Small Employers: 5 Ways to Manage Risk in a Self-Funded Group Health Plan

The Affordable Care Act makes significant changes to group health plans, and so far there are few solutions to alleviate escalating health care costs. All employers, especially small business owners, are concerned how rising health care costs will affect their bottom line:

• In a survey of Chief HR Officers by the HRA Policy Association in Sept. 2010, 96% thought company health care costs would increase beyond what is anticipated.

• The average family premium in 2000 was $6,438. In 2010 it was $13,770. (Source: The Kaiser Family Foundation and Health Research & Educational Trust Employer Health Benefits 2010 Summary of Findings).

This financial pressure has employers looking at a spectrum of group health plan funding options. Even small businesses that dismissed self-funding as a group health plan option in the past are now considering it. From the period 2006 to 2010, there is a slight increase (13% to 16%) in self-funded groups of 3-199 employees. The increase is larger for the same group size (3-199) that incorporated a high-deductible plan-7% to 24% (Source: 2010 Summary of Findings by The Kaiser Family Foundation and Health Research & Educational Trust Employer Health Benefits).

Some small business owners are still skeptical about self-funding, and the objections we have heard most often are: “the group is too small”, or “it’s too risky”, or “it’s too much work”, or “it’s never been explained well enough to be given serious consideration”.

To be clear, self-funding is not appropriate for every group. Unlike a fully insured plan that has the insurance company assuming the risk, the self-funded plan has the employer taking on the risk. Self-funding is meant to be a long-term investment, and the company must thoroughly evaluate factors such as risk tolerance, firm asset exposure, the stop loss deductibles amounts, reserves, and cash flow requirements. Some groups are too small. In North Carolina, the minimum number of employees for a group to self-fund is 50. Other states such as South Carolina have no minimum requirement. We have a self-funded client in South Carolina with 25 employees.

Midsize and small employers hire a third party administrator (TPA) to manage their self-funded plan. Most TPAs, like Tucker Administrators, are not just claims payers-they provide a variety of health risk management services for the entire plan, from implementation to the day-to-day plan operation. A TPA has expertise in stop loss, compliance, provider networks, pharmacy benefit managers, and the resources to generate highly detailed reports on how every penny in the health plan is spent. The relationship between an employer and a TPA is more intimate than an insurance carrier, and the service is personalized and closely involved on a long term basis. Like other business partners such as CPAs and attorneys that offer professional services, TPA operations are designed to assist the employer with the decisions they need to make regarding the risk factors discussed in this article.

Below are 5 ways small employers control financial risk in the self-funded plan. Some may be applied to fully-insured plans as well.

1. Purchase stop loss insurance for self-funded plans. Stop loss insurance covers the dollar amount of claims above the deductible as specified in the contract. The amount of the deductible is determined by the employer, and reflects the level of financial risk the employer is willing to take. The amount above the deductible transfers the risk to the stop loss insurance company. The employer is in control of how much risk to assume, and how much to transfer to the stop loss insurance company. Since the annual and lifetime limits were eliminated by the Affordable Care Act, the purchase of stop loss insurance that protects employers against large claims is even more important. Discuss this with your consultant and TPA to obtain the right coverage for your group.

• Get the right stop loss contract. The scenario we have seen time and again is the employer that ended up paying a large claim because stop loss contract period expired. This is one of the most important reasons you need an expert in stop loss. The amount and type of coverage, the time period of the contract, the funding process of stop loss claims, and coordination with the plan document must all be considered. The wrong contract may result in financial hardship for the employer. TPAs typically have expertise in stop loss contracts and will help you avoid the wrong contract trap.

2. Ensure plan compliance and be informed on the health care reform changes. Government compliance is a major employer responsibility of a self-funded plan. Just think of a single compliance issue, COBRA, and the complex notification and enrollment schedules that are involved. Every year, there are on average 1,500 new laws, regulations, interpretations, official opinions, and major court cases relating to employee benefits. The regulations come from about 300 different government entities. If you have a fully-insured plan, the insurance carrier will generally handle most compliance issues. In a self-funded plan, the employer is responsible for compliance and is one of the most important reasons TPAs are hired to administer the plan.

