From the August 2011 issue of Benefits Selling Magazine • Subscribe!

Stop-loss becomes a go

Ten years ago, benefits self-funding—and the stop-loss coverage that typically accompanies it—was a world occupied mainly by large employers. Only those with more than 500 employees were typically willing take on the liability of providing employees with medical coverage, and only companies that size generally had cash flow adequate to the job.

Within the last year, however, the world of self-funded benefits and stop-loss insurance has begun to change. Propelled in part by health care reform legislation, smaller companies are self-insuring more often and buying more stop-loss coverage. The result is a bigger stop-loss insurance market—and more flexibility and customization for a wider variety of employers and their workers.

A stable business model in a changing world
In a self-funded insurance plan, an employer assumes the financial risk for providing employees with a health care benefit plan. Self-insured employers typically pay employee medical claims out of pocket from a trust fund the employer sets up for that purpose. Self-insured employers need substantial cash flow in order to make the benefit plan work.

They do, however, have an additional tool: stop-loss coverage, which reimburses them for medical claims that exceed a stated amount. Stop-loss insurance offers two different coverage types. Specific coverage sets a deductible amount for every employee; aggregate coverage sets a deductible amount for the entire employee group. Most self-funded employers buy both types of self-insured coverage, though most claims are made under specific coverage, says Michael Fry, executive vice president of the group division for Symetra Financial Corp.’s insurance subsidiaries.

(Symetra is based in Bellevue, Wash.) According to a report done by the Employee Benefit Research Institute and cited by the Self-Insurance Institute of America, a trade group, approximately 50 million people received benefits through self-insured group health plans in 2000. These recipients made up 33 percent of the 150 million people who got their health coverage from an employer that year.

(The remaining 100 million workers have employers who sponsor fully funded health care plans.) Businesses have a variety of reasons for choosing self-funded benefit plans, most of which boil down to lower costs and/or increased flexibility. Specific rationales might include the desire for a customized plan, rather than a one-size-fits-all policy; the possibility of interest income from a trust fund; the improved cash flow that comes with paying for claims as they occur; a chance to sidestep conflicting health insurance regulations and benefit mandates; and the opportunity to avoid paying state taxes on health insurance premiums.

Large businesses have long benefited from the lower costs and increased flexibility that self-funded plans offer. Now smaller companies are increasingly choosing self-funded benefit plans. “For the last solid year we have seen a tremendous interest from small-group employers in the self-insurance concept,” says Kurt Ridder, president of Spectrum Underwriting Managers in Indianapolis, a managing general underwriter of specific, aggregate, and integrated medical stop-loss insurance for employers with between 25 and 199 workers.

A surge in popularity
Health care reform is a force behind the change, industry experts agree. “The premise of health care reform was to lower the cost of health care, and that hasn’t been accomplished,” Fry says. A May 2010 Towers Watson study surveyed 650 senior benefits professionals. Only 14 percent of respondents think health care reform will help contain heath care costs.

Just 25 percent think reform will promote healthier lifestyles, and a scant 20 percent believe reform will increase the quality of medical care. Most employers, the study concludes, plan to continue offering medical benefits to their employees after health care reform rules take hold. At the same time, they want less expensive, more flexible, more effective health care. Many of them see self-funded benefits as a tool that can help them achieve those goals.

Saving money with less-expensive plans
“When you have an environment where costs are going up and employers still want to provide benefits, self-funding is a very cost-efficient way of providing care,” Fry says. “Employers are trying to find every dollar they possibly can.” When a company self-funds its medical benefits plan, it keeps whatever money employees don’t spend on their health needs.

Firms that buy fully funded plans, by contrast, don’t see that money again, even if their workforces spend less than anticipated on medical costs. Firms with self-funded benefit plans can administer those plans themselves, which may be a money-saving and practical option for very small firms. Larger firms often hire third-party administrators, and many find that the combination of a self-funded plan and a third-party administrator is less expensive than a fully funded plan.

That’s particularly true in the current environment, Ridder says, because fully insured carriers are requesting (and often getting regulatory approval for) larger and larger rate increases. “In the past, pushback helped keep price increases lower,” Ridder says. “Now they’re not backing off rate increases as much as they had in the past.” Employers whose carriers impose stiff rate increases can always investigate moving their business to another insurance company.

