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Self-insurance draws new converts among small employers

Originally posted by Richard Stolz on March20. 2015 on ebn.benefitnews.com.

An Affordable Care Act-fueled surge in self-insurance for medical benefits among smaller employers appears to have leveled off somewhat, but not due to any disenchantment with the cost-management strategy.

Rather, many that were open to giving self-insurance a try already have done so, observers suggest. Yet a steady flow of hold-outs continues to make the switch, and employers who already are self-insured are gaining the benefit of more competition among stop-loss carriers for their business.

“Brokers are continuing to ask us what we can do to help these groups,” says Rob Melillo, who is responsible for the medical stop-loss line at Guardian, a recent entrant to that market. Guardian began rolling out the coverage at the end of 2013, and has found a strong market among the small to mid-sized employers that represent its primary market for insurance sold to employers.

In 2013, 16% of employees at companies with fewer than 200 workers were covered under a self-insured plan, up from 13% two years prior, according to the Kaiser Family Foundation.

Regulators ill at ease

Meanwhile, state insurance regulators have been expressing more and more concern about smaller employers moving to the self-insurance model, and are working to persuade their legislatures to adopt laws that would impede the trend. California already has done so, and several other states may be close behind.

The growing acceptance of self-insurance among smaller employers is not just about changes wrought by the ACA; the steady increases in health benefit costs are the underlying motivator.

“You’re going to have to make a serious change if you’re going to impact the health care spend,” observes Melillo. And switching from a fully insured model to self-insurance represents “serious change.”

Whereas employers with fewer than 500 employees and dependents were once generally deemed unsuitable for self-insurance, some stop-loss carriers today think nothing of signing up employers with 50 or fewer employees.

Presumably they can do so profitably. Employers suited to self-insurance anticipate savings in the 5% to 10% range, or more, industry participants say.

Part of that stems from savings from avoiding ACA-imposed taxes on fully insured plans. Beyond that, however, is the promise of employers gaining a better vantage point to identify and address specific problem spots in their plans.

The adage, “You can’t manage what you can’t measure,” applies perfectly to this arena, according to Melillo. “When you self-insure, you have access to every claim that’s submitted to your group, every aspirin, every complicated surgery. As that data grows, you can benchmark against industry norms,” and try to figure what’s causing any aberrations.

Although carriers offering fully insured plans typically also try to help employers in this regard, the transparency just isn’t the same, Melillo maintains.

Drilling down

He recalls once, when he was a broker, “drilling down” into some claims data concerning a client’s emergency room utilization. In doing so he discovered that a walk-in clinic used by many employees would code all services rendered after 5:00 p.m. as emergency room treatment, even though nothing had changed but the time of day.

With that insight the employer was able to adjust its plan design to preclude coverage for services at that clinic after 5:00 p.m.

The other fundamental draw of self-insurance is the fact that you are no longer “at the mercy of the carrier for what they will charge for risk pooling,” notes Michael Tesoriero, a consultant with Segal Consulting. That is, the claims experience of an employer that’s too small to be individually underwritten is aggregated with claims of other small employers, many of whose claims track records may be worse, leading to higher than necessary premiums.

Self-insuring also allows employers to:

  • Avoid being subject to state insurance regulation and mandates of benefits not otherwise required by federal law, such as fertility treatments required in some states;
  • Customize (within the broader confines of the ACA) the health plan design; and
  • Control funds reserved to pay health claims, and benefit – initially, last least – from the cash flow benefit of the lag between the accrual of claims, and having to pay them.

Role of community rating

In the ACA world, perhaps the biggest factor that has spurred greater interest in self-insurance among smaller employers is the community rating requirement, which virtually eliminates insurers’ ability to offer preferential rates to employees with healthy workforces.

On the flip side, however, some smaller employers with aging workforces and/or particularly bad claims experience might find community rating works to their advantage. But going that route might sap an employer’s motivation to take aggressive steps to lower employee claims through a focus on what Brian Ball, national vice president, employee benefit strategies and solutions for USI Insurance Services, calls “population health.”

Still, self-insuring isn’t for everyone. One consideration is the cost of stop-loss insurance, as well as the employer’s appetite for claims risk. For smaller employers, an important variable in the cost of stop-loss coverage is their degree of “credibility,” Ball says. That refers to the degree to which a stop-loss carrier will base premiums on the employer’s experience. Often only a portion of the premium will be based on experience, and the rest on a standard formula.

