First off, self-funding isn't without some kind of financial protection for you, the employer. Unless you have a massive workforce, the decisions you face as an employer are more about the level of financial risk you assume and the level of engagement your team is going to participate in when setting up your benefits. The biggest change is that you are going to begin paying for healthcare expenses directly from your bank account to a healthcare provider via a Third Party Administrator (TPA) instead of paying a health insurance company for you to be hands-off. Functionally, it doesn't sound that different, but this is where all the variables converge and your pathway to a customizable and potentially less expensive health plan starts.
Are you too small?
In theory, the answer is always, “no”.
But, there are limiting factors which can make this less practical depending on the size of your workforce.
First up is the question of finding the appropriate Third Party Administrator (TPA) who will receive, review, and process payments for the expenses of the medical services that your employees incur. Some TPAs have a minimum size for employers that they choose to work with. That number can be as high as 1000 minimum enrolled employees, or as low as 50 enrolled employees.
Now, don’t lose all hope if you don’t have 50 employees enrolled on your health plan. There is an ample supply of both Independent TPAs or Carrier-owned TPAs that will offer their services to an employer group under 50 employees, with some even allowing as few as 2 enrolled employees. If your company is in this size segment, you will most likely be reviewing a “Level-Funded” style of a self-funded health plan. There is nothing wrong with this option, and it is likely to be exactly what a company at your size is looking for as these plans are pre-bundled with all the vendors you need and the plan manager does all the vendor and financial management for you.
Your next barrier to entry due to size is finding the right stop loss insurance vendor. Just like the TPA barrier, some stop loss vendors do not like to take on the risk profile of a smaller group, and the options become fewer when the size of your enrolled workforce drops below 100 employees.
Again, there are several options available to employers under 100 enrolled employees, the field of candidates just narrows. Thus, if your company is under 50 employees, the same criteria applies, and you are most likely shopping the Level-Funded style of self-funded health plans due to both availability and administrative leverage.
I like to think of the following sizes as ideal for each level:
2-25 enrolled employees: Ideal for a Level-Funded option of the self-funded health plan and best suited for a plan option offered from a carrier-owned TPA.
25-99 employees: Ideal for a Level-funded option with some additional flexibility to explore both the options from the insurance carrier-owned plans as well as options from the Independent TPA vendors. Note that most independent TPAs or carrier-owned TPAs are purchasing the stop loss on behalf of the employer and there aren’t many options to separate those choices at this size.
100 to 250 employees: Ideal for a self-funded plan. Independent TPAs become more desirable at this threshold due to the ability to save costs and provide a higher level of customization. Purchasing the stop loss independently from a Captive Stop Loss solution or Managing General Underwriter (MGU) is more prevalent in this space when shopping for stop loss insurance. Also, at this size, there is a wide variety of additional solution vendors you can integrate into your plan that will focus on cost containment strategies for either your entire organization or focused on specific members with chronic or high cost medical conditions.
250 to 999 employees: Independent TPAs and carrier-owned TPAs are both extremely competitive in this space. This company size is extremely desirable. You will have options from more “name-brand” vendors, and your size for stop loss will be considered more “credible”. This opens up more options for “direct-written” stop loss insurance in addition to purchasing through a secondary vendor like a Captive or MGU.
1,000-9,999 employees: The world is your oyster.
10,000+ employees: It isn’t even fair to consider you in this article. You are more likely making decisions about the value of carrying a stop loss policy and going without. Many employers at this size indeed carry the full risk of all medical claims, including the multi-million catastrophic ones without any underlying insurance product for protection. These employers focus their sights on the accuracy of the TPA, Pharmacy Benefit Management, and the best cost-containment vendors that address specific medical needs.
Are you too sick?
This question can’t be asked without the context of the size question. To quote Adam Russo from the PHIA group, “Would you rather insure a group of 8 yoga instructors or a group of 80 truck drivers?”
And, you might also not have any idea if your group is considered healthy, average, or super high risk. Thankfully, there are tools available to help you determine your risk level without violating the trust and confidence of your teammates.
If your company is headquartered in Texas, you even have a leg-up since all employers in Texas have long had access to some basic claims data reports from their insurance companies. But, thanks to recent legislation in the last couple of years, all employers now have the ability to receive some basic historical claims information if they ask for it.
What kind of information is helpful to use for this litmus test? On a Fully-Insured health plan, it is advantageous to view a report of the total amount your insurance company paid on medical and rx claims versus the money you have paid them for the cost of insurance. This can easily be one of the most effective indicators of risk. In my experience, anything under 80% paid out in claims versus what was paid in to the insurance product is an easy “let’s do this.” But that does not mean that a higher percentage paid out in claims, or a really ugly report that is well in excess of what was spent on insurance isn’t still worth exploring.