That’s also becoming less of an option. “We’re seeing some fully insured carriers getting out of the business. They don’t like what they see coming under health care reform,” Ridder says, adding that such firms might be put off by complying with reform legislation’s minimum medical loss ratios, which they see as limiting profits in good years but not limiting losses in bad ones, as well as by unlimited lifetime benefit maximums. Less competition, again, means higher prices for fully funded benefit plans. Legislative quirks can also help self-funded plans save employers money.

A fully funded plan must comply with regulations in each state where the company has workers. What’s more, companies with fully funded plans pay state taxes, generally between 2 and 3 percent, on their premium dollars. Self-funded plans, by contrast, are federally regulated, so they don’t need to comply with individual state rules. Companies that use them don’t pay state taxes on premium dollars, either.

Wellness and consumer-driven care
Self-funding companies can passively pocket whatever savings exist—or they can actively nudge their employees in healthier directions, combining the trend in self-funding with another movement of corporate wellness programs and consumer-driven health care. That puts more responsibility on employees to keep medical costs down by actively managing their health.

More and more companies include campaigns to combat common (and expensive) ailments — heart disease, diabetes, obesity, back problems, depression — in their total employee benefits package. They could send employees information about the costs of treating a particular problem, then follow that up with advice on managing a condition, lifestyle coaching, Biggest Loser-style competitions, or Weight Watchers meetings on company time.

Employees who use these opportunities to improve their health might get rewards in the form of time off, gift cards, health savings account contributions, preferential parking spots, lunch with senior management, paid time off, the chance to help design future company-wide health initiatives, or even investments in professional development or resources. Nothing prevents employers from having both wellness programs and fully funded medical benefits, of course.

By using self-funded benefits, however, firms get to keep the money that they save by using wellness programs. A company that implements a successful wellness intervention, for instance, may pay for a worker’s $12,000 angioplasty—but not for his $250,000 triple-bypass surgery. The firm pockets the difference. “You have the opportunity to benefit from your own claims experience,” Ridder says. Self-funding also lets smaller firms join larger ones in tailoring total benefit programs to their worker population.

Consider a particular business in which workers do a lot of bending and lifting, for example. That employer could offer great chiropractic care and frequent employee education on back health and safe lifting practices, as well as incentives for workers who use good biomechanics on the job. The firm would likely see greater productivity and reduced absenteeism, as well as a direct reduction in medical costs. For even more tailoring, some stop-loss purchasers search for what exactly the firm is spending its medical money on.

“The whole idea behind self funding is greater control of employee benefit dollars, and we are evidence that employers are playing a more active role in controlling their benefits costs,” says Chris Metcalf, marketing and communications director at Benefit Informatics in Tulsa, Okla. Metcalf’s firm collects and analyzes health care data, then passes that information on to its clients, which include reinsurance companies, consultants, insurance brokers and third-party administrators.

The company can slice data in a wide variety of ways, revealing everything from specific “trigger ailments” to where it’s spending the most money, then projecting how benefit program changes will affect a given group. “They’re always evaluating plan design—co-pays, deductibles, plan features, drug formulary,” Metcalf says. “We’re definitely seeing more smaller groups in our book of business,” Metcalf says. In the past, 500 employers was the lower limit for self-funded benefit plans.

Now, Metcalf says, he commonly sees self-funded firms with 200 workers, and even notices self-funded companies with 100 or 50 employees.  Virtually all of them, he says, are motivated by the possibility of maximizing the return on their health care dollars, as well as by the chance to keep whatever they don’t spend on medical benefits.

They use detailed data to help design wellness and consumer-directed health care programs that are maximally effective for their employee populations. Ironically, being self-funded helps them get this information in the first place. Fully funded carriers can give firms data, but an employer might have multiple carriers, each with their own data collection and analysis systems.

Fully funded firms have one data source — their own firms — and can choose their own data collection and analysis systems. In the future, Metcalf predicts, companies with fewer than 25 workers will be fully funded, or will buy coverage through insurance exchanges. Other firms, he thinks, will self-fund their employee benefits, using stop-loss insurance and wellness plans to get the healthiest workers they can—and the best possible return on their investments.

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