, or prepaid dream vacation. For employers, the goal is no different. However, with health insurance premiums rising rapidly, many HR leaders are starting to seek alternatives to control costs without negatively impacting their employees’ health.
Mounting evidence shows that for employers with as few as 25 full-time employees, choosing to go self-insured is a flexible, cost-savings option worth considering. Here’s how to evaluate whether your company should choose to be fully-insured vs self-insured when it comes to benefits.
The Pros and Cons of Going Fully-Insured
Knowing whether to broach this subject with your executive team depends first and foremost on your organization’s tolerance for risk.
Suppose your CFO absolutely must know in advance exactly how much your employee health and pharmacy benefits will cost at the end of the year. In that case, it may be necessary to pay a substantial, albeit predictable, monthly premium to a health plan as part of a fully-insured benefits strategy.
In a fully-insured arrangement, you’ll contract with a medical carrier that bundles together all your medical and pharmacy benefits vendors and services. Regardless of what unfolds, your organization’s costs for the current year are fixed. While this approach may feel more comfortable and safe, the status quo has inherent risks.
- The cost of premiums for fully-insured plans and their members is very high. If your employee population is healthy or doesn’t use much healthcare or medication during the plan year, your organization will have spent a significant sum of money it can’t recoup.
- In a catch-22, if your plan’s costs exceed what the health plan’s underwriters modeled for the year, hefty rate hikes are inevitable, making renewal negotiations tedious.
- In addition to high fixed costs, fully-insured arrangements provide few, if any, options to tailor plan design, coverage, and provider networks for your members or adapt to meet new healthcare or business challenges as they arise (think COVID-19).
The Argument for Becoming Self-Insured
The most significant advantage of self-funding is the potential for cost-savings. In this arrangement, you will set aside a monthly amount of money to cover administrative fees, stop-loss insurance premiums, and your employees’ anticipated health and pharmacy costs. As your employees seek care from physicians and hospitals and fill prescriptions at the pharmacy, the claims are paid directly from these funds. Because you have stop-loss insurance, your risk corridor is outlined.
- At the end of the year, payments and costs are reconciled. If claims are lower than expected, your organization receives a refund of any unused funds, minus the insurance company’s administrative fees.
- If your plan incurs above-average costs or catastrophic claims, your stop-loss coverage provides financial protection.
- If outcomes are positive, and the trend continues, there may be a reduction in the necessary contributions made by both employers and workers.
The second-most significant advantage is that self-funded plans are far more flexible than fully-insured plans. They offer your business the opportunity to customize benefits. Because you have full access to all claims information in a self-funded arrangement, you know who uses the plan and where healthcare dollars are spent. With these insights, you can make educated decisions on both your plan design and benefits coverage, and proactively steer spending.
For example, you can choose to work with an insurance company’s network so both your plan and members benefit from its doctors, hospitals, specialists, and pharmacies with contracts that outline predetermined prices. Or, you can give your employees the freedom to choose any doctor or specialist they want.
Making a Decision
To decide whether to be self-insured, your organization should carefully consider your employee population’s overall health by examining current and past plan years’ utilization data. Granted, it will be hard to get your current carrier to hand over historical data, but don’t let that deter you. Push hard and then provide whatever information you can get to an underwriter. This can help you get a sense of what the projected rates will look like compared to what you’re paying for your fully-insured plan.
If you decide to move forward, you should self-fund both the pharmacy and medical benefits, not merely one or the other. Here’s why: Some prescription drug claims could be covered under the pharmacy or medical benefit, creating a push-and-pull of liability. The medical insurance vendor may try to push claims to the pharmacy side and leave you responsible for paying.
By contrast, you may expect the medical carrier to cover the claim. As more high-cost specialty drugs hit the market, there will inevitably be conflict among the different entities regarding who is responsible for the risk. Avoid this by self-funding both healthcare benefits programs.
Carving-Out Pharmacy Benefits
Today, your plan is likely to pay somewhere between $0.21 to $0.30 of every healthcare dollar on prescription drugs, making finding ways to manage rising prescription drug spending a priority. Allowing the pharmacy benefit to remain bundled, or “carved-in,” with a medical carrier severely limits your options. Optimizing the value your organization derives from its substantial investment in pharmacy benefits begins with the decision to carve-out.
Consider this: In a self-funded administrative services only (ASO) arrangement, your organization pays for the prescription drug claims, but the medical carrier continues processing them. You’ll have more access and insight into your pharmacy claims, pricing, and utilization data, but you’ll experience all the same frustrations encountered under the fully-funded benefit arrangement: The carrier remains in control of all the critical cost-saving decisions. You also still can’t customize your plan design or tailor your formulary (approved drug list) based on your membership’s medical needs or your plan’s cost-savings goals. In short, you simply can’t create a truly tailored pharmacy-benefits experience for your employees.
Conversely, self-funded, carved-out employer-sponsored pharmacy programs have full control over selecting their preferred pharmacy benefits partner, pharmacy network, stop-loss carrier, and more. You’ll have the flexibility to explore the market and choose the pharmacy partner that listens to you and recommends strategies that best align with your organization’s economic and clinical goals. You’ll be empowered to negotiate a more competitive and transparent contract with market-competitive rates and rebates. Plus, you can select a partner with a reputation for providing excellent client and member services. All of these are vital if a pharmacy provider is to deliver sustainable savings on prescription drugs.
When making the switch to a self-funded, carved-out plan, it’s important to allow ample time to gather the pharmacy claims file from the carrier, evaluate the data, and determine an optimal strategy to address any clinical or financial risk areas.
Some medical carriers drag their feet when providing newly self-funded employers with their pharmacy claims data file. However, data is key to helping employers identify risks related to their members’ specific medication utilization patterns, disease prevalence, and appropriateness of prescribed therapies. That data analysis guides pharmacy plan design decision-making and informs recommendations about which clinical programs to implement. A conservative timeline allows at least four months before the desired start date for a proper implementation process.
Ultimately, once your organization decides to become self-insured, how you communicate the change to people is critical. Most employees feel the impact of rising healthcare and prescription drug costs on their own pocketbooks and will appreciate a solution. Explain to them how cost-control measures can positively impact their premiums, copays, and deductibles. Discuss ways that potential savings might be reinvested in other programs that benefit employees.
Communicating transparently will make employees feel valued and respected and will go a long way toward making them comfortable and empowered to make the best healthcare decisions — which is the ultimate goal.