You will most likely be able to get some kind of report on your “high-claimants”. Most insurance companies or plan administrators have a report on any employee or plan member who has experienced claims in excess of $15,000 per year. This report typically gives you the timeframe of that claimants treatment and whether it is ongoing or resolved. These reports are also useful for you to confirm if those same claimants are even still active employees or dependents of active employees within your company. That one additional question can make a huge difference to your potential insurance suitors.
Some additional reports like the top 20 most expensive medications your team has filled by either volume or dollars is a great report. This can give you information not only about some potential medical conditions in your group, but it can also give you information so you can price shop to see if you are overpaying for those high dollar medications.
Similarly is the top 20 most frequently used providers or the top 10 most expensive locations of care by volume. These reports can also give you great information which can help to explain findings from the original report of money in versus money out.
But, now that you have those reports, what are the real actionable items?
Putting it all together, size & health status
This is what really matters. Size alone doesn’t mean much, and your company’s underlying health risks are only of major concern if there isn’t an offset of money that additional employees and dependents with lower expected expenses bring to your overall group.
This is where the very ambiguous term, underwriting, comes into play.
Essentially, you want to get a price for the costs of administering your plan, insuring you for an expense that exceeds your company’s allowable expenses, and finally, you want to know how much money you should set aside to pay those self-insured medical claims. And, the underwriter can give you those numbers as long as you can speak their lingo.
Fixed Costs
First up will be the “fixed” costs or the expenses you will pay regardless of whether you pay zero or 100 billion in claims. Most third party administrators (TPAs) are going to have a fixed cost per employee per month to administer your self-funded health plan. The same may be true of your pharmacy benefits manager (PBM). But do note, there are often a few other revenue streams these two vendors participate in when it comes to your claims dollars.
The biggest ticket item you’ll pay under the umbrella of “fixed” costs will be your stop loss insurance. We alluded to this earlier, but you’ll likely be evaluating this insurance cost in 2 flavors.
The first is your Specific Stop Loss, which is the amount of money you, the employer, will fund for any given employee or dependent. This may be as little as $25k or upwards of $250k per person. Regardless of the level you choose, the stop loss insurance company is promising to pick out that excess risk above the threshold of the insurance. But, this isn’t the only insurance coverage your stop loss vendor will likely provide. Many employers also choose to cover themselves with an Aggregate Stop Loss, or a worse case scenario. This coverage is not per person, but for the entire company’s enrolled membership. Aggregate Stop Loss provides you with that number that gives you your maximum risk.
Variable Costs
Variable costs are just that, variable. You can’t know exactly how much your company’s plan will pay out in claims every week, every month, or every year.
Your stop loss underwriter will provide you with 2 numbers you want to pay close attention to. The first is your aggregate deductible. This amount is the number we mentioned previously as your company’s worst case scenario, in which you could risk paying yourself in claims before the stop loss insurance could pick up and pay for the remainder. This is something to keep in mind when budgeting your risk tolerance. If you add your total fixed costs plus your aggregate deductible you can find your maximum risk.
If you combine your aggregate deductible and your annual projected fixed costs you can compare that number versus your current projected fully-insured annual insurance costs.
If your combined totals at maximum expenses are equal or less than your fully-insured costs, pursuing a self-funded or self-insured health plan is a valuable option for you. Some employers are even willing to gamble with a maximum worse-case scenario that is 10% or 15% above their projected fully-insured health insurance plan since they know they can pull more levers to control the costs of care moving forward, and they see this as a calculated risk versus waiting for the next annual renewal of 7% to 15% from their incumbent insurance company.
But, what did those “Agg Factors” on the stop loss insurance proposal tell you? Well, that aggregate deductible you are using as a worse-case scenario is not a static number like the threshold you are choosing for your specific per-person risk or specific deductible. Your aggregate deductible changes based on each enrolled person on your plan every month. So, when you look at your annual aggregate deductible, you need to understand that your aggregate deductible can grow or shrink based on the number of plan participants you have each month.
If your underwriter is willing to shave some money off your aggregate factors, but not the cost of your specific or aggregate insurance costs, you get a pretty good idea of what will work in your favor or against you when it comes to evaluating your company’s risk profile in order to provide a self-funded health plan.
So, what are you?
You are a perfect candidate to explore some version of self-insured or self-funded health insurance. You are the fiduciary responsible to do the due diligence and you have the duty of care on behalf of your employees to provide them with the best care, cost, and quality of health plan available.
If you don’t perform the basic exercises and explore the offerings from a TPA in conjunction with a trusted stop loss vendor, you are at risk of violating that trust and duty.
And, if you do perform these basic exercises, you will become a more informed consumer who understands what you are purchasing. At the same time, you will learn about valuable point solutions that can create cost savings and life-giving care to your employees, which you had likely outsourced to your trusted insurance vendor. You just can’t afford to outsource the invaluable care of your employees.
