How Your Health Plan May Be Affected by Rising Costs
MAY 3, 2022
COVID-19 continues to have a negative impact on the cost of care. For example:
- Hospital operating margins were in the negative the first two months of 2022, as a result of decreasing inpatient stays and a sluggish return to outpatient services.
- Labor costs continue to increase due to a widespread labor shortage, particularly of nursing staff.
- New variants of COVID-19 continue to emerge as Delta and Omicron recede and restrictions ease.
How much these factors will impact health insurance depends on the type of plan employers have in place.
Weathering Market Volatility
Fully funded health plans pay a monthly premium to the insurer in return for paying plan member claims. Insurers benefit when claims costs are kept below premium, retaining any excess as a profit. When market instability makes it difficult to foresee claims costs, insurers respond by increasing margins, which is passed along to fully funded health plans in the form of higher premium.
Partially self-funded plans contract with an insurer or a third-party administrator (TPA) to administer the plan, but the employer funds the claims. Employers benefit when claims costs are kept low, reserving unallocated funds for future claims. While partially self-funded plans may be impacted by increasing claims costs, they are better able to weather market volatility and keep costs relatively low, compared to fully funded. This is because partially self-funded plans:
- Pay for claims incurred — Self-funded plans only pay for the claims processed each month. The fewer claims an employer has, the more funds it will have set aside for future claims.
For example, health plan usage dropped off significantly for both fully funded and self-funded plans during the early months of the pandemic. Self-funded plans saw a decrease in claims costs of $18 per member per month (PMPM). Fully funded plans overpaid premiums by $25 to $72 PMPM in 2020. Despite lower usage, market volatility kept premiums high for most fully funded plans in 2021.
- Eliminate carrier profit and premium taxes — Self-funded plans pay less for administration. Additionally, self-funded plans are not subject to premium taxes (up to 4%) imposed by individual states on fully funded plans.
- Allow for flexible plan design — Self-funded plans are subject to Employee Retirement Income Security Act (ERISA) laws, not state regulations and mandates, allowing employers to design a cost-effective health plan that meets member needs.
- Provide more transparency — Self-funded plans can view their utilization data, which allows employers to identify key cost drivers and implement targeted solutions.
Read our previous article to learn how USI Insurance Services helps organizations weigh the risks and rewards of a partially self-funded plan.
Optimized Self-Funded Plans: Even More Savings
Employers that already leverage a partially self-funded plan can realize additional savings by optimizing the plan and reducing the cost of claims:
Purchase plan components separately — Unbundling self-funded plans allows an employer to evaluate and select plan components based on price and quality. From pharmacy carve-outs and independent marketing of stop-loss, to benchmarking certain fees and implementing targeted disease management, employers often see 10% to 15% of additional savings per component.
Reduce fixed and administrative costs — By reviewing contract language and negotiating required service fees, employers can further reduce administrative costs associated with a partially self-funded plan.
Address claims costs — Self-funded employers benefit the most by keeping claims costs low and preventing catastrophic claims. Employers can employ a variety of solutions to better manage overall claims costs, such as population health management, chronic disease management and prescription drug utilization.