Self-Funding Your Group Health Insurance: Making the Case (study) for Savings

By William Johnson,

President and CEO of CIBC of Illinois, Inc.

 www.CIBCinc.com

I have many friends in the business world who are what you might consider to be Type A personalities. Dedicated, focused, and driven, these people tend to be extremely analytical and very confident of their ability to make tough decisions in their business and personal lives. These abilities are some of the qualities that have made them successful in their chosen field.

It has always amazed me that when I start talking to them about self-funding group health insurance, I can see the anxiety and fear sweep across their faces. Many take the path of least resistance and say “I leave that up to my HR Director,” and others take the position that self-funding is only for the large companies, those with huge reserves of liquid capital. Then there are those who curl up into a ball and go to their “Happy Place.”

I get that. There is something inherently scary about the notion of paying for claims out of pocket. But for a lot of small businesses, it is just what the doctor ordered. The best way I can explain it is with an example.

 Case Study: Acme Inc

Business has been good for Acme Inc. Their largest customer, Coyote Inc., has helped this small business of 25 employees grow to 100 employees by continually ordering Acme’s various avian control devices. The group health plan that used to fit 25 employees has now grown significantly in census population and also in premium dollars. Acme has a fully-insured health plan, which is the typical situation for most small businesses. You pay a premium, and in turn you get coverage for eligible expenses from a carrier. This type of plan offers broad access to doctors and hospitals, typically, and is a good ‘one size fits all’ type of plan funding mechanism. It’s easy to maintain, but all of this comes at a price.

As the census grows, the claims typically increase as do the premiums. When there is a ‘good year’ and there are lower claims, it is the carrier who benefits due to still charging the same premium. And when was the last time you got a rate reduction? Also, you will never really know when you have that elusive “good year” because in a fully-insured plan, you do not have access to claims data. Acme just got another premium increase, and now it has become unaffordable for all to continue on this path.

Sandy Acme, the fourth-generation President and CEO of Acme Inc., sits down with her HR Director and Comptroller to find a solution to their health insurance costs. The new rate increase put their premiums at roughly $1.4 million per year for 91 employees, and they have hired nine more full time employees (FTE’s). Sandy wants to know what their broker thinks the possible solutions are, and her HR Director says that the broker offered to look at the market to see if there were better rates. He also says that they tried that three times before with no positive result.

            “It is what it is,” the HR Director says.

             Unsatisfied, Sandy asks the Comptroller for her opinion.

            “Well, at my old company we had a benefit consultant who helped us address this very

              type of scenario.” she says.

            “Get them on the phone,” Sandy interjects. “There has to be a better way.”

So the benefit consultant comes in and looks at the entire picture. He runs the numbers, looks at how Healthcare Reform applies to the situation, and comes back with a recommendation for Acme to become a self-insured group.

 The Numbers Don’t Lie

Typically, deductibles on a fully-insured plan range from $500 to $5000. In the self-funded arena, however, there is a term called specific deductible. For Acme, the specific deductible in the re-insurance contract could possibly be $55,000.00, which means that for each employee on the plan, the first $55,000 in costs (minus any deductible, coinsurance, etc…) would be the shouldered by the employer.  After the specific deductible is met, the re-insurance takes over.

Within the re-insurance contract there is a term called an aggregate attachment point, which means there are only so many $55,000 specific deductibles that need to be satisfied up to a maximum amount.  In this case, the maximum plan exposure (what the employer is on the ‘hook’ for) is roughly $1.4 million, which is just about what the fully insured premiums would have been. If the expected plan exposure (fixed cost and utilization) is around $705,000, Acme would be adding $700,000 to their bottom line. All of the potential savings is lost on a fully-insured plan, and more importantly, you do not get claims data. There is no way to know what types of claims are costing the group dollars, and no way to address these issues with plan design and wellness initiatives.

Remember, self-funding does not automatically equal savings. The data and utilization of the plan is where true savings can be found, and this information will help structure the plan according to known patterns. Accurate data will give a basis of knowledge for working with employees in reaching wellness goals, treatment options, and also it provide resources to find these options. Quantifying Costs is where true savings is found.

It really all comes down to having the data so you can make the best decision for your business. CIBC of Illinois provides these solutions for employers. Solutions…That Work.

This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.

 To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.