3. Data Analysis. Data analysis drives cost containment. The comprehensive reports generated by the TPA (usually more detailed than carrier reports for fully-insured plans) for a self-funded plan are used to track every expense of the plan-claims costs of the medical provider, provider network, pharmacy and administrative services. A health risk management TPA has enhanced capabilities that provide precise information to develop appropriate disease management, prevention and wellness plans. The types of data analysis used are:

• A claims audit is a retrospective analysis of paid claims. It is a broad term that describes services such as examining adjudication accuracy, overpayments, fee/code manipulation, or categorizing claims by multiple layers of risk. It may be as simple as reviewing random samples of claims. A more sophisticated program blends advanced claims data mining with independent physician review. This results in customized disease management programs, and in some cases specialized network access to ensure quality patient outcomes and to provide additional savings to the plan.

• Predictive modeling is a prospective analysis of claims that have not yet been incurred. Using financial and clinical algorithms, it identifies members at risk in the plan and presents outcomes before a medical crisis occurs, and before it becomes a catastrophic claim. The members at risk can then be placed into a disease management program. The uses of the information are many. Some of the main uses for the employer may be to modify benefit plan designs, adjust stop loss coverage, and implement employer-specific prevention and wellness programs.

The table below is an example showing the impact of medical costs by the severity of coronary artery disease. Costs increase as the severity of the disease increases.

4. Make sure everyone on the plan is eligible. On average, 4% to 8% of dependents covered by an employer’s health plan are ineligible for benefits. This is an avoidable and unnecessary expense. Using the plan document and stop loss contract as a reference, an audit of the group health plan indentifies who is eligible and who isn’t. This is recommended for fully-insured and self-funded plans alike. Besides trimming health plan costs, it also facilitates compliance of the “exclusive benefit” mandate of ERISA, which requires persons and entities that manage and control plan funds to do so for the exclusive benefit of participants and beneficiaries. 

5. Provide a wellness plan. Research shows there is a link between lifestyle factors and medical costs. According to the Centers for Disease Control (CDC), four modifiable health risk conditions are responsible for chronic conditions that result in illness and early death:

• Lack of physical activity
• Poor nutrition
• Tobacco use
• Excessive alcohol consumption

For example, a smoker taking three 10-minute smoking breaks a day spends 6 percent of his or her time, the equivalent of 15workdays a year, away from work. For an employee earning $20/hour, this translates to $2,400 in direct wages. (America’s Health Insurance Plans AHIP Innovations in Prevention, wellness and risk reduction). This is just the cost of smoking activity at work, and does not account for the costs associated with the health plan for tobacco-related illness. An employer-sponsored wellness plan (applies to fully-insured and self-funded plans) focuses on keeping the healthy members healthy, and helps at-risk members to become healthier.

• Claims surveillance programs may identify and categorize members from low to high risk. Healthy members with little risk to the plan will be sent prevention, recommended screening, and wellness information only. Members identified as medium or high risk to the plan will receive a more aggressive program with a telephonic and/or in-person health coach. The goal is to improve each member’s health, and facilitate efficient use of health care services that provide quality outcomes.

• Health risk assessments (HRA) are sometimes offered as part of the wellness plan. An HRA is an analysis of information collected (questionnaire and/or biological measurements) from an individual that identifies health risk factors, provides recommendations to promote health, and/or prevent disease. There are many wellness and prevention services available such as stop smoking, weight management, healthy nutrition, walking, stress management programs to fit any budget.

• Commitment and engagement is needed to encourage participation. The International Foundation of Employee Benefits (IFEB) May 2011 Survey found that approximately 38% of the respondents have adopted or expanded (or plan to adopt or expand) their use of financial incentives to encourage healthy behavior. For example, some employers provide discounts on the group health plan premiums in exchange for wellness program participation.
Discuss this with your consultant or TPA to find the best program to fit your plan.

Summary:  As health care costs continue to rise and regulatory compliance becomes more complex, most employers have gone through the “wait and see” phase, and are looking for ways to reduce health plan costs now more than ever. The trend shows that self-funding for small employers is growing. There are other factors for a small employer to consider self-funding, but getting a basic understanding on managing the 5 factors discussed is a start. This overview provides employers with possible cost-containment solutions in their particular plan(s). Managing these factors will keep the plan compliant, contribute to a healthier work force and productivity, give the employer peace of mind through stop loss placement, and optimize health plan savings.