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November 17, 2011
Self-Insured Health Plans Viable For Small Companies, Too

Self-funding a health plan sounds risky, like something that should be undertaken only by the very largest employers. In some respects, that perception may be accurate. But when done properly, small employers can enjoy the benefits of self-funding just like a large company. Brad Lewis, Executive Vice President of IMG-Stop Loss (www.img-stoploss.com), has been helping small and large firms with self-funded medical plans for the better part of three decades, and he took some time recently to educate us about some of the ways small groups can take advantage of self-funding.

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Design flexibility may encourage wellness

One of those advantages is the ability to design a plan that is unique to the employer. “Self-funded plans are not subject to many of the mandates that fully insured plans have to meet,” Lewis says. “And, the employer decides what to cover in the plan. Say you are a muffler shop, and all of your employees decide to take up skydiving or motorcycle racing. As the employer, you can decide you don’t want to cover hazardous activities.”

The insurance underwriter sets rates based on plan provisions, as well as the group demographics, industry, and other variables, so avoiding costs due to hazardous activities could result in lower premium costs. This kind of plan design flexibility can allow companies to encourage employees toward better health and wellness.

Lewis cites his own company, IMG Stop-Loss, as an example. “(Our president) used to smoke,” Lewis says. “He went to a stop smoking clinic, and got into fitness while he was there. He came back motivated; he put in a gym, pays for smoking cessation programs for employees, and set up a weight-loss incentive program. Some employers feel that it isn’t their job to pay for people to smoke.

"Employees know it’s bad for them; why should it be the employer’s problem if they do it? When you self-fund, you can encourage healthy habits by putting wellness strategies into your plan documents, like weight loss incentives, smoking cessation, and health risk assessments.”

Some self-funded groups contract with a concierge service that uses data from the government or other sources to find the lowest-cost, highest-quality medical services available for employees. “For example, if you need a knee replacement, the doctor doesn’t tell you to come in that day to get the surgery,” Lewis says. “A concierge service will go out and shop the best location near you, finding the best price and best service. They may call the hospital and tell them you’re coming in for a knee replacement, and say, ‘Here’s the amount we’re going to pay for it.’”

This kind of precertification is one way to save money, but Lewis cautions that you need to know what you’re buying. “A lot of companies hire a precertification company that only reviews hospital bills. How do you save money that way? If you’re paying somebody to do case management via the hospital bill, you’re not doing anybody any good. Case management has to be proactive.”

There are a few key terms to understand that will help in the design of a self-funded medical plan. The first is specific retention. “That’s the amount the employer will pay for claims on each individual person,” Lewis explains. “So for example, you might have a plan with $25,000 specific retention. In the event of a large claim, the employer would pick up the first $25,000 on that person, and anything over that amount of stop-loss carrier picks up.

“Then there is aggregate protection. Let’s say you have ten employees who hit the $25,000; that’s really going to blow your budget. So you buy aggregate protection that says once the claims have hit a specific amount for the group, the stop-loss carrier will pay above that level. For ease of illustration, let’s say you have three people in your group and your aggregate level is $10,000. If one employee hits $5,000 and two hit $3,000 each, then your claims have gone over the aggregate level by $1,000. The carrier is going to reimburse the employer that $1,000.”

Don’t allow a laser

Lewis says that ‘lasering’ is one of the most important terms to understand for any company considering self-funding. “Let’s say that, God forbid, someone in your company comes down with cancer, and the company has a $25,000 specific retention. Some carriers out there will say, we’re sorry John Smith has cancer, but we’re going to put a laser on him at $500,000. That means the employer has to pay the first $500,000 of claims on that person. That could be devastating to a small group.”

Lasering is one reason Lewis recommends doing business only with a reputable broker, TPA and stop-loss carrier. “Don’t be cheap on your stop-loss coverage,” he says. “Nowadays, for 8-12% more in premium you can buy a guaranteed no-laser policy.” And while 8-12% more sounds like a lot, it doesn’t apply to the entire plan cost.

Lewis explains: “If the rates are increasing, for example, 20% for the year, a fully insured plan will see a 20% increase on every dollar they pay. So if the premium was $1, now it will be $1.20. But that same 20% increase in a self-funded plan might amount to only 6%, because the 20% increase is only on the fixed (premium) portion of the dollar – 20% of 30 cents is 6 cents. So the new premium might be $1.06, instead of $1.20 for the fully insured plan.”

Whose dollars and data are they, anyway?

And that brings us to one of the biggest differences between fully insured and self-funded premiums. “When you send a dollar to the carrier on a fully insured policy, they keep the whole dollar – it’s theirs,” says Lewis. “They pay claims out of it, and they pay commissions, but if there is any of it left over, it belongs to them. With a self-funded plan, depending on the size of the group and how the plan is designed, 20-30% of that dollar is for fixed, or premium, costs.

"The rest of it you put into a claims account. So we’ll say that, out of the dollar you pay, 30 cents goes to fixed costs, and 70 cents goes into reserves. If the company only pays out 60 cents in claims, then the 10 cents they saved is theirs. They get to keep it.”

“When you self-fund, you own your claims data,” says Lewis, pointing out another major difference from fully insuring. “One problem in this industry, especially with bigger groups is the carriers won’t release the claims data, even to the client. If the group is good, they don’t want you to know because they’re making money on it. And if the group is bad, they don’t want you to know, because they want somebody to take the group, to take a chance on it.

“But with self-funding, it’s your data, it belongs to you. Then you can see that maybe your group has a problem with diabetes or cancer, and you can adjust your plan accordingly – maybe you can put in a smoking cessation program, or weight loss management. At our company, we have a boot camp. The boss pays for a trainer to come in twice a week and conduct a boot camp. He pays you a dollar for every pound you lose, and when the challenge is over, the winner gets $500. We had a quarter of our company in that at one time.”

The bottom line is that employers down to as few as 25 employees should seriously consider self-insuring. It may not be for everyone, but the flexibility and potential for saving make it worth a serious look.

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