Control Your Health Plan Costs With Alternative Funding Strategies
MAY 2, 2023
Before the pandemic, U.S. employers experienced a period of incredible growth and low unemployment. However, changing economic demands — such as high inflation and higher-than-average wage growth — have since increased the costs of doing business, and employers are now looking for ways to spend less.
Employers often make cuts to benefits in an effort to reduce spending, but making changes without understanding what’s driving costs is only a temporary fix. Organizations that are serious about controlling health plan spending should evaluate the way they fund their claims risk.
Get What You Pay For
Under a fully insured plan, employers pay the premium and the insurance company processes the claims. The premium typically includes the anticipated cost of claims as well as a pooling charge to cover any high-cost claimants. At the end of the plan year, the insurance company retains premium not used for covered medical expenses. The insurance company also factors in a margin so that if your organization has a worse-than-expected claims year, they can still make a profit. If you have a particularly good claims year, the insurance company profits from both the premium and the margin. Because of the ability to profit either way, insurance companies are incentivized to push fully insured plans.
Large employers that manage their risk and pay their own claims have realized that actual costs per person are significantly lower than what they are being charged by insurers under a fully insured plan. This is why most employers with 1,000+ employees use some form of self-funded or alternatively funded plan — removing much of the insurance company’s profits from the equation. For example, switching from a fully insured plan to a partially self-funded one often reduces insurance costs by 10% to 15% when all factors are considered. For a mid-sized employer of 500 employees, that can amount to $600,000 in premium savings.
Alternative Funding Strategies
When it comes to managing claims risk, employers have several options — if you want to control costs like a large organization, consider one of the alternative funding strategies listed below.
Partially self-funded: Employers contract with an insurance company or third-party administrator (TPA) to manage the administration of claims, but the employer funds the claim payments. Partially self-funded plans are less expensive because you pay a low monthly fixed cost for administration and for stop-loss coverage to protect against large claims, and actual claims are invoiced to you monthly as they are processed by the insurance company. You may also hold your own reserves for claims incurred but not yet reimbursed. Read our previous article for additional benefits of partially self-funded plans.
Level-funded: This type of plan is closer to a traditional fully insured plan — you pay a consistent (or “level”) premium over 12 months and the insurance company manages the administration and pays the claims. Level-funded premiums are generally lower than fully insured, plus there’s an opportunity to receive a refund if claims costs are lower than the premium paid.
Both funding strategies see additional savings from a lower premium tax and fewer mandated coverages. These strategies also allow for greater claims transparency, creating more opportunities for employers to better manage the cost of care.
For groups with over 100 employees, actual claims experience plays the most significant role in determining health insurance rates. Alternative funding strategies offer a different way to manage the rest of the cost while reducing or removing carrier profit margins. Given the inherent tax and fee advantages of alternative funding arrangements, long-term savings are highly likely. Watch this video to learn how USI Insurance Services calculates probability and risk for self-funded plans.
Optimize Your Alternative Funding Strategy
As more employers have migrated from fully insured plans to alternative funding arrangements, insurance companies have found new ways to profit from level-funded and partially self-funded plans.
Bundled plans: Most insurance companies offer bundled plan components, including administrative service only (ASO), pharmacy benefit manager (PBM), and stop-loss coverage. Often included in those bundled plans is inflated profit for the insurance company if not properly managed. Shopping for plan components individually allows you to select the best options for your business based on price and quality. Employers often see additional savings of 10% to 15% per component if purchased individually instead of utilizing a bundled plan.
Administration fees: For a partially self-funded plan, administration fees can be a hidden source of profit for the insurance company. Reviewing contract language and negotiating service fees can help further reduce costs associated with a partially self-funded plan.
Employers can maximize the savings of a partially self-funded plan by proactively managing claims through risk reduction strategies, including incentivized physician engagement, targeted disease management, and pharmacy management programs. USI works with employers to evaluate and implement a variety of solutions designed to better manage overall claims costs.