Self-Insured Health Plans [CPA Journal, The]

An Approach for Providing Real Value and Lower Costs

Healthcare ranks as one of the top costs for U.S. employers today, and healthcare spending is projected to grow at an annual average rate of 5.8% from 2010 through 2020, reaching $4.64 trillion annually. This rate is 1.1% faster than the expected growth in gross domestic product (GDP), and it will represent 19.8% of GDP in 2020, according to the Health Affairs Blog (Chris Fleming, "U.S. Healthcare Spending Projected to Grow 5.8 Percent Annually," Jul. 28, 2011, http://healthaffairs.org/blog/).

With rapidly rising health insurance premiums straining against efforts to cut costs, many companies have been forced to cut healthcare benefits in order to save money. In tiie long term, these cuts hamper a company's ability to attract and retain high-quality workers. But one option does allow companies to continue offering quality, cost-effective healthcare: self-insured health benefits.

Financial advisors should consider familiarizing themselves with this specialized area in order to better guide existing and prospective clients that seek alternatives to a fully insured plan. Deep knowledge of a self-insured health plan involves a full understanding of the scope of financial obligations, the opportunities to safeguard against catastrophic health events, and other techniques that can lower healthcare costs. Expertise in self-insured health benefits can give CPAs a competitive edge at a time when healthcare costs represent a significant burden on companies and flie U.S. economy as a whole.

Controlling Costs with Stop-Loss Insurance

Self-insured health plans allow employers to pay for individual employee health claims out of pocket, rather than as a monthly fixed premium to a health insurance carrier. Although employers assume the direct risk for payment of claims, costs are based on actual employee healthcare use. This makes them both cost-efficient and more effective than the one-size-fitsall model of a fully insured plan.

In some cases, switching to a selfinsured plan enables businesses to cut healthcare costs by 10% to 20%. Besides cost savings, several other reasons have made self-insured health plans increasingly attractive to many small businesses in the past few years; these reasons include -

* increased cash flow;

* greater flexibility in benefit decisions;

* streamlined administration; and* exemption from state jurisdiction under the Employment Retirement Income Security Act of 1974 (ERISA), and thus exemption from the state premium tax - generally 2% to 3% - levied on conventional insurance plans.

In order to maximize these benefits, selfinsured plans often contract with a health plan management provider. As mentioned previously, employers bear the risk associated with offering health benefits. But stoploss insurance exists to protect them from catastrophic costs. This can be especially useful for small businesses that might otherwise shy away from self-insured plans because of the perceived risk. Stop-loss insurance encompasses two types of coverage, discussed in the following sections. With either type of stop-loss insurance, it is important to remember that risk mitigation is most effective when coordinated by an experienced health plan management firm

"Specific" stop-loss insurance. Specific stop-loss insurance protects against a catastrophic loss incurred by any individual covered by the plan, with the deductible set at a level appropriate for the size and financial strength of the company. Under this form of stop-loss insurance, an employer pays a fixed premium each month and is liable for the claim payments of an individual up to a chosen deductible, with amounts in excess of that covered by the stop-loss carrier. Some specific stop-loss contracts don't require the employer to fund the claim and wait for reimbursement; instead, the administrator pays the claim directly from the carrier's account.

In one real-life example, a 32-year-old woman delivered a baby boy prematurely in the seventh month; the infant suffered from health issues and had to be treated in the neonatal intensive care unit for 60 days. The claims totaled $285,000. The mother worked for a self-insured company, and the employer's specific stop-loss insurance had an $80,000 deductible. The stop-loss carrier reimbursed the other $205,000.

"Aggregate" stop-loss coverage. Although specific stop-loss insurance protects the employer against a single catastrophic claim, aggregate stop-loss insurance protects against an excessive amount of claim expenditures for the entire plan. Through actuarial studies, stop-loss underwriters can estimate smaller, predictable claims; however, these projections are based on large, industry-wide samples and are therefore subject to variations and fluctuations.

Comparing Self-Insured Healthcare with Full Health Insurance

In 201 1, 60% of workers with health insurance nationwide were covered by a self-funded plan, according to the Kaiser Family Foundation. Among large employers, the number was even higher, with 82% of workers self-insuring at companies with more than 200 employees (Katie Thomas, "Self-Insured Complicate Health Deal," New York Times, Feb. 15, 2012). To better understand this shift in the marketplace, as well as the advantages of self-insurance with stop-loss protection, it is helpful to compare real-world examples of each type of insurance.

Example 1. A medium-sized textile company, Acme Corp., had a fully insured carrier and paid $1.5 million annually for its health insurance plan. At the end of the year, the company showed only $1 million in claims and administration costs. The carrier kept the other $500,000 as profit.

Acme Corp.'s main competitor, Thread Corp., was self-insured with a health plan management company overseeing its stop-loss insurance. The company's potential worst-case scenario for the year was $1.6 million. Thread Corp. paid $20,000 per month in fixed-premium costs and reserved $1.36 million for potential claims; the company could invest this money, segregate it, or use it for day-to-day business until a claim occurs. At the end of the year, Thread Corp.'s claims totaled $1 million; it kept the $360,000 it had reserved and saw a savings of $260,000.

Example 2. Small companies are not alone in adopting a self-insured approach to healthcare coverage; municipalities and unions have gotten on board as well. The city of Temple, Texas, after years of being fully insured, switched to self-insurance with third-party administration and stoploss insurance to mitigate risk. In 2010, when Temple called for proposals for both fully insured plans and self-insurance plans, it received a fully insured plan proposal that presented a 46% increase in cost to the city and its employees, and a second fully insured plan that proposed a 103% increase in cost. The self-insurance plan proposal, on the other hand, was the most affordable. In addition, it brought added advantages - greater transparency in utilization and costs and greater control over future cost increases - that could be applied to any company or organization that opts for self-insurance.

Overview of the Benefits

In essence, self-insured health coverage enables companies to offer quality, costeffective healthcare at a time when many employers are forced to cut costs - often at the expense of their workforce. Compared with fully insured plans, self-insured plans can lower expenses, increase cash flow, and allow for greater flexibility in benefit design. Moreover, they are exempt from the state premium tax. Gaining expertise in this area not only affords CPAs the opportunity to become valued guides for businesses looking to reduce healthcare costs, but it also serves as a catalyst for differentiation in the marketplace.

Joseph Berardo Jr. is the CEO and president ofMagnaCare, New York, N.Y.Jim Cusumano is the CFO ofMagnaCare.