Increasingly, those plans are self-funding. The vast majority of large companies – those with more than 5,000 employees — have turned to self-insurance as they reshape their total rewards portfolio and drive employee accountability. Broadly defined, self-funding or self-insurance programs are those in which the employer provides employee benefits by electing to pay claims directly, rather than contracting with an insurance company to insure their employees.

In 1990, some 9.5 million American workers were covered by self-insured employers, and by 2000, the number jumped to 50 million. As recently as 2010, it was expected to top 100 million. Large employers were the first to adopt self-insurance, since they had enough employees to do risk pooling just like an insurance company would. As of 2007, more than 89 percent of employees in large companies (those with more than 5,000 employees) were in self-insured plans.

However, the benefits are being limited to large companies: More than 70 percent of companies with between 1,000-4,999 employees are self-insured, and more than 50 percent of those with just 200-999 employees have followed suit. Even companies with between 3 and 200 employees are jumping on the bandwagon — some 12 percent of them are self-insured.

A growing momentum
Why has self-funding become so prevalent, even among smaller companies? There are several reasons that this approach has gained momentum, yet it is not without its challenges on the road to successful implementation. Companies with self-funded plans have two key goals in mind: to reduce costs, but to also ensure that their employees enjoy a beneficial health plan. After all, it makes no sense to cut costs if it adversely impacts the health and productivity of the employees themselves.

Reasons for adopting a self-funding approach include:

• Greater control over costs and cash
• Major cost advantages
• More flexibility in plan design and coverage
• Reduction of regulation (enabling employers doing business in multiple states to avoid inconsistent laws and policies)
• Overall lower cost of operations
• A clear opportunity to further engage employees to focus on quality and cost of care
• Ability to focus on specific employee health problems such as smoking or obesity

Yet challenges abound. It’s not enough to merely provide a self-funded plan that shifts a greater percentage of the costs to the employee. Companies must ensure they have sufficient cash flow to meet the obligation, as well as the internal resources to manage the plan.

In addition, companies are eager to couple new plans with a head-on attack on employee bad health habits, the underuse of preventive services, and the widespread overuse or inappropriate use of care (think the use of the ER rather than urgent care clinics) by employees. Without tools to help employees make smart health care shopping decisions, employee education and engagement initiatives, and consistent support from all levels of management, self-funding will not deliver all the anticipated benefits.

Keys to success
Consistently high-performing companies have seen dramatic declines in their overall health care costs, and corresponding increases in employee wellness and productivity after implementing self-funding. The tools and techniques that have proven to be most effective in achieving sustainable benefits cover a range of issues, such as implementing wellness/fitness programs, instituting disease management initiatives, encouraging employee engagement, but most of all, providing transparency to the employee.

For the employer, it’s equally important to engage their employee base in an educational program, while simultaneously ensuring that the most affordable, quality options are accessible and transparent. For companies to reap the rewards of innovative benefit design, employees must be able to evaluate the cost, quality and convenience of health care providers and facilities.

Costs for identical procedures often vary enormously in the same zip code in the same carrier network. When equipped with previously-unobtainable information, employees can and will manage health care spending much more effectively.

Transparency of health care cost and quality is a key ingredient for a number of reasons:

• Transparency enables innovative benefit design that reflects a company’s own values and priorities.
• The most progressive and effective trends in benefit design introduce elements of consumerism: They encourage employees to shop for health care like they do for other services, and to treat health care dollars as if they were their own
• An increasing number of employers are introducing reference-based pricing, a shopping-oriented benefit design that invites employees to understand that certain procedures are relatively quality-invariant, despite high costs
• Some employers allow employees to cover costs over the reference-price out of their own pockets, while others are introducing shared-savings models to reward employees for shopping under the reference price
• Transparency helps employees avoid frustration by providing them the education, know-how and tools they need to navigate the costs, quality and choices involved when participating in this new wave of self-funding.

More than half of all personal bankruptcies are caused by medical bills. As a side benefit, transparency tools can support the employer’s total benefits program, by providing timely, relevant teaching moments through via personalized messages, disease counseling, and wellness initiatives.

No correlation between cost and quality; when true costs and unbiased quality measures are made visible, employees can make better choices. Many employees simply don’t know that for procedures like MRIs, colonoscopies or simple lab tests, there are less-expensive options that will still provide high-quality care transparency, and the resulting overall savings in their yearly health care spend, improves employee satisfaction and engagement in benefits programs.

The consumer-oriented benefit design enabled by self-funding is embraced by employees when transparency tools are made available. Making health care affordable is key to providing a competitive reward package and attracting and retaining top talent.

Successful outcomes
The results of well-implemented self-funding based on transparency are dramatic. Surveys of self-insured employers find that their employees pay on average 20 percent less than their counterparts. One national supermarket chain found that a self-funding program incorporating a health care transparency solution (allowing employees to shop for health care) resulted in a savings, on average, of $300 for every colonoscopy.

Multiply that by thousands of employees, and you can see the potential savings. Companies that are seeing the most dramatic results from their self-insured programs note several “best practices” that can help ensure consistent, long-term results.

These practices include:

• Providing a total compensation or total benefit statement that includes the value of health benefits
• Providing employees with information on provider and hospital quality
• Differentiating cost sharing for using high-performance networks
• Reference prices for “shoppable” procedures

Transparency at the programs core
While some companies struggle to engage employees, others have seen tremendous success. Castlight Health is working with some of these innovative companies to enable employees, employers and health plans to take control of health care costs and improve care through easy-to-use shopping tools and unbiased price and quality information.

The future of self-funding is reliant on the elimination of the highly guarded price game that comes with choosing health care services as well as putting health care transparency tools in the hands of your employees. That way, you can keep your health care spending trend in check.

Prater leads Castlight’s marketing and product management functions. He holds an MBA from the Wharton School of the University of Pennsylvania.