Last March, Aetna scored one of the biggest single contracts in its history when the Teacher Retirement System of Texas shifted the administration of its self-insured healthcare benefits program from Blue Cross and Blue Shield of Texas to Aetna.
The TRS' ActiveCare account insures 415,000 active public school teachers and their dependents and pays out more than $1.5 billion in healthcare claims every year.
BCBS of Texas had the account for 12 years, but TRS officials determined that Aetna offered the best overall value for its teachers, said Sally Imig, Aetna's top sales executive for public businesses in Texas. “Like all public entities, they have to save costs,” she said. For TRS members, the change means little. But the deal matters a lot to Aetna. It is an administrative services only, or ASO, contract resulting in hundreds of millions of dollars in new revenue.
ASO contracts are a big part of health insurers' business, representing billions of dollars in annual revenue. ASO plans are also becoming a preferred option for smaller and larger employers alike, in part because of the Patient Protection and Affordable Care Act. As more employers explore the advantages of self-insurance and ASO contracts, insurers know they have to compete to retain or grab that business. That means they have to find innovative ways—including wellness programs, accountable-care networks, hospital bill audits and direct contracting with providers—to appeal to employers and help them reduce costs and improve care.
“The standard things in administering claims aren't going to keep claims down,” said Jonathan Edelheit, Employer Healthcare & Benefits Congress president. “Self-funded employers are demanding getting better value from their plans.”
Health insurers provide ASO services to self-insured companies, which pay their employees' medical claims expenses. Under such contracts, employers pay a fee to third-party administrators such as Aetna to handle claims processing, organize provider networks and manage other health plan logistics.
It's essentially an outsourcing deal where insurers generally bear little or no financial risk, unlike in fully insured products. Instead, employers take on the financial risk of their employees' health, and they typically buy stop-loss insurance to protect themselves against catastrophic claims. Stop-loss insurance often can be purchased from the same insurer providing the ASO services. Some employers, though, hold health plans accountable for some financial risk. For example, employers may place a portion of the ASO fee at risk and judge the insurer's performance by measures such as employee satisfaction.
Employers of all sizes are moving toward self-insurance. Self-insuring and hiring a third-party administrator under an ASO contract can save employers 10% to 25% on their healthcare costs. That's because insurers build in higher profit margins for fully insured products, partly reflecting the actuarial risk they are taking for higher-than-expected healthcare costs.
Another big reason is that self-insured company plans are exempt from state insurance regulations and premium taxes under the federal Employee Retirement and Income Security Act. They also are not subject to many of the provisions of the ACA. Experts say healthcare reform has prompted more employers to become self-insured.
Cost savings and less regulation have clearly produced a shift. Traditional fully insured membership dropped more than 10% from September 2013 to September 2014, according to data from consulting firm Mark Farrah Associates.
Meanwhile, ASO membership increased more than 3% in the same time frame, totaling more than 101 million people. “Once you move to ASO, you rarely move back,” said Beth Bierbower, president of Humana's employer group division.
Most Americans with employer-provided insurance are in self-funded plans, and that's been the case since at least 2010. Roughly 60% of members at Aetna, Anthem and Cigna are in ASO plans. More than 3 in 5 U.S. companies are self-insured, and self-insurance is almost universal among large employers. About 91% of people in companies with 5,000 or more workers were in self-insured plans in 2014, compared with 15% of people in companies with fewer than 200 workers, according to the Kaiser Family Foundation. Fifteen years ago, only 62% of workers in companies with 5,000 or more employees were in self-insured plans.
But ASO contracts aren't usually as profitable as insurers' full-risk products. The Congressional Research Service reported that commercial ASO contracts are break-even deals on average, though larger national insurers can reap 5% margins. Insurers would rather keep companies in the more lucrative fully insured plans. But they take the business they can get. And it's becoming an increasingly cutthroat one, with local governments and union health plans more willing to change third-party administrators to keep costs down.
Greg Maddrey, a director at the Chartis Group, a Chicago-based consulting firm, said he has seen small employers with as few as 10 workers moving to self-insured plans. But he and other experts say employers of that size are far too small to take on the financial risk of one or more employees experiencing high medical costs. Nevertheless, Humana offers ASO arrangements and stop-loss insurance to companies with fewer than 50 employees, Bierbower said. UnitedHealthcare and others do as well.
Corporate wellness programs have been one of the most popular health plan add-ons for insurers to attract self-funded employers. Companies pay insurers a few extra dollars per employee per month to provide the wellness programs, which typically offer workers financial incentives to exercise and monitor their health. But findings on whether employee wellness programs produce cost savings and improved health have been mixed. Some of the most recent research suggests wellness programs don't save any money at all.
Insurers also are creating and selling more accountable-care and “value-network” products as self-insured employers demand better care coordination. In these narrow-network plans, hospitals and doctors form an accountable care organization and are financially responsible for the care of a contracted employee population. The insurer acts as the claims administrator and distributes the defined budget.
Cigna Corp. has aggressively pursued this ACO strategy. This past summer, Cigna met its goal of creating 100 private ACOs, which are offered to all groups. Aetna has accountable-care deals with Houston-based Memorial Hermann Health System and other major providers in Texas, which are being offered to self-insured public schools within the TRS, Imig said.
In some cases, ACOs are partnering with smaller third-party administrators to create their own health plan. Kelsey-Seybold Clinic, a multispecialty physician group in Houston that has an ACO, partnered with benefits company Boon-Chapman in 2013 to offer its own health plan. The plan, called KelseyCare, is offered to partially self-funded employers with 50 or more workers in the greater Houston area.
Insurers that will win the most business in the ASO space are those that offer services demonstrating unique, long-term value, Edelheit said. One such service is hospital bill auditing, which is when an insurer verifies that every procedure or code is correct. Employers can save 10% to 15% on their hospital expenses if their third-party administrator conducts these deep reviews, Edelheit said.
Some industry observers think established insurers are at risk of losing some ASO business as more employers directly contract with health systems. Boeing Co., for instance, signed deals with two major systems in Washington state last summer. Intel Corp. similarly cut out its insurance middleman in 2013 and contracted with Presbyterian Healthcare Services, an integrated delivery system in Albuquerque that has its own health plan.
But not all health systems have their own insurance infrastructure, which means insurers may still play an administrative role in direct contracting deals. And many say those direct deals will be more the exception than the rule for self-insured employers. “Not many companies can do what a Boeing is doing,” said Brian Marcotte, CEO of the National Business Group on Health, which represents large corporations, including Boeing. “And not even Boeing can do it in every market.”