The Advantages and Risks of Alternative Funding

Brian McNulty is Southeast Region Employee Benefits Pratice Leader for USI Insurance Services, LLC.

Brian McNulty is Southeast Region Employee Benefits Pratice Leader for USI Insurance Services, LLC.

In today’s rapidly changing health insurance environment, many employers are exploring the possibility of moving to an Alternative Funding (or partially self-funded) option. While there has been significant change in the health insurance arena in the past few years – one thing remains the same in most cases – costs continue to rise.

There are interesting dynamics in the health insurance market today which will impact group medical insurance rates in the near future and long-term. The fully insured health insurance market continues to consolidate, resulting in less insurance carrier options and limited competition. In some markets there may be only 3 or 4 viable group medical insurance carriers by the end of 2016. With the potential mergers and acquisitions slated for this year, competition will continue to shrink.

While the fully insured carrier market is contracting, the stop loss insurance market is vibrant and competitive [Stop loss is an insurance product that provides protection against catastrophic or unpredictable losses, purchased by employers who have decided to self-fund their employee benefit health plans, but do not want to assume 100{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} of the liability for losses arising from the plans]. It is not unusual to have market availability of 8-10 stop loss insurance carriers competing for business depending on the size and demographics of the group. There is now an increase in employers analyzing the feasibility of moving to a partially self-funded arrangement.

The Differences

There are taxes and fees related to the Affordable Care Act that impact fully insured plans differently than Alternative Funded plans. For instance, the Health Insurance Tax applies only to fully insured plans. This tax started at $8 billion in 2014 and will increase to $14.3 billion in 2018. The tax will continue to increase after 2018 based on premium trend each year. This tax does not apply to Alternative Funded plans.

In today’s economy where every dollar counts, most businesses would jump at the chance to implement a strategy that provides a 7{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} to 12{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} reduction in costs for the same product or service. However, when some employers focus on the outside number of 125{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} of expected claims, many immediately dismiss partially self-funded arrangements as too risky. In doing so, they fail to see the guaranteed savings in taxes and fees that reduce the total cost of risk and the long-term probability of reduced overall costs.

Once a business understands that the probability of approaching maximum claims liability is low, they become more comfortable with analyzing partially self-funded options. This opens up a wide array of choices that don’t exist in the fully insured world. Stop loss carriers, third party administrators and medical management firms are on the leading edge of innovation and doing more to control costs than most bundled fully insured programs.

The Case For Partially Self-Funded

While many businesses are understandably hesitant to move to a partially self-funded arrangement, those that do are often rewarded with significant savings in the first year. Over the long-term the probability of approaching the maximum claims liability is low in any one year and very low when spread over several years. This is a long-term strategy which provides the ability to implement many cost reduction strategies, including: hospital bill audits, large case management, disease management, wellness programs, predictive modeling analytic tools, pharmacy solutions and more.

There is also the ability to unbundle the core components of health insurance and negotiate them separately, such as: medical claim administration, stop loss insurance coverage, telemedicine, provider network access and transparency tools (ability to find out the actual cost of medical services before going to the provider).

A recent case study of a non-profit organization with 165 covered employees, found it was spending $2.4 million annually on their fully insured health plan. The client was facing a double digit increase at their annual renewal. The analysis was performed with limited claims data and the decision was made to move forward with the partially self-funded arrangement. As a result of moving to this funding arrangement, the first year savings were $155,000 through lower taxes and carrier profit and an additional savings of $305,000 due to their favorable claims experience. The total savings in year one was $460,000. The projected savings in year two is an additional $643,000 (when comparing to an estimated 15{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} fully insured increase in year two) for a two year total savings of $1,103,000.