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To Self-Insure ... Or Not?

Many companies have found that self-insured healthcare -- combined with effective wellness programs -- saves money and aggravation. But healthcare reform may prove to be a disruptive factor.

Sunday, October 16, 2011
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A few years ago, Matt Philips got his life back -- and the wake-up call to improve his health and lifestyle came from his own company.

Specifically, it came via a wellness screening, a free voluntary service offered by his employer, The Scooter Store, as part of its self-funded healthcare program for more than 2,700 employees around the country. The New Braunfels, Texas-based company provides people who have limited mobility with scooters, power wheelchairs and other equipment. (You've probably seen their infomercials on TV.)

Deanna Scott, vice president of human resources and operations, says she remembers receiving an email last year from Philips, a distribution-center manager for the Pittsburgh region, that brought her to tears: "He wrote me, 'You guys really got to me. After my biometric screening, I realized that I just went home and sat on the couch ... and was very overweight.' "

That's when he started walking every night. A year later, he had lost 100 pounds and his wife, who started walking with him, lost 45 pounds.

His email thanked Scott and the company for "giving him his life back," Scott recalls. Since then, Philips has lost an additional 35 pounds and has inspired others at his location to start exercising and losing weight.

His success story was possible because of The Scooter Store's nearly four-year-old wellness program, an integral part of its self-insured healthcare plan, which was implemented 10 years ago after the company was bombarded with several consecutive years of ever-increasing healthcare premiums.

"You can't absorb a 12-percent-to-14-percent increase in costs every year and still make a profit," Scott says, adding that the company felt passing the increases along to employees was not an option. "It was important that we be competitive and we try to keep costs as low as possible for our employees, so they can make a good living.

"As we started to grow, it became apparent that benefits were a huge cost and, in order to control that cost, we found that while it may be a little more work ... [self-insurance] does give you much more flexibility and allows you to provide a better product to your employees than you might be able to afford if you just were insured," she says.

For The Scooter Store, self-insurance costs 30 percent less than insurance -- and the wellness program helps control those costs, which are strong incentives for effective implementation.

However, adds Scott, "We don't just do self-funded to save money. We also do all these other things because, No. 1, it's the right thing to do for our employees, and two, they're going to be healthier, happier and live longer, and three, it is going to cost less."

It's thinking like this that's led to the growth of self-insurance in recent years. More than 59 percent of American workers are covered by self-funded plans, according to a 2010 report by the Oakland, Calif.-based Henry J. Kaiser Family Foundation and the Health Research and Educational Trust.

The percentage of covered workers in self-funded plans increases as the number of employees in a firm goes up. Covered workers in mid-to-large firms (200 or more workers) are more likely to be in a self-funded plan than employees in small firms, at 83 percent versus 16 percent, respectively. In addition, 80 percent of covered employees in firms with 1,000 to 4,999 workers and 93 percent of covered workers in firms with 5,000 or more workers were in self-funded plans, according to the Kaiser/HRET report.

To boil it down, more and more companies are turning to self-insured programs for a variety of reasons: They can't continue to absorb continued insurance-premium increases, nor do they want to pass them along to employees. They also want greater flexibility in design and services than traditional insured programs can offer; they want to create a single plan across multiple states, which is not possible with traditional insurance programs; and they take the bet that they can use effective wellness programs to reduce and prevent claims.

More Flexibility

"When you go to self-insurance, you have more flexibility in terms of the design of the plan," says Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute in Washington.

"While self-insurers don't have to comply with state mandates -- and there are an estimated 2,100 [mandates across the country] -- most employers that self-fund offer pretty good benefits," he says. For example, self-insured companies will provide automatic coverage for newborn children, but may not cover infertility treatments or chiropractic care.

"There are the obvious savings opportunities [from self-insurance] in terms of premium taxes, plan-design issues, [and] cash flow, but I would say the bigger issues are around flexibility," says Chris Renz, a San Francisco-based partner and healthcare consultant at Mercer.

By "flexibility," Renz isn't just talking design flexibility, but also about the level of services you're purchasing. "When you purchase an insured product from a health plan, you are not just getting a benefits package but a set of administrative and management services that they've decided to include," he says. "There's not a lot of choice about whether you pay for those or not."

In a self-insured program, however, an employer can decide which disease-management services it wants to purchase, what level of administration it wants to get and it can dial up or dial back the intensity of management and administration as needed. "That's a pretty good deal," Renz says.

What's more, as more employers invest in health management and wellness programs, it's only when you're self insured, he says, that you can get an immediate and direct benefit to your health costs. "If you are insured, you may ultimately see some savings in lower premium increases in the future, but the impact is delayed and may be spread among other employers," he says.

True, self-funding is more work, requiring the employer to manage the funding and hire a third party to administer its program. Plan design, for example, has to be carefully considered; although self-insured plan coverage is not governed by individual state regulations, it must still comply with a variety of federal laws, including the Employee Retirement Income Security Act, the Health Insurance Portability and Accountability Act and the Consolidated Omnibus Budget Reconciliation Act. 

Self-funded does not mean avoiding all insurance, either, say the experts. Insurance mechanisms such as stop-loss coverage guard against high claims breaking the bank.

As for the negatives of self-insurance, Renz adds, the most obvious one is the cost-unpredictability factor.

"If you have insured coverage, the premium rates are set for the year and you know what your costs will be for that year," he says. "They could increase significantly the following year, but you know what they would be for that year. That's why many smaller self-insured operations use stop-loss insurance as a hedge against unexpected claims spikes. Larger employee bases, however, have a larger risk spread and, therefore, more predictability."

This lack of predictability, say experts, means self-funding may not be a good idea for companies for whom annual fluctuations in claims payments might be especially problematic, such as companies with fixed government contracts that include healthcare costs, or public-sector organizations that cannot easily increase their revenue sources.

The Tech Factor

While most companies -- self-insured or not -- have wellness programs, there's an added incentive for self-funded companies to ensure their programs are effective: By potentially preventing disease and reducing the severity and frequency of claims, wellness programs can have a direct and immediate impact on the company's -- not an insurer's -- bottom line.

Technology now lets HR do a better job of managing self-funded plans, says George Pantos, executive director of the Healthcare Performance Management Institute in Bethesda, Md.

"The software available now gives us better insight into our plans, a better idea of where benefit bucks are going and where we see the greatest impact," he says. "It lets us look at the year 2010 and see where the claims were. We're now able to extract all the prescription-drug data and clinical data."

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Thanks to data warehouses and predictive-modeling technology, says Pantos, HR can determine that, going forward into the year 2012, for example, an organization may have 13 people at high risk because they've been prescribed diabetes medication. Thus warned, HR can hire third-party vendors to intervene with the employees to ensure they get the support and encouragement they need to become healthy while protecting their anonymity. 

Scott says the Scooter Store's "Live. Work. Be well" program includes biometric screenings and wellness-awareness campaigns, group athletic events such as the Annual Couch Potato 5K Run/Walk, and "Be Well Bucks" incentives that reduce employees' healthcare contributions if they participate in WeightWatchers or other health-improvement programs.

"We try to be very employee-centric and customer-centric at the same time," says Scott. "We want to be an employer of choice."

Reaching employees like Philips is not a one-size-fits all approach, says Jim Winkler, a consultant with Aon Hewitt's health-and-benefits practice in Norwalk, Conn.

There are ways to be more targeted and sophisticated the way consumer-marketing companies are, he says. "The food companies have figured out how to get us to eat the bag of chips, because they're really good at that. We have to be just as good in helping people to understand why eating the bag of chips is probably not a great idea.

"I think there's an opportunity for employers to do those kinds of data analytics," he says. "For example, putting in a smoking-cessation program is a good idea, since probably 10 percent to 20 percent of your population most likely smokes. But, what should the program look like, what kind of incentives and penalties should it have, and how do you communicate the messages? Because telling people that the Surgeon General has advised us that smoking is not good for your health is not going to work."

Instead, good programs are based on the understanding that there are different ways to get the message heard. "There's a segment of [the smoking] population that, if you tell them 'If you continue to smoke, you won't walk your daughter down the aisle at her wedding,' it really resonates. For somebody else, it could be as simple as 'I'll give you a hundred bucks if you stop smoking,' and they're very motivated by that."

 

The Wild Card

Healthcare reform will enter the to self-insure-or-not decision process when the Patient Protection and Affordable Care Act's healthcare exchanges go into effect in 2014, potentially impacting the growing trend toward self-insurance.

"Come 2014, individuals and small companies will be able to buy into the exchanges," says John Lapinski, a principal with Buck Consultants in Detroit. As time goes on, larger companies will be able to, as well. This is already leading some employers to question whether they want to continue to be in the health-insurance business, he says. "If the government is going to set this mechanism for the employees to just go out there and buy their own insurance, then some employers will say, 'We'll pay the penalty -- $2,000 or $3,000 per employee -- and that's less than we're paying today. So, we'll give them an extra bump in pay and let them go out and buy health coverage themselves.' "

The wild card is how the insurance market will react to the PPACA changes, says Mercer's Renz.

"With healthcare reform and the medical loss-ratio requirement, insurers are going to be limited to what they can retain as a percentage of profits," he says. "That's fixing their revenues on those products. Insurers are now looking at ways to manage their costs and services provided, if those revenues can only be limited to 15 percent of premium. It could lead employers to look to self-insurance if they want more services."

Should companies elect to maintain their self-insured programs, says Pantos, it'll be because "they see themselves as doing the right thing by their employees. They see themselves giving benefits to employees as a matter of workforce philosophy. They won't have to go into government-run exchanges and will offer their employees more choice and fewer restrictions."

And, in the end, if considering what employees want is a smart business decision, then carefully analyzing the benefits and drawbacks of self-insurance will continue to be a standard good-business practice for companies both large and small.

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