3 steps to savings for small businesses that self-fund health care

Self-funded health plans were traditionally something only large employers considered – those with at least 500 employees. But that’s no longer the case. Advancements in underwriting and risk management technologies and metrics mean that smaller businesses can now realize the cost savings and improved employee satisfaction previously reserved for larger organizations.

With self-funding, unlike fully insured plans, the employer pays providers directly for employee health care claims via a third-party administrator (TPA), with what is called stop-loss insurance to protect itself from runaway costs, rather than paying a premium to an insurance company to both underwrite and administer their plan.

Buying fully insured health plan benefits, a common “set it and forget it until renewal” strategy that many small companies have been forced to follow for years, assumes that an insurance company is effectively managing claim expense and quality outcomes. This can be a costly assumption, with the small employer receiving little or no data to understand the drivers behind their, usually increasing, health plan costs. Self-funding opens the door to obtaining the data driving trends, which enables an employer to enact strategies to ensure cost-effective, high quality benefits for their employees. In the first year of self-funding, a small business’s goal should simply be to beat the increased premium that would have been paid if it had stayed fully insured. But as the business generates more data and insights into its plan it can realize cost reductions in subsequent years. Here’s how to get there.

Self-funded data insights compound to create cost savings

With a fully insured plan, premium costs typically rise each year, and the employer has no insight into where the money goes. But self-funded plans bring transparency: employers have access to all their claims data, and they know exactly what they’re paying for.

Having this data allows the employer to identify cost saving opportunities, especially in areas like high-cost specialty drugs and medical procedures. Understanding the unique health care needs of their employee population, which can be enacted with controls in place to de-identify specific employee claims and outcomes, lets employers reduce the cost of care and increase their control over future health care spending.

The longer an employer has access to their claims data, the more precisely they can calibrate the plan to suit the company’s needs. Predictions and goals from year one can be fine-tuned in the second year of the plan, and by the third year, the plan has been completely tailored to effectively lower the cost of benefits. At that stage the focus shifts to maintaining and refining benefits to ensure that the plan continues to deliver value and control for employers.

Self-funded plans are also more customizable because they are not subject to state regulations, including required coverage of certain procedures. They are still regulated federally under the Employee Retirement Income Security Act (ERISA). Other federal rules such as HIPAA, parts of the Affordable Care Act (ACA) and the No Surprises Act also apply to self-funded plans, but they’re still far more flexible.

Tolerating mild cash-flow turbulence of self-funding pays off

Larger companies have traditionally been more likely to adopt self-funded plans, but the size of a business shouldn’t discourage it from adopting a self-funded health plan. Even businesses that cannot absorb cash flow variability can self-fund without concerns over unexpected increases in claim volumes.

An accompanying stop-loss insurance plan will limit the employer’s liability in case of catastrophic or high-cost claims. The TPA or broker will typically help an employer research and select a plan, in part based on quotes from stop-loss carriers. This amount will vary based on plan design, services and a current employee census.

There is also the option to “level-fund,” which reduces cash flow variability. With this kind of plan, the underwriters determine an expected aggregate monthly claim cost and that’s what the employer plays every month, with a true-up at the end of the year,

In addition to protection against high-cost claims, it’s also important to have a robust cyber liability policy and a rock-solid plan for protecting employee health data. This includes minimizing the number of people in your organization with access to Protected Health Information (PHI).

Setting and tracking goals for self-funded health plan

To get the most out of the data that a self-funded plan provides, company leaders need to set goals for the plan and then consistently monitor the plan’s performance against those goals, adjusting as needed. Employers should perform actual-to-target comparisons on a monthly basis.

Two primary benchmarks to watch are Medical Cost Per Member Per Month and Pharmacy Cost Per Member Per Month. If you’re moving from a fully insured plan to a self-funded one, you can start by using the financial metrics of the old plan as your baseline.

The company’s TPA or broker should be supplying monthly reports on medical and pharmacy claims generated by their employees. The team overseeing the plan should collect the following data, at minimum, in order to monitor their plan’s performance:

• Medical claim executive summary report: This lists the amount of money spent, the number of members in the plan, number of claims, etc.
• Medical claim detail report: lists all claims
• High-cost claim report: shows claims in excess of $10,000
• Stop-loss report: shows claims that hit stop-loss targets

The primary figure to look at is “high dollar” claims (always using de-identified patient data) for things like hospital stays or specialty drugs. Employers should communicate closely with vendors about how high-dollar claims are being managed.

For example, are prior authorizations being required and used? Should the company hire a medical case manager for an employee facing serious medical challenges, to help ensure the employee gets the best medical care while maintaining reasonable cost controls? Can some expensive procedures (such as MRIs) be done at a lower-cost site of service, outside of a hospital? Should your company use a health care navigator to help patients make complex decisions and advise on cost-saving opportunities? Consultant experts exist that can help the employer monitor and refine their benefit strategies, the cost of which is more than covered through the plan savings that result from their assistance.

The sooner you dig into any of these questions the better, so receiving and reviewing comprehensive data in a timely fashion is key to successfully managing a self-funded plan. It’s also important to track non-financial factors, such as clinical quality and employee satisfaction, when evaluating a plan’s performance over time.

Related: Boosting financial health benefits in the small business workplace

Typically, one executive leader bears responsibility for the health care program overall, but a successful plan requires that everyone in the leadership team track certain objectives and results related to employee benefits. Employers should review the performance of the self-funded plan each month, but it’s also helpful to have a smaller, more specialized leadership team working with the TPA or broker to review high-dollar claims in depth.

It may sound complicated and risky up front, but the “set it and forget it” approach of years past is perilous from an ever-increasing cost perspective. A self-funded health care plan can lead to big savings for employers of any size, while still providing the same or even better benefits, when implemented and managed correctly.

Steve Palma is president of Sola Health, a Goodroot community company that delivers next gen health plan experiences.