Self-funded health plans can save money, up risks

Business consulting company Spooner found itself facing the same challenge its clients and many other employers across the country are grappling with: rapidly rising health plan costs.

Many of the Westlake, Ohio-based company's clients were on what chief marketing officer Andy Lembach calls the “hamster wheel”

“Every year, everyone dreads shopping for the next plan (during) open enrollment,” Lembach said. “And you get a bunch of quotes from people, you go with the cheapest one, and then the next year they jack up the rates, and then you're in this vicious (cycle) and you're doing it all over again. There's seemingly no control.”

Last year, Spooner, which employs about 130 people, switched to self-funded health insurance, a model in which an employer provides health benefits to employees with its own funds. It's typically a cheaper option, but the employer then assumes the risk for paying claims, versus the traditional fully insured model in which insurance carriers bear that risk.

The self-funded option emerged for large, multistate employers after the Employee Retirement Income Security Act of 1974 exempted self-funded plans from state regulation, said Mike Ferguson, president of the Self-Insurance Institute of America.

The option has migrated down market ever since, with midsize and smaller companies making the switch from fully insured benefits. That has accelerated through health care reform.

“Companies are certainly seeing a lot of disruption in the marketplace over the last several years,” Ferguson said. “They want to be able to insulate themselves somewhat from that and by setting up your own health plan, you have more control over your future in terms of costs and how benefits are provided to your employees.”

But of course, there is that tradeoff. Although companies aren't paying traditional premiums to insurance carriers, they are on the hook for claims as they come in.

Dan Polk, Medical Mutual of Ohio's vice president of small group sales, said it is “extremely important” for groups to understand that self-funded plans pose these greater financial risks.

He has seen considerably more interest from groups in the under-100-employees market to offer some form of a self-funded health insurance option, particularly since the Affordable Care Act was signed into law in 2010, he wrote in an email.

“Groups in a self-funded arrangement are not required to adhere to many of the provisions required by ACA, including community rating and covering what are known as essential health benefits, and also are not required to pay some of the federally mandated fees that fully insured plans do,” Polk wrote. “As a result, a self-funded arrangement can provide some cost savings.”

Self-funded plans usually are administered by a third-party administrator or a traditional payer. Medical Mutual provides certain self-funded arrangements in its options for small group customers, Polk said.

The acceleration of employers shifting to self-funded plans is an unintended consequence of the Affordable Care Act, said Tom Campanella, director of the health care MBA program at Baldwin Wallace University,

And that trend further exacerbates the problem.

The insurance health pool of all covered individuals now includes sicker, costlier individuals, since the Affordable Care Act prohibits insurers from denying people coverage. But with not enough young healthy people enrolling, premium costs are rising.

As those costs soar, smaller employers with generally healthy, low-cost employees — and therefore less financial risk — are more likely to switch to a self-funded plan and exit the fully insured pool, Campanella said.

“We're back to another unintended consequence of it,” he said. “The ACA is incenting healthier groups to get out of the pool, but the whole idea was — through things like individual mandates — to incent healthier people to stay in the pool or come into the pool.”

The general rule of thumb has been the bigger a company is, the more likely it is to be a good candidate for self-insurance, Ferguson. But smaller companies have begun signing on.

Cleveland-based Admiral Products is into its fourth year using a self-funded insurance model for its 38 employees. CEO Vincent Hvizda kept watching premiums grow every year, sometimes reaching into double-digit increases.

But three years ago, that increase was going to be more than 25%, he said.

“I about fell off my chair,” he said. “There's gotta be a better way to do this.”

For his company, there was. Since then, self-insurance has saved about $150,000 a year, or 12.5% when compared to fully insured options, Hvizda said.

He gets regular reports of claims, giving him a sense of health issues within the company. It's always summaries and never identifiable, but the information has provided a basis for him to set up a wellness program within the company, to hopefully further control costs.

Spooner, the Westlake consultancy, also is looking into instituting a wellness program. Lembach said they never would have considered taking more ownership of employee health in a fully insured model, because they didn't know what the issues were.

The aggregated data he now gets let him know that about 60% of his medical costs was coming from prescription drugs. A switch to generics this year has saved the company money “hand over fist” in the first quarter.

“We see that people (are) going to the ER instead of establishing a relationship with a primary care doctor. They don't have a primary care doctor because they're not doing their general screening,” Lembach said. “We didn't know any of that before, so this transparency is very powerful.”

In the first year, Spooner saved between $300,000 and $400,000 on premiums. There were some administrative costs associated with managing a self-insured plan, but that was only a fraction of the savings.

Spooner has started recommending that clients shift to the self-insured model. One client told Lembach it would be the “easiest sell you've ever had.”

Already, two have made the shift and Lembach said he expects more of the more than 3,000 employers Spooner works with throughout Ohio.

"Self-funded health plans can save money, up risks" originally appeared in Crain's Cleveland Business.