Is Your Self-Funded Health Plan Unhealthy?

By Bob Marcantonio, Cammack LaRhette Consulting Nov 7, 2011
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For large U.S. employers, self-funding a health plan can be the best way to manage health care costs. However, HR needs to determine whether or not the plan is working effectively. This involves identifying problem conditions and their co-morbidities (accompanying symptoms that are warning signs of trouble) and then taking action to remedy these conditions and get the plan on the right track. This article addresses some typical conditions, related co-morbidities and treatments.

Condition: High Claim Levels

High levels of claims do not necessarily mean that the plan is failing. Generally, use of health services increases from year to year. Moreover, large claims happen, sometimes several at once, so that costs may appear to be out of control because of a temporary spike. The key is to determine if these increases are being managed as well as possible or whether they indicate an ailing plan.

Co-morbidities: high-cost providers and usage frequency. Plans that fail to examine their network usage and associated charges closely can become ineffective at controlling costs, as their members seek care from the highest-cost providers and facilities. This is a sign a plan is not on the right track and likely will continue to experience rising costs.

Treatment: monitor claims and usage regularly. Effective plans monitor utilization on a quarterly or monthly basis, including costs, charges and discounts. Look for spikes or unusual occurrences, like abnormally high charges. The causes of these anomalies can vary. Some are routine, but others could result from changes in network or contract status of a particular provider or a new provider. Be prepared to make mid-year changes to networks or even to benefit design to protect against costs driven by external changes.

When examining existing networks:

  • Consider charges from facilities and physicians. Determine where the population is getting care and whether those services are being provided by the lowest or highest cost providers within the network.
  • Watch out for high-cost, free-standing surgical centers. Identify high charges from unique physician groups, and monitor where those physicians are performing their services.
  • Once you have identified high-cost providers, consider negotiating with them. For instance, you might restrict them to the out-of-network tier or eliminate coverage for those facilities or physicians if services with similar quality and outcomes are available in other venues.
  • Analyze the relationship between high claims levels and use frequency. Accelerated claim levels from period to period, without an associated spike in utilization, can indicate that you are paying higher costs for the same amount of services. This can indicate a change in network discounts or point to the difference between one network and another if you have recently changed networks, carriers or third-party administrators. Network discounts are where the real money is. Don't chase savings by looking to lower administration costs; these represent only a small fraction of the total cost.

Condition: Adverse Selection

Adverse selection is probably one of the hardest conditions to diagnose in an ailing plan and might go undetected. It is commonly caused by multiple plan offerings, which increase plan expenses.

Symptoms are not readily apparent, as adverse selection does not present with overt signs like high cost claims. Statistics show that about 5 percent of the population accounts for nearly 40 percent of claims, while nearly 60 percent accounts for less than $1,000 each in annual claims. Thus, where the members of these populations enroll, and what they contribute in payroll deductions, can affect the plan's financial performance dramatically.

Co-morbidities: alternative plans and opt-out credits. Offering opt-out credits such as cash and other benefits to opt out of a health plan might end up costing more because of adverse selection. Similarly, if a fully insured plan with lower premiums (perhaps offset by higher deductibles or more cost sharing) is offered alongside a self-funded plan, healthy individuals might elect the fully insured plan.

Treatment: Price plans correctly and eliminate opt-out credits. Optimize enrollment by pricing plans according to their actuarial difference, and not solely on the plan's experience. Pricing based on the plan's experience might cause migration of low-cost healthy individuals to the plan with the lowest contribution, eroding gross employee premium contributions. Regardless of the number of plans offered, the plan is responsible for the aggregate of all claims of the population; therefore, enrollment should be as balanced as possible among all plans, with each one carrying its fair share of sick and healthy people.

With respect to opt-out credits, the initial intent of these credits was to incent individuals to enroll in another employer's plan as a cost-saving initiative. If a plan mirrors the current market in benefit levels and cost share and is not a plan of choice, those who opt out are likely to continue to do so. For those who enroll, 60 percent of individuals have less than $1,000 in annual claims. By charging even a modest amount per month of payroll contribution, the odds are that more will be collected in payroll contributions from the majority of the former opt-out population than will be paid in claims. This influx comes on top of savings derived from eliminating the opt-out credit.

Condition: Ineffective Stop-Loss Protection

A poorly structured stop-loss contract characterizes a self-funded plan that is destined for a crash. This condition can manifest itself in many ways, including an impression that the plan's fixed costs are too expensive and an observation that large claims are never reimbursed by the stop-loss.

Co-morbidity: coverage gaps and inappropriate deductible levels. Contracts with low deductibles, gaps in stop-loss contract provisions and variances between the plan document and the stop-loss coverage can cause significant pain and discomfort. Fortunately, these symptoms can be treated.

Treatment: lifestyle changes. A hallmark of a self-funded plan is an appropriate assumption of risk. However, many risk-averse plan administrators attempt to shed as much risk as possible by setting the stop-loss deductibles so low—and the accompanying premium so high—that the plan might be better off fully insured. To counter this problem:

  • Set stop-loss deductibles high enough that premiums don't eat into the savings garnered by self-funding. This can be a difficult change for an organization that is particularly risk averse. However, managing networks as described above will go a long way toward controlling costs. Remember, plans that attempt to hand off high costs to someone else eventually pay those costs in any case.
  • Ensure that stop-loss provisions, like incurred periods and paid periods, line up with expectations. It is always possible that a large claim that has been incurred in December and continues into January might slip by the stop-loss thresholds of both contract years, leaving the plan to pay 100 percent of the charges. Ensure that you have the proper run-out and run-in protection as opposed to a low deductible.
  • Make sure that the plan document is aligