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Across the U.S., CFOs, HR directors and CEOs at companies of allsizes are grappling with what to do in the face of unsustainablehealth insurance program cost increases. After all, how do you budgetfor seemingly endless annual premium rate hikes that typicallyrange from a "low" of 7 percent to upwards of 12 percent andbeyond? We are not talking small dollars here—a 10 percent renewalincrease could represent a six-digit increase in overall premiums.When does it become unsustainable? Many will say the answer isyesterday.

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There are multiple reasons why annual increases in the cost ofmedical care persistently outpace general inflation, and why thereappears to be no end in sight. The ongoing emergence ofgroundbreaking gene therapies, specialty drugs and innovativecancer treatments, together with the increasing power of providers(e.g., via hospital mergers), will continue to put pressure oninsurers to pass along the resulting higher health insurance coststo employers.

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Related: Wanted: More health carecompetition

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A recent headline in the Washington Post, "FDA approves a genetherapy that is the most expensive drug in the world," perfectlyunderscores the situation. The gene therapy, called Zolgensma,comes with a $2.1 million price tag to treat spinal muscularatrophy.

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The undeniable reality is that health care costs will continueto rise for employers. You can increase deductibles, copays,coinsurance, etc., but those are all only temporary fixes, and mostare no longer viable in a time of full employment.

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That said, there are alternative funding solutions that shouldbe explored to help employers better manage this expense and,ultimately, provide the transparency and tools required to helpstabilize these costs.

The rising popularity of alternative funding solutions

The cost of a traditional employee health insurance program istruly ominous for most organizations; it typically ranks in the topthree expenditures of an organization's overall budget. In fact,Starbucks spends more on health care than they do on coffeebeans.

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Thus, it comes as no surprise that alternative fundingsolutions, which enable employers to have more control over thecost of their health care program, have increasingly gained inpopularity over the past decade, initially with largerorganizations.

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According to the Kaiser 2018 Employer Health Benefits Survey, asof 2018, 87 percent of covered workers in firms with 1,000 to 4,999workers and 91 percent of covered workers in firms with 5,000 ormore workers were in self-funded plans.

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Somewhat surprisingly, mid-sized companies (those with 100 to499 employees) haven't taken to self-insurance so readily. Still,the percentage of smaller organizations that are moving towardsself-funding is on the rise, from 25.3 percent in 2011 to 30.1percent in 2015, according to the most recent data available fromthe Washington, D.C.-based Employee Benefits ResearchInstitute.

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An employee benefits captive is often the most attractivealternative funding option for these mid-sized and smallerorganizations, because this self-funding approach places multipleemployers together in a collective risk-sharing arrangement. Ifadministrated effectively, a captive should reduce risk andvolatility for the participating employers, help reduce thefinancial impact of any unexpectedly large medical claims, andprovide employers with useful information to manage theirprogram.

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In the words of management guru Peter Drucker, "You can't managewhat you can't measure."

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Whether an employer chooses a captive or to wholly self-fundtheir benefits, stop-loss insurance plays a crucial role inprotecting their company against high-cost claims. This productprovides essential protection against catastrophic or unpredictablelosses, and so it is critical for employers to understand how thiscomponent works and the potential long-term impact on theirself-funded plan.

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Most companies that decide to self-insure do so not only toescape the rising cost of health care premiums, but also to gainprogram transparency. Some advantages of self-funding include:

  • Access to detailed data on employees' health care claims. Thistype of information is typically not available to employers in afully insured model. However, with a self-funded model, this datais at the employers' fingertips, which enables them to pinpointpatterns of claims among workers and build custom-tailored wellnessand cost-containment programs to address these issues.
  • More flexibility and control. A self-funding model provides anemployer with much more freedom to decide what their company's planwill encompass, including covered benefits and exclusions, employeecost-sharing, direct contracting with health care providers orhospitals, and pharmacy benefit managers they want to partnerwith.

Despite these opportunities and more, there is still asubstantial majority of mid-sized companies that have not made theswitch to a self-funded or captive model.

Why haven't more employers explored alternative fundingarrangements?

There are several key factors that hold many smallerorganizations back from making the self-funding decision, includingan increased level of financial risk, known ongoing large claims intheir fully insured program, and the requirement for the leadershipto be actively involved in the health of their workforce.

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Here are some real-life scenarios that could occur with aself-insurance program that is not properly designed, executed ormanaged:

  • The company is coming to the close of a particularly bad yearin health care claims in which multiple members went over thespecific deductible. Now, at renewal time, their stop-loss premiumskyrockets by 50 percent, which makes them wonder if self-insurancewas the right choice.
  • It is renewal time for their stop-loss policy, and they have anemployee with cancer. There are known and expected ongoing healthcare costs. The stop-loss carrier increases that particularemployee's specific deductible to $100,000, whereas the rest of themembers have a $30,000 specific deductible, a practice which iscalled "lasering" in the insurance industry. Now, can you imaginethe cost implications if the stop-loss carrier issued not one, butthree lasers?
  • The company hired a third-party administrator (TPA) becausethey thought it would put employees at ease and help with thetransition over to self-funding, but this TPA is less experiencedthan anticipated. As a result, they are not flagging claims, notsending claims for reimbursement as quickly as they should to thestop-loss carrier, and not supporting the company in implementingeffective cost-containment strategies. They should have been theprogram's quarterback; instead, they are constantly fumbling theball.

Larger companies typically have the financial wherewithal tosustain events like these: a brutal claims year, a substantialstop-loss insurance rate increase, medical lasering of one or moreemployees. However, mid-size and smaller organizations generally donot have the cash flow to absorb even one of these unforeseen hitsto their budget.

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Inevitably, more risk shifts to the employer with an alternativefunding model. And so it may be that staying with a traditionalhealth insurance provider plan is the right option for certaincompanies today. However, if you think that in the long-term, aself-funded or captive model might make more sense for certainclients, then the key is to start planning now.

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As employers explore and implement alternative funding options,it is critical to work with an employee benefits resource with theexperience to address this strategic shift from every angle. Thisfirm must have the knowledge to assist in taking advantage of thecost-containment rewards and other benefits that a self-insuredstrategy offers, while also being able to support the company inputting a long-term strategy in place that minimizes financial andliability risks. In addition, even before the employer moves to aself-funded or captive model, this firm should be providingguidance and rolling out a game plan on how to advance a culture ofhealth and wellness in the organization.

What employers should expect from their broker

Moving towards an alternative funding model is an excellent wayfor mid-sized companies to better manage their health insurancecosts. However, hiring the wrong broker on this journey can quicklyderail the company and its budget. Instead, they'll want tocollaborate with a benefits resource who can help develop along-term benefit strategy (3 to 5 years) for the organization thatshould include these elements:

  • Ongoing evaluation of where the organization is headedstrategically and operationally.
  • Continuous assessment of employee population dynamicsassociated with multiple generations using the program.
  • Development of a data-driven wellness program that focuses onthe health-related conditions—e.g., diabetes, high blood pressure,obesity, smoking—that can turn into much larger claims.
  • Regular analysis of all viable cost-containment programs in themarketplace to ensure that the alternative funding model is workingand helping the employer better manage costs within thatmodel.
  • Consistent employee engagement and education activities toensure that employees understand all their provider options andprogram details. Through surveys, lunch and learns, and numerousother communication mediums, the advisor and employer can providethe workforce with information on lower-cost/higher-qualityproviders, cheaper alternative prescription drugs (generics whenavailable), and the importance of regular primary care physicianvisits to keep large claims and chronic conditions at bay.

Selecting a brokerage that will play a key part in the strategicbusiness planning is vital to successfully controlling thiscritical spend. Employers should also look for this benefitsresource to be an expert in self-funded benefits plans, stop-losscontracts and cost-containment programs; and to be knowledgeableabout many other alternative risk vehicles.

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Most importantly, though, it's essential to seek out a brokerwho the employer is confident will commit substantial time andresources to help them evaluate, transition to, and manage thecosts and risks of an alternative funding approach.

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Ryan Cronan is a client executive in theemployee benefits practice group at Fred C. Church.George Lucas, Ph.D. is the director of businessdevelopment at Fred C. Church.


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