Apples and Oranges

The Benefits of Self-Funded Medical Plans

The cost of benefits….

• Cost of providing health benefits a major line item for businesses:

• Between 2004 and 2005, premiums for employer sponsored health insurance rose 9.2%– more than twice as fast as overall inflation (3.5%)– three times as fast as wage gains (2.7%)

• Starbucks spends more on health insurance than raw materials needed to brew its coffee.

The dilemma….

• To remain competitive, employers want and need more…

• More help in controlling healthcare costs.• More choices in plan design.• More responsive service.• More data capture for intelligent decision

making.

• More on-demand reporting capabilities.

The world of apples…

• Everyone likes to talk about an ‘apples to apples’ comparison.

• Easily done…in the healthcare world, most carriers’ products are the same.

• This creates one fairly significant problem…

• What if you don’t want an apple?

The good news…

• The good news is that there’s an option available to help you meet your needs.– Provides help in containing healthcare costs.– Provides flexibility in plan design.– Provides more personalized customer service.– Provides greater electronic interaction and user-

defined reports available 24/7.

• And it’s not an apple….

And the answer is…

• Employers can – and often do - choose to self-fund their employee health plans.

• Over 50 million employees are covered by self-funded medical benefit programs – one third of total participants in private employment based plans.

» Employee Benefit Research Institute, 2000

• Can provide the same benefits as a fully insured program, often at significantly lower cost.

So how does it work?

• Employer adopts an employee benefit plan pursuant to ERISA and establishes a fund which is used to pay employee medical expenses allowable under the plan.

• Employer and employee contribute to the fund, just like paying premium to an insurance company.

• Payments are issued by a contracted administrator for medical expenses payable under the plan.

And I save money how?

• Understand how a fully-insured program works:– Premiums include claims dollars, administrative

costs, premium taxes, risk charge and profit margin.

– Premium dollars are paid to the insurer without regard to whether claims are incurred or payable.

– Premium dollars are invested by the insurer, generating interest, until required for claims payment.

– Unspent dollars belong to the carrier.

And so?

• Under a self-funded plan:– Funding includes claims dollars and

administrative costs, but no premium taxes, risk charge or profit margin.

– Claim payments are funded as claims are incurred or payable, improving cash flow.

– Premium dollars can be invested by the employer, generating interest for the business itself, until required for claims payment.

– Unspent dollars belong to the employer and fund, carry over and can be used to help offset the following year’s claims costs.

But what if there’s a BIG claim?

• Most prevalent misconception about the self-funding of employee medical benefits.– Visions of unlimited liability…– What if there’s one big claim (or two or

three!)– What if there’s a bundle of small claims

that eat up all my claims dollars?

The concept of stop loss

• There is an insurance product that protects against these types of risks – stop loss coverage.

• Specific stop loss coverage limits the amount payable on any one claim and protects against catastrophic losses.

• Aggregate stop loss coverage limits the total payable on all claims and protects against higher than expected plan utilization.

Discounts or savings?

• Carriers talk “discount” - read the fine print.– Figure not limited to negotiated discounts from providers.– Includes savings arising from denial of duplicates,

copayments, deductibles, all other disallowed expenses.– Often offer guarantees, put portion of fees at risk.

• Self-funded plans talk “savings”.– Breakout negotiated network discounts, other disallowed

expenses separately.– Compare on the basis of “Total Plan Savings”.– Offer similar guarantees, put portion of fees at risk.

Can any employer self-fund?

• In theory, yes…in practice, no.• Small businesses with less than fifty

employees generally aren’t good candidates.• Businesses unwilling to become actively

involved in controlling their benefit costs aren’t good candidates.

• Poorly managed businesses and businesses with cash flow issues aren’t good candidates.

Keys to success?

• Committed employer– Common vision (Senior management/Finance/HR)– Broad outlook (wellness, disease state management)

• Outstanding network – Substantial negotiated discounts– Extensive penetration

• Professional administration– Service oriented– Superior performance metrics

Is self-funding right for you?

• It’s worth exploring for most employers.• Self-funding of employee health benefits is

widespread and offers a number of advantages to simply buying an off-the-shelf insurance policy.– Greater flexibility – Increased financial control– Lower costs – Better service

Thank you for your time!

Questions?