How do you even read a self-funded plan proposal?
When you start evaluating the merits of self-funding your health plan, you want to know if you are unlocking the door to cost savings and if you are gaining control over when, where, and how much you and your employees are spending for medical services.
When you compare the fully-insured health insurance quotes, you can see comparisons of plans and prices upon which the only variable to cost is the number of enrolled plan members (employees and dependents). But, when you start to peel back the layers of vendors, service providers, and catastrophic insurance contracts, the comparison is an incomplete picture since the frequency and severity of those same plan members’ encounters with our healthcare system are not a tidy and predictable monthly expense.
We must now use big broad terminology and discuss fixed expenses and variable expenses as two separate points of focus and then build the combined pricing model to judge the potential outcomes against the old way of pricing from the fully insured program. In essence, the old fully-insured total annual expense becomes the litmus test for potential savings versus the combined fixed plus variable expense world of self-funded health plans.
Let’s say your fully insured employer group health plan today spends $3 million a year (roughly 300 employees). As long as the combined fixed costs along with the worst-case scenario of variable costs are equal to or less than that $3 million mark, you have a pathway that makes financial sense.
The Fixed Costs
Let’s assume you want to endeavor this simple exercise. First, you need to find your preferred Third Party Administrator (TPA). Often this is a crapshoot based on your broker or consultant’s recommendations which they offered to you based on their search for a TPA that has access to a specific solution for your company such as access to a well-known and trusted provider network or hospital system or a particular TPA's penchant for unique cost savings strategies.
Once you have the TPA selection in place you want to combine that TPA with a Pharmacy Benefits Manager (PBM) partner. Ideally, this will be a PBM that already has a working relationship with your selected TPA, and then you want to determine the best strategy for provider network choice. You can now start gathering the pricing of your fixed administrative fees as Step 1 of your fixed costs.
Once the basic parameters of TPA, Network, and PBM are in place, it is time to engage a stop-loss vendor for insurance quotes to protect your company from medical claims that exceed the risk that is tolerable for your company. The stop-loss provider will need the information about your TPA + PBM + Network setup to appropriately price their insurance offering, and since they are no dummies they know historically how well each of these vendors can manage the allowable expenses that their insurance product is potentially at risk for paying in the event of large claims. Their quote will make up the last portion of fixed costs in terms of the price per person of insurance you will purchase to protect yourself from large medical claims.
The Variable Costs
The stop-loss vendor will also price your worst-case scenario of variable expenses as part of their process. This number that you look for in their quote is your aggregate deductible plus the aggregate corridor at which point they become the responsible party.
Once you add the numbers up between your fixed cost vendors and your worst-case scenario of variable claims often called maximum claims, you have the answer of cost potential versus a full-insured scenario.
But, it isn’t advisable to look only at the maximum costs. Buried inside those TPA and Stop-loss quotes are another number, this number will be labeled "expected" claims.
Expected claims are the estimate of what you would pay if everything averages out and you don’t have a catastrophic year of medical expenses. When you add your fixed costs and the expected costs together, this is the number that can be used as a better gauge for your upside potential when you transition to a self-funded health plan. This number is the goal to shoot for and it is often a 20-percent or greater differential in savings which makes all the extra work to invest in such a transition worthwhile, especially when you begin a new trajectory for your company’s year-over-year increase versus the traditional 7% or larger increase that is historically experienced in fully-insured health plans.
Attacking the Variable Costs
There are most likely going to be additional solution vendors and their associated cost structures that should be discussed in depth. These additional solution vendors are going to provide services to your plan in an effort to address a higher engagement with your employees, or they are going to exist behind the scenes to reduce the costs your plan pays for the various healthcare services. These vendors exist to reduce the cost you pay on claims, thus they exist to reduce your variable costs. However, their associated fee structures will vary. Typically these fee structures fall into one of two categories. The first is a per-employee-per-month option where they simply charge a flat rate. This option does increase your fixed expenses, but if they do their job they are well worth their fees based on the variable expenses they save your company. The next option is a solution vendor who charges a percentage of savings. Their fees are often considered a variable expense as well since there is a chance you never pay any fee if they don't save you and your employees' money. When an add-on solution vendor charges a percent of savings fee structure, you do need to understand and verify that your chosen stop-loss vendor recognizes those fees in a manner where they are covered by your insurance contract, otherwise, you will encounter additional expenses that you were not expecting, which can be eye-opening if you learn this caveat during a stop-loss claim and the insurance company leaves your company to pay more money than you budgeted for your overall financial risks.
Regardless of the fee structure, if the additional chosen vendors do their job appropriately, you and your employees will realize very tangible and very large savings.
Final Thoughts
This is a pathway that extends beyond just this initial exercise in reading and judging quotes. The financial impact and savings are just the initial step, and if done right it is only the first reward you and your company will reap. Beyond financial savings in the first year of transition, this pathway opens more opportunities to reduce costs and stabilize the annual expenditure of your company. The other employers who have done this well end up enhancing their benefits and creating a competitive advantage, especially when they share these savings with their employees in a way that is tangible either through simple one-time acts like a payroll deduction holiday or through long-lasting rewards such as increased wages, starting or increase employer contributions to their 401k, or investing in educational programs.
And, as an employer, wouldn't you rather be on the pathway to unlock an ability to share the rewards instead of simply trying to absorb the uncontrollable price increase each year?
