It's no secret health care in the United States is undergoing afundamental change. Rising costs, rampant litigation,ground-breaking health care reform legislation and the globalrecession are all wreaking havoc with the established norm.

Total health care costs for active employees are expected to top$11,000 in 2011, up from $10,387 in 2010. While employers arefacing difficult choices, the health care cost burden is alsofalling heavily on the employee, who pays 45 percent more todaythan five years ago. Clearly, both employers and employees aremotivated to find ways to reduce the overall cost withoutendangering health or wellness.

With these uncertainties swirling, innovative, consumer-orientedbenefit designs are becoming an employer’s most effective strategyagainst the health care cost trend. Self-funding medical plansgives the employer the most flexibility to design a plan thatreflects the company’s values, delights employees, and generatessavings that can be deployed for other benefits or flowed to thebottom line.

Changing the health care plan is one of the most obvious stepsan employer can take to reduce health care costs. A recent AonConsulting survey revealed that nearly two-thirds of employersintend to make health care plan design changes in 2011, sharingmore costs with employees. By the end of 2011, 61 percent of allbusinesses will be offering a high deductible health plan.

Increasingly, those plans are self-funding. The vast majority oflarge companies – those with more than 5,000 employees — haveturned to self-insurance as they reshape their total rewards portfolioand drive employee accountability. Broadly defined, self-funding orself-insurance programs are those in which the employer providesemployee benefits by electing to pay claims directly, rather thancontracting with an insurance company to insure theiremployees.

In 1990, some 9.5 million American workers were covered byself-insured employers, and by 2000, the number jumped to 50million. As recently as 2010, it was expected to top 100 million.Large employers were the first to adopt self-insurance, since theyhad enough employees to do risk pooling just like an insurancecompany would. As of 2007, more than 89 percent of employees inlarge companies (those with more than 5,000 employees) were inself-insured plans.

However, the benefits are being limited to large companies: Morethan 70 percent of companies with between 1,000-4,999 employees areself-insured, and more than 50 percent of those with just 200-999employees have followed suit. Even companies with between 3 and 200employees are jumping on the bandwagon — some 12 percent of themare self-insured.

A growing momentum
Why has self-funding become so prevalent, even among smallercompanies? There are several reasons that this approach has gainedmomentum, yet it is not without its challenges on the road tosuccessful implementation. Companies with self-funded plans havetwo key goals in mind: to reduce costs, but to also ensure thattheir employees enjoy a beneficial health plan. After all, it makesno sense to cut costs if it adversely impacts the health andproductivity of the employees themselves.

Reasons for adopting a self-funding approach include:

• Greater control over costs and cash
• Major cost advantages
• More flexibility in plan design and coverage
• Reduction of regulation (enabling employers doing business inmultiple states to avoid inconsistent laws and policies)
• Overall lower cost of operations
• A clear opportunity to further engage employees to focus onquality and cost of care
• Ability to focus on specific employee health problems such assmoking or obesity

Yet challenges abound. It’s not enough to merely provide aself-funded plan that shifts a greater percentage of the costs tothe employee. Companies must ensure they have sufficient cash flowto meet the obligation, as well as the internal resources to managethe plan.

In addition, companies are eager to couple new plans with ahead-on attack on employee bad health habits, the underuse ofpreventive services, and the widespread overuse or inappropriateuse of care (think the use of the ER rather than urgent care clinics) by employees.Without tools to help employees make smart health care shoppingdecisions, employee education and engagement initiatives, andconsistent support from all levels of management, self-funding willnot deliver all the anticipated benefits.

Keys to success
Consistently high-performing companies have seen dramatic declinesin their overall health care costs, and corresponding increases inemployee wellness and productivity after implementing self-funding.The tools and techniques that have proven to be most effective inachieving sustainable benefits cover a range of issues, such asimplementing wellness/fitness programs, instituting diseasemanagement initiatives, encouraging employee engagement, but mostof all, providing transparency to the employee.

For the employer, it’s equally important to engage theiremployee base in an educational program, while simultaneouslyensuring that the most affordable, quality options are accessibleand transparent. For companies to reap the rewards ofinnovative benefit design, employees must be able to evaluate thecost, quality and convenience of health care providers andfacilities.

Costs for identical procedures often vary enormously in the samezip code in the same carrier network. When equipped withpreviously-unobtainable information, employees can and will managehealth care spending much more effectively.

Transparency of health care cost and quality is a key ingredientfor a number of reasons:

• Transparency enables innovative benefit design that reflects acompany’s own values and priorities.
• The most progressive and effective trends in benefit designintroduce elements of consumerism: They encourage employees to shopfor health care like they do for other services, and to treathealth care dollars as if they were their own
• An increasing number of employers are introducingreference-based pricing, a shopping-oriented benefit design thatinvites employees to understand that certain procedures arerelatively quality-invariant, despite high costs
• Some employers allow employees to cover costs over thereference-price out of their own pockets, while others areintroducing shared-savings models to reward employees for shoppingunder the reference price
• Transparency helps employees avoid frustration by providingthem the education, know-how and tools they need to navigate thecosts, quality and choices involved when participating in this newwave of self-funding.

More than half of all personal bankruptcies are caused bymedical bills. As a side benefit, transparency tools can supportthe employer’s total benefits program, by providing timely,relevant teaching moments through via personalized messages,disease counseling, and wellness initiatives.

No correlation between cost and quality; when true costs andunbiased quality measures are made visible, employees can makebetter choices. Many employees simply don’t know that forprocedures like MRIs, colonoscopies or simple lab tests, there areless-expensive options that will still provide high-quality caretransparency, and the resulting overall savings in their yearlyhealth care spend, improves employee satisfaction and engagement inbenefits programs.

The consumer-oriented benefit design enabled by self-funding isembraced by employees when transparency tools are made available.Making health care affordable is key to providing a competitivereward package and attracting and retaining top talent.

Successful outcomes
The results of well-implemented self-funding based on transparencyare dramatic. Surveys of self-insured employers find that theiremployees pay on average 20 percent less than their counterparts.One national supermarket chain found that a self-funding programincorporating a health care transparency solution (allowingemployees to shop for health care) resulted in a savings, onaverage, of $300 for every colonoscopy.

Multiply that by thousands of employees, and you can see thepotential savings. Companies that are seeing the mostdramatic results from their self-insured programs note several“best practices” that can help ensure consistent, long-termresults.

These practices include:

• Providing a total compensation or total benefit statement thatincludes the value of health benefits
• Providing employees with information on provider and hospitalquality
• Differentiating cost sharing for using high-performancenetworks
• Reference prices for “shoppable” procedures

Transparency at the programs core
While some companies struggle to engage employees, others have seentremendous success. Castlight Health is working with some ofthese innovative companies to enable employees, employers andhealth plans to take control of health care costs and improve carethrough easy-to-use shopping tools and unbiased price and qualityinformation.

The future of self-funding is reliant on the elimination of thehighly guarded price game that comes with choosing health careservices as well as putting health care transparency tools in thehands of your employees. That way, you can keep your health carespending trend in check.

Prater leads Castlight’s marketing and product managementfunctions. He holds an MBA from the Wharton School of theUniversity of Pennsylvania.