Is Your Self-Funded Health Plan Unhealthy?

Here are some conditions, symptoms and treatments for ineffective self-funded medical plans.

This article accompanies To Self-Insure ... Or Not?

Sunday, October 16, 2011
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Among large employers today, self-funding your health plan is the best way to manage healthcare costs. Despite this surety, do you experience ongoing doubts as claims increase year to year?

These doubts can be amplified when other managers (usually the CFO), armed with some new idea from a seminar or article recently attended or read, begin asking difficult questions about the plan: how it operates, why it's costing so much and why the plan does not employ one strategy or another.

So how do you go about determining whether or not your plan is in trouble? How do you identify the conditions, symptoms and warning signs, interpret those signs and take action to correct problems to get your plan on the right track?

Read on.

Condition: High Claim Levels

High claims do not necessarily mean the plan is failing. As utilization generally increases from year to year, large claims happen, sometimes several at once, making costs seem out of control. Determining if these increases are managed as best as possible or indicative of a plan that is failing is the key.

Co-morbidities: High-Cost Providers and Utilization Frequency

Today's healthcare environment is changing more rapidly than ever before. New physician practices and healthcare facilities are emerging on a regular basis and the self-funded plan manager must keep up. Plans that fail to closely examine their network utilization and associated charges can become ineffective at controlling costs as their members seek care from the highest-cost providers and facilities. This is a sure sign a plan is not on the right track and will likely continue to see rising costs.

Treatment: Monitor Claims and Utilization Regularly

Effective plans monitor utilization on a quarterly or monthly basis, including costs, charges and discounts. Look for spikes or unusual occurrences, such as higher-than-normal charges. The cause of these anomalies can vary; some are normal, but others could be due to changes in network or contract status of a particular provider or the emergence of a new provider. Be prepared to make mid-year changes to networks and even benefit design to prevent runaway costs due to some external change.


Then, dig deeper.

When examining networks, consider both facility and physician charges. Determine where your population is getting care and if those services are being provided by the lowest- or highest-cost providers within your network.

Watch out for high-cost free-standing surgical centers.

Identify high charges from unique physician groups and monitor where those physicians are performing their services.

In general, once high-cost providers are identified, consider negotiating with those providers, restricting them to your out-of-network tier or eliminating coverage at those facilities or physicians altogether if those services are available in other venues with similar quality and outcomes.

Know the relationship between high claims levels and utilization frequency.

Accelerated claim levels from period to period, without an associated spike in utilization frequency, can mean you are paying higher costs for the same amount of services. This can be indicative of a change in network discounts or of the difference between one network and another if you recently changed networks, carriers or third-party administrators.

Remember, network discounts are where the real money is. Don't chase savings by looking to lower administration costs, as administrative costs are only a small fraction of the total cost.


Condition: Adverse Selection

Among conditions of an ailing plan, adverse selection is probably one of the hardest to diagnose. Symptoms are not readily apparent, as adverse selection does not present with overt signs such as high cost claims. Rather, adverse selection causes the plan to cost more in a way that may go undetected and is commonly caused by multiple plan offerings.


Statistics show that only about 5 percent of the population accounts for nearly 40 percent of the claims, and nearly 60 percent account for less than $1,000 each in annual claims. Thus, where the members of these populations enroll and what they contribute in payroll deductions can dramatically affect your plan's financial performance.

Co-morbidities: Fully Insured Plans and Opt-Outs Credits

Consider carefully the offer of any fully insured product such as a community-rated HMO alongside a self-funded plan. If healthy individuals elect the fully insured plan, you trade low claim costs for high fixed premiums. Opt-out credits may only be costing you money and not doing what you intended.

Treatment: Price Plans Correctly and Eliminate Opt-Out Credits

Optimize enrollment by pricing plans based on their actuarial difference, not solely on the plan's experience.

Pricing based on the plan's experience may cause migration of low-cost healthy individuals to the plan with the lowest contribution, eroding gross employee-premium contributions. Regardless of the number of plans offered, the plan is responsible for the aggregate of all claims of the population and, as such, enrollment should be as balanced as possible among all plans with each plan carrying its fair share of both sick and healthy people. This ensures you maximize employee-aggregate contributions to your plan.

With respect to opt-out credits, the initial intent of these credits was to incent individuals to enroll in another employer's plan, thereby saving you money. If your plan mirrors the current market in benefit levels and cost share, and is not a "plan of choice," those who opt out are likely to continue to opt out given the payroll contribution for participating in your plan.

For those that do now enroll, remember that 60 percent of individuals have less than $1,000 in annual claims. Charging even a modest payroll contribution each month means odds are you'll be collecting more in payroll contributions from the majority of the former opt-out population than you'll pay in claims. This is on top of savings derived from eliminating the opt-out credit.

Condition: Ineffective Stop-Loss Protection

A characteristic of a self-funded plan destined for a crash is a poorly structured stop-loss contract. This condition can manifest itself in many ways, from the feeling that the plan's fixed costs are too expensive to the feeling that large claims are never reimbursed by the stop-loss.

Co-Morbidity: Coverage Gaps and Inappropriate Deductible Levels

Contracts with low deductibles, gaps in stop-loss-contract provisions and variances between the plan document and the stop-loss coverage can cause significant pain and discomfort, but fortunately these can be treated


Treatment: A Hard Pill to Swallow -- Lifestyle Changes May Be Needed.

One of the primary components of a self-funded plan is the appropriate assumption of risk. However, many plan administrators are risk averse and attempt to remove as much risk as possible by having the stop-loss deductibles so low and the accompanying premiums so high, that one wonders if the plan would be better off fully insured.

Set stop-loss deductibles high enough so that premiums don't eat into the savings garnered by being self-funded. This can be a difficult lifestyle change for an organization that is particularly risk averse. However, managing networks as described above will go a long way to control costs.

Remember, plans that attempt to simply hand off high costs to someone else pay those costs eventually, no matter what.

Ensure stop-loss provisions such as incurred periods and paid periods line up with expectations. Understand that there is always a chance that a large claim incurred in December that continues into January, may slip by the stop-loss thresholds of both contract years, leaving the plan to pay 100 percent of the charges.

Ensure you have the proper run-out and run-in protection, as opposed to having a low deductible.

Make sure that the plan document is aligned with the stop-loss contract's limits and exclusions. Your plan document should not cover a service that is excluded under your stop-loss contract. This includes eventual lifetime-dollar limits on essential benefits as well, considering we are marching towards unlimited lifetime maximums for all plans grandfathered or not, under healthcare reform.

Condition: Commitment-Phobia

We all have heard that expression as it relates to the depth of one's commitment to one thing or another and unfortunately, it can be applied to self-funded plans. That's because too many organizations have trouble committing to what it takes to be a self-funded plan -- ensuring you have enough reserves.

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Treatment: Act More Like an Insurance Carrier.

Ineffective self-funded plans tend to avoid accepting the notion that they are, for the most part acting like an insurance carrier. Self-funded plans accept risk, collect premiums, adjudicate claims, some make claim-fiduciary decisions -- all similar to the functions of an insurance carrier.

Like a carrier, self-funded plans should set aside reserves from year to year. Avoid the pitfall of believing a low-claim year will reoccur. Accumulate reserves during the good years to build a bulwark against high claims and utilization during the bad years.

Once self-funded, you need to commit to doing all the things a self-funded plan must do in order to be successful. Measure the plan's success over the long run, not just the last 12 months.

Condition: Specialty-Drug Addiction

High levels of Rx utilization among specialty drugs can cost a plan dearly. In the past, specialty drugs were usually reserved for rare, short-term conditions, but pharmaceutical manufacturers are increasingly producing specialty drugs that treat common, long-term chronic conditions.

Co-Morbidity: Rx Costs Increase Consistently Above Trend

Understanding pharmaceutical contracts can be the most complex part of your plan. Average Wholesale Price, discounts and rebates can be difficult to truly quantify. Regardless, if your Rx costs are consistently above trend, it's a pretty good bet you are not getting a good deal.



Negotiate prescription-drug contracts with guaranteed rebates and periodic auditing and reconciliation if contractual guarantees are not attained. Look for specific utilization-management opportunities that address your plan's prescription use, not generic "catch all" programs.

All major pharmacy-benefit managers produce detailed utilization reports. Make sure yours also produces ideas to change utilization and lower costs. Ensure appropriate utilization of specialty drugs, engage in physician outreach to modify prescribing habits; oftentimes, this saves both the plan and the patient money.

Condition: Myopic Vision

Too many plan administrators don't fully see what's going on in their plan.

Treatment: Open Your Eyes to a Plan Audit

The best-run self-funded plans conduct independent claims audits at regular intervals, typically a thorough review every three years. More-frequent eligibility audits may also be warranted as well as verification of plan-coverage rules to ensure services being paid for are indeed covered services under your plan.

Look for subrogation opportunities and see if the plan's subrogation process is being followed. Know your subrogation process. Does your plan pay and pursue or pursue then pay? Verify network discounts are being applied correctly and that the actual plan design, such as cost share, is being administered properly.

The audit should include a focus on ancillary functions.

Administrative packages include a variety of ancillary services such as wellness, care and disease management, and so on. These should be integral to your plan, but they should also be effective.

Measure return-on-investment of these programs and discontinue those with no evidence of efficacy. See if your care-management program actually engages the individuals targeted and base your evaluation on clinical outcomes.

Keep an eye out for new ancillary services and products that emerge on scene periodically, such as access-management services that provide individuals with cost and quality data for various providers that offer the type of service needed. These services can help steer members to lower cost, high quality providers.


Today's healthcare space is more dynamic than ever before. Regulatory changes, market changes among provider groups, and hospital mergers and consolidations all pose challenges unlike those seen in the past.

Running a successful self-funded plan has never been more complex and, while daunting, the self-funded plan is best positioned to react to these changes. HR leaders who recognize the symptoms of the various market forces and how they affect the plan will be best aligned to establish and maintain a successful, effective plan.

Robert Marcantonio is a consultant with Cammack LaRhette's health & welfare clients to develop optimal plan designs, funding mechanisms and communication strategies that help employees become more engaged with their benefit programs. He has more than 20 years' experience as a business professional, and 10 years of experience in the employee-benefits field.

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