April 8, 2013

Employers weighing self-insurance as benefit cost hedge

HBJ File Photo
HBJ File Photo
Bill Husic, executive vice president and actuary, Lockton Cos.

More Connecticut employers are seriously considering a move to self-insured health plans as a way to bypass some of the extra costs and mandates from the federal health care reform law, industry experts say.

It's a strategy shift that some insurance brokers and consultants say they are urging their clients to strongly consider, even for businesses with fewer than 250 workers, which have traditionally shied away from self-insurance because of the increased risks associated with taking direct control of paying employee health claims.

It's also a trend that insurance industry regulators and officials will keep a close eye on. If it gains steam, it could create major issues for Connecticut's fully-insured marketplace and its insurance exchange, leaving insurers to compete for sicker, older patient populations deemed too risky by employers to self insure.

"From an independent actuarial perspective, I can't imagine anything less expensive than an employer with credible claim experience who offers a medical plan under a self-insured arrangement," said Bill Husic, the executive vice president and actuary at Farmington benefits consulting firm Lockton Cos.

Self-insured health plans differ from fully insured plans because they shift the responsibility of paying for medical claims from the insurer to the employer.

Insurance carriers and other firms are hired to act as third-party administrators, processing the claims, issuing ID cards, and handling customer questions.

Husic said he has been pushing more of his clients to consider self-insuring recently because those plans are exempt from several key measures under the Affordable Care Act that are likely to raise the cost of providing health benefits.

Self-insured plans, for example, won't have to pay new health insurer fees, which are expected to be passed onto fully-insured plans raising costs by as much as 4 percent. Employers that are self-insured also won't have to comply with new community rating guidelines and essential health benefits mandates, which are also seen as new cost drivers.

Traditionally, self-insurance has been reserved for bigger companies that could spread the risk of claims over a larger population of workers. But the Affordable Care Act — and double digit premium rate increases felt by many Connecticut employers in recent years — are spurring businesses with fewer than 250 workers to rethink their benefit plans.

Shouldering more risk in a bid to potentially reduce, or at least control, health care expenses is increasingly being seen as a viable alternative for many smaller companies.

Farmington's Ovation Benefits is expecting as much as 20 percent of its employer group customers with 250 or fewer workers to move to self-insured plans in the next year or so, said Brian Driscoll, the firm's chief operating officer.

Driscoll said clients that make the move could avoid 5 percent in state and federal taxes upfront.

Brooks Goodison, president of Diversified Administration Corp. — a third party administrator in Marlborough — said his company has seen an 18 percent increase in business over the past year thanks to more employers of all sizes moving to self-insured plans.

Diversified's sweet spot is working with companies with five to 250 employees.

"Employers are trying to escape health reform," Goodison said. "There is no doubt that is happening."

Besides allowing employers to side-step certain mandates and taxes, self-insurance also allows firms to take more control over their health plans, Goodison said.

Since employers pay claims under a self-insured model, they collect claims data, which allows them to better understand cost drivers. That gives employers the opportunity to try to combat those cost factors with wellness programs that aim to keep employees more healthy.

That is one of the main factors that drove East Hartford lubricant distributor Booth Waltz Enterprises to shift from a fully-insured to self-insured health plan on Jan. 1.

Booth Waltz chief financial officer Doug Click said the company, which saw its workforce recently double in size to 225 employees thanks to a 2011 acquisition, was tired of being hit with double-digit premium rate increases for the past five to six years without knowing what was driving the higher costs.

Click said the firm's former Connecticare fully-insured health plan, which was purchased through CBIA Health Connections, provided little transparency about costs so the company self-insured to "control their own destiny."

Under their new plan, Booth Waltz offers the same benefits and has held employee deductibles in check at $1,000, Click said. They are also getting valuable claims data showing where most of the health care spending is coming from. The firm is sharing that information with its workers and providing perks and incentives for employees to get healthier and choose lower cost generic drugs.

Booth Waltz, for example, is now offering a free smoking cessation program to employees, a benefit that wasn't previously covered by the fully-insured plan.

"We've raised employee awareness of what health care costs," Click said. "Now we are seeing employees take more interest in their own health care spending."

Click said the goal for Booth Waltz is to hold annual health care cost increases in the single digits or flat. Through the first three months of 2013, Click said claims have come in below expectations, which is a good sign.

Of course, self-insured plans aren't right for all businesses and can increase costs if a proper plan design isn't implemented, brokers say. Fully-insured employers thinking about making the switch must be willing to shoulder more risk and face the prospects of month-to-month fluctuations in claim expenses, which can impact cash flow.

Brokers say the model works best for firms with younger, healthy employees because they are less likely to experience higher healthcare utilization.

Meanwhile, insurers in recent years have been responding to market demand by unveiling or retooling products that aim to hedge some self-insurance risks.

That includes new, more aggressive stop-loss insurance, which is a key component of self-insured plans. Stop-loss plans mitigate a company's risk if there are unexpectedly high claims.

Essentially, the stop-loss defines the maximum dollar amount that employers must pay for their claims for both individual employees and the overall company. After a certain threshold is reached, the insurer picks up the remaining tab.

In recent years, insurers like Aetna and Cigna have been retooling stop-loss coverage by reducing medical cost caps to as low as $10,000 per employee.

Meanwhile, if more small-to-mid size employers in Connecticut decide to self- insure it could pose risks to the state's health insurance exchange, experts say.

If firms with younger, healthier employees make the switch, it could leave the state's health exchange with a disproportionately higher number of older, sicker residents who will likely have higher health care costs.

That would force insurers to charge higher premiums for fully-insured plans offered inside and outside the exchange, potentially making those plans unaffordable.

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