For the past two decades, health care costs have been the fastest growing component of the corporate budget. There are many causes of this double-digit rise, including new costly medical technology, personal lifestyle habits, cost shifting from government programs and the aging of the population. There are also many strategies employers have implemented to reduce the impact of run-away costs. Smart employers have combined cost management strategies with self-funding to hold benefit costs to a minimum.
Over 65% of U.S. employers effectuated some form of self-funding for their medical benefit program in 1991. That percentage has increased steadily over the past decade as employers have realized the strong positives self-funding offers in helping control costs.
More and more companies are turning to self-funding to avoid unnecessary charges and costs and to gain control over health care expenditures. Through self-funding, the employer is in control of the benefit dollars, the benefit design and the reserves. The result is savings in benefit payout.
The rationale of employers in implementing self-funding makes sense. That is to lower the ongoing fixed costs associated with the benefit program and pay only for claims experienced by their employees. Since over 80% of employees and dependents experience low dollars in claims, the savings for these employees are great.
For those employees and dependents with catastrophic claims, the other 20%, employers purchase stop loss insurance to minimize risk. Stop loss insurance for self-funded benefit programs is inexpensive compared to premium rates for fully insured benefit programs and protects the employer from high dollar individual and group claims, therefore eliminating the risk of catastrophic claims.
Why Self-Funding Saves Benefit Dollars
Benefit plan are established to pay the claims of Plan Participants to help pay the costs of medical or other covered care. Self-funded plans provide more “bang for the buck” since they concentrate more of the benefit dollar into paying employee claims. To translate this savings, for a benefit program with 80 employees with $240,000 of claims payments, the average amount paid by self-funded plans to pay these claims is $288,000 while insured plans average $375,000. This is an average savings of 23% for self-funded plans.
Self-Funding Is For Small Business
Until recently; self-funding has been an option only for the larger employer with over 100 employees. However, insurance rates have increased dramatically in recent years and the smaller employer has been forced to seek new approaches to save benefit program dollars. This has driven the introduction of new self-funded options for the smaller employer, even with as few as 25 employees.
Small employers have been in the dark about their health care claims expenditures. Since insurance companies and HMOs do not provide the smaller employer with detailed information on claims paid, there has been no data to access and analyze where or why benefit dollars are being spent.
All self-funded options from Avalon Benefit Services include reports that list each expenditure and analyze total expenditures made. This provides the employer with the information to analyze benefit expenditures and eliminates surprises at the annual renewal time. Since information is control, this gives the employer control of the benefit program.
Avalon Benefit Services has led the way in developing and marketing self-funded options designed for smaller employers. Product offerings include low stop loss levels that fit the budget of the smaller employer, cash flow management approaches that ease the burden during high claims payment periods and specialized claims processing systems that provide high quality and personalized service.
Control Elements To Include With Self-Funding
Self-funding has proven to be a cost-saving strategy for employers that have implemented the approach in the past. Employers that have experienced the most success with self-funding have carefully implemented certain elements of cost control along with their self-funded program to help control claims payments.
The successful strategies have included:
- Selecting a TPA that successfully manages claims.
- Implementing a benefit design that properly includes patient cost-sharing.
- Implementing pre-certification, other utilization control approaches and early intervention case management.
- Implementing programs that gain payment discounts from cost effective providers and directing their employees to these providers through benefit design.
- Implementing tax advantaged strategies.
- Educating and rewarding employees to change poor health habits and lower claims.
- Implementing a well conceived written plan description to reduce confusion on the definition of covered services and the resulting disputes that lead to overpayments in the benefit program and unnecessary legal costs.
- Aggressively addressing areas of unusually high expenditures in the benefit program by early identification and timely strategy implementation.
Implementing and operating a self-funded program is as easy as implementing an insurance program. Most employers rely on a third party administrator (TPA) to implement the self-funded program. TPAs provide special skills such as experience with government regulations, trained claims personnel, specialized computer systems and in-depth knowledge of benefit design options. The TPA can help in all aspects of the program, including benefit design, defining stop loss needs, selecting a stop loss carrier, drafting required documents and benefit booklets, paying claims, collecting premiums, preparing management reports, analyzing claims expenditures and recommending design options to reduce costs.
The TPA selected should have a strong track record of client satisfaction and of paying claims. Since claims constitute over 80% of the costs of a self-funded program, claims handling ability is the most important element to consider when selecting a TPA. TPAs vary greatly in their ability to handle claims, and it is important to find a TPA with a strong record of holding claims payments to the lowest level without the patient being balanced billed by the provider of service.
Avalon Benefit Services, Inc., as your TPA, and your broker can help incorporate these elements into your program.