Smart Practices for Self-Funded Employee Health Insurance.

• Author: Kavanagh, Shayne

Self-funded health-care coverage is a potentially powerful way for governments to save money One study, for example, showed a cost reduction of 10 percent compared to commercial insurance. (1) With self-insurance, the local government maintains its own fund to cover the cost of claims, administration of benefits, and reinsurance rather than purchasing a commercial insurance plan to cover these costs. Self-insurance generates savings by eliminating the profit margin of commercial insurers, designing the benefit plan to the employer's exact specifications, and avoiding some legislative mandates and tax implications that apply to commercial insurers, the costs of which are passed on to customers.

In the past, local governments have not self-insured as often as private firms, (2) but this could change as healthcare cost pressures continue to mount. The purpose of this article is to review smart practices for running a self-insured employee health plan. For governments that already have a self-insured plan, these practices can be implemented to make sure it remains sustainable. For those that are considering self-insurance, these practices can form the basis of a plan's design.

FUNDING THE PLAN

Just as a private insurer charges premiums to cover the cost of health insurance, a local government must devise a system of internal charges. Under commercial insurance, the market effectively "enforces discipline" on a health plan because commercial insurers will charge the government commensurately with the cost of providing services. Under self-insurance, a government must discipline itself --if internal charges are insufficient, the plan will not be sustainable.

Funding Smart Practice No. I: Make sure the costs for the amounts needed to cover the use of benefits and to fund the desired reserve levels are transparent.

Foremost, charges should be set at a level sufficient to cover the cost of medical services, administering the health plan, and purchasing reinsurance, or "stop loss" coverage. Local governments can calculate a range of likely costs and then set charges high enough to cover it. Local governments can engage an actuary or work with other external experts to help set rates. Outside advice is needed because in addition to accounting for the plan's own experience, rates should also cover external factors like medical cost inflation or changes in the market for medical services. An outside firm that helps the local government run the plan could even "bill" rates to the government, mimicking a premium payment and enforcing the discipline that commercial insurance would impose. Charges should also be sufficient to make progress toward accumulating the desired reserves for the plan, protecting it against unforeseen circumstances.

Funding Smart Practice No. 2: Align participant contributions with the cost of the plan. Employees should contribute to the funding of the plan, and the size of the contribution should be related to the plan's overall cost. This means that local governments should adopt a policy stipulating that employee contributions will change with the cost of the plan, giving employees a stake in cost management. This policy will also help the employer maintain regular updates to the contribution structure and avoid a situation wherein contributions remain stagnant while costs increase.

Funding Smart Practice No. 3: Allocate costs to departments. It's a good idea to allocate the employer's share of the plan to departments based on the number of employees they have participating in the health plan. This allows governments to make personnel decisions based on true cost of personnel.

CONTAINING THE COST OF THE PLAN

One of the big advantages of self-insurance is that it gives the employer more latitude in designing the plan, compared to commercial insurance. As a result, it's often easier to apply cost-containment measures.

Cost Containment Smart Practice No. I: Develop a cost-effective wellness plan. Wellness plans have the potential to generate substantial savings. One large study showed more than $3 in savings for every $1 spent on wellness over a three-year period. (1) However, the design of a wellness plan makes a huge difference in the amount savings, or if savings are generated at all. (4) Self-insured governments typically have much better access to claims data than their commercially insured peers, and these data can be used to align wellness offerings with the conditions that are driving costs up. Biometric evaluation and surveys can complement claims data by providing more forward-looking information on the conditions that should be of greatest concern; for example, data on high blood pressure, cholesterol, glucose, and triglycerides can suggest the biggest risks to employee health, which in turn suggests potential areas of focus for wellness.

Cost Containment Smart Practice No. 2: Provide more cost-effective ways to access care. A trip to the doctor's office can be expensive, not only in terms of the payout to the doctor but also in lost work time and, in the case of services that require 24/7 coverage, the cost of substitute labor. Governments should consider creating an on-site clinic to provide medical services on (or near) the workplace. In addition to creating more rapid access for employees, the employer benefits from an on-site clinic by eliminating the profit margin a commercial provider would charge and by gaining ways to negotiate charges with the medical service provider that staffs the clinic. Staffing needs vary from nurse practitioners and physician assistants to a full medical staff, depending on how the clinic is expected to be used. The services offered may range from immunizations and limited acute care to physicals, lab work, behavioral health services, and even pharmacy services. Research shows that on-site clinics save between $1.60 and $4 for every dollar invested. (5) Keep in mind, however, that employees will require incentives...