LAS VEGAS — Fully funded group health plans can be "a rigged system" on behalf of insurance carriers and benefits brokers, cautioned Steve Watson, SHRM-SCP, speaking at the SHRM Annual Conference & Expo 2021.
Many organizations are now renegotiating health benefits for 2022 with insurance carriers, or getting ready to do so, said Watson, CEO of Trendbreakers, a group health plan consultancy.
As an HR leader, he once had to tell employees that their premiums were going up 20 percent while their benefits were being watered down. "I decided I never wanted to be in that position again," he said.
The average cost of an employer-sponsored family plan is now more than $21,000, according to the Kaiser Family Foundation. "For many families, that's equal to the cost of buying a car," Watson said.
Starbucks spends more on employee benefits than on coffee, he noted. Yet, "it's likely Starbucks is much more focused on negotiating coffee beans than on the cost of health benefits for their employees."
He advised employers to use the end-of-year negotiations of health benefits for 2022 to consider changing how they finance their health coverage, with an eye on moving in stages toward self-funding their coverage—especially if an employer has 75 or more covered lives (employees and dependents) in its plan.
5 Financing Options
Watson explained five major plan financing options:
1. Pre-negotiated plan, Aka a "fully insured" plan.
The moniker "fully insured" can be misleading, Watson said. "It's meant to sound safe and secure but often isn't in an employer's best interest."
With pre-negotiated plans, employers every year negotiate a fixed price for the plan, regardless of employees' health claims. He spoke of a company that saw its premiums increase 2 percent in 2020 so that it ended up paying its insurance carrier $6 million; that year, however, employee claims amounted to just $3.4 million.
"Ask who profits the most from this approach," Watson advised.
2. Pre-negotiated plan with shared savings, aka a level-funded plan.
A level-funded plan option may be suited for companies with 75 to 100 employees, Watson said. It's often a steppingstone toward self-funding "that keeps some of the predictability of a fully insured plan."
3. Carrier-based pay-as-you-go plan with a cap, aka a partially self-funded plan.
A partially self-funded plan is a further steppingstone toward self-funding, with separately negotiated plan components for plan administration and for claims.
4. TPA-based pay-as-you-go plan with a cap, aka a self-funded plan.
Here, the employer assumes financial responsibility for enrollees' medical claims and for all incurred administrative costs. "This approach typically involves negotiating a health provider network with an insurance carrier, a pharmacy network, and stop-loss insurance, as well as plan administration services through a third-party administrator [TPA]," Watson said. However, "the more services that are bundled together, the more expensive the plan becomes."
5. Build-your-own plan, aka a reference-based pricing plan.
With a reference-based pricing plan, the employer, through a TPA that specializes in this approach, creates its own network of health providers by contracting directly with doctors and hospitals. Reference-based pricing—paying health providers a small multiple above the Medicare reimbursement rate—is typically used as a basis for price negotiations.
A Cost-Savings Continuum
Employers can save 5 percent to 10 percent on health care costs by advancing through each of the above levels, with a 20 percent to 40 percent difference in costs between the first and last stage, Watson said. He recommended that organizations with fully insured plans—if they have more than 75 employees—proceed one step at a time through these plan stages, and that "as you proceed, figure out what the barriers are to the next step."
He also advised finding a broker that works with the types of plans the organization wants to transition to, noting that "if you go to a Honda dealership, they'll only show you Hondas."
Be Mindful of Broker Compensation
Insurance carriers can pay benefits brokers commissions of 5 percent to 20 percent of the plan's costs, Watson pointed out, saying, "The broker gets a raise when you pay more, in a case of misaligned incentives."
If a broker is paid with commissions, asking for help to transition to a more cost-effective plan means "expecting the broker to do more work in order to get paid less," which isn't likely to get the broker on board.
Carriers may also pay brokers bonuses for selling a certain number of fully insured plans or set up revenue-sharing agreements with brokers.
"Ask brokers how they get paid," Watson advised.
He noted that under new transparency rules taking effect in 2022, brokers must disclose their compensation before being engaged to perform services, and when contracts are renewed or extended. Beginning next year, if an employer doesn't receive these disclosures, they should request them.
Watson also recommended:
- Conducting a stewardship review with your current broker.
- Focusing efforts on moving to the next plan-financing level. Discuss the experience with peers that have done so.
- Starting to meet with the executive team to explain the cost-savings potential of moving toward self-funding. Keep focused on the benefits to the company.
"There is at least $1,000-per-employee worth of savings inside your plan." Watson said. "What could your company do with that money?"
In a separate concurrent session at the conference, Keith Lemer, CEO of WellNet Healthcare, a national health care services company, called self-funded plans "more affordable and more transparent" but acknowledged the fear of "monthly volatility" in claims payment acts as a deterrent for many employers.
Evidence shows those fears are unfounded, Lemer said. With stop-loss coverage against unexpectedly high claims, self-funding typically lowers employers' costs, often significantly.
Self-funded approaches are typically used by plans with at least 100 enrollees, he noted, but can also work at organizations with as few as 50 insured employees depending on workforce demographics related to health.
Trying to get aggregated health outcome data from resistant insurance carriers often proves impossible, Lemer said, preventing employers from learning what their plan is actually paying out and from creating incentives so that enrollees chose the highest quality doctors and hospitals.
"In many cases, the highest-quality providers—centers of excellence—are also the least expensive," he noted, because doctors or facilities specialize in specific services, whether its joint replacement or cancer treatment.
"The solutions that got you into this mess [of rising costs] cannot be the solutions that get you out," said John Augustine, senior vice president at WellNet, during the session. Trying to control rising premiums by shifting costs to employees means "workers taking home less money, are not taking their medications and even ending up bankrupt due to their out-of-pocket health bills."
Insurance carriers "have a financial interest to let claims cost increase," Augustine said. In addition, many fully insured group health plans are pooled in many states, meaning that the employees of one company are grouped with those of another, so that "reducing claims cost [in your organization's plan] has little effect on premium costs" going forward.
He advised, "Be willing to step back and ask hard questions of your consultants and carriers."
As Watson stated, Lemer said level-funded plans are an opportunity for employers to "step their toe in" regarding self-funding and can help management become comfortable with the idea of moving away from insurance carrier plans.