An employer with about 300-350 employees and dependents covered by the plan might be “50%-60% credible,” Ball says. It might take about 500 covered individuals before a stop-loss carrier would deem an employer group “fully credible,” according to Segal Consulting’s Tesoriero.

The larger the group, the less the potential for a year of unusually high claims making the stop-loss policy a losing proposition for the carrier. Stop-loss carriers also, of course, base premiums on the level of the “specific” limit (i.e. the dollar threshold for the stop-loss to begin absorbing claims for a particular individual over the course of year.

Naturally, the lower the threshold, the higher the premium.

Sending the wrong message

In addition, however, when specific low stop-loss thresholds are particularly low, the message to stop-loss carriers is that the employer isn’t fully buying into the self-insurance concept, and therefore may be less motivated to manage claims aggressively. That conclusion would tend to raise the premium as well.

From the employer’s perspective, the level of exposure must not be a cause of sleepless nights. Even smaller employers with balance sheets strong enough to navigate occasional claim spikes that fall below the specific limit have to consider the prospect of a truly horrendous year. That’s where setting the aggregate stop-loss level comes in.

Stop-loss carriers review the employer’s claims history, and produce a number that represents its estimate of total claims for the year. The aggregate limit, also called the attachment point, is set as a percentage (125% is typical) of expected total claims.

There can be some haggling on the estimate of total claims; the lower the number, the greater the probability of being protected by the aggregate limit. However, convincing a stop-loss carrier to make a significant adjustment is a rare event.

If the prospect of being on the hook for claims exceeding the norm by 25% (i.e. 125% of the total) is too daunting, “if you want to pay a little more [in premium], you can take it down to 120% or 115%,” says Ball.

Cash flow considerations

Another common source of employer anxiety is managing corporate cash flow when monthly claims bounce up and down dramatically. But recently a level-funding option has become more widely available. Under that arrangement the total expected claims for the year are divided into 12 equal monthly installments, with a reconciliation of variances at the end.

Several other relatively new bells and whistles are giving employers more options than before. Many state insurance regulators, meanwhile, are not thrilled by the growing popularity of self-insurance among smaller employers.

For one, they don’t like the fact that by self-insuring, employers are evading state-mandated benefits.

Another state concern is adverse selection – that employers with healthy employees (and thus lower costs) that self-insure leave carriers offering fully insured plans with a disproportionate share of high-claims policyholders, driving premiums higher and higher.

A third concern is that some self-insured arrangements with very low stop-loss limits are the functional equivalent of insured plans, and therefore are abusing the system by avoiding state regulation.

Last year California governor Jerry Brown signed a measure setting minimum specific deductibles for employers with under 100 employees at $35,000 (rising to $40,000 in 2016). Minimums are also set for aggregate stop loss, based on a formula.

The law contained several other provisions, including a ban on “lasering,” the carrier practice of demanding higher deductible levels or higher premiums for individuals expected to have unusually high claims due to history or a known ongoing critical illness.

Other states, including Rhode Island and Minnesota, are considering similar measures or have adopted less stringent ones.

Ball is not particularly nervous about the prospect of states’ stamping out self-insuring for smaller employers. In his view, unfolding market dynamics “can only improve” the appeal of self-funding.

New stop-loss options

Stop-loss carriers have been becoming more creative in recent times, according to Segal Consulting consultant Michael Tesoriero. The following are some examples he offers:

  • Caps on future rates. In some competitive situations carriers agree to limit rate increases for the next one or more years. This relieves employers of the risk of a big jump in rates following a year of high claims, when stop-loss thresholds were exceeded significantly.
  • Dividend-eligible policies. Sometimes offered to established clients, under these arrangements employers with below-than-expected claims can receive a slice of the savings the stop-loss carrier enjoys.
  • No new “laser” contracts. Often, stop-loss carriers, based on claims experience, will require an employer to accept a higher deductible, or pay a higher premium, for employees who are expected to have substantial claims over the course of the year, perhaps due to a chronic condition or ongoing critical illness. That is known as lasering. A “no new laser contract” is one limiting the carrier’s ability to establish new laser coverage.
  • Defined rate renewal formula. The carrier eliminates the subjective element of determining new rates at renewal. Instead, rates are adjusted based on a transparent formula linking specified premium increase percentages to the ratio of prior year claim reimbursement totals to premiums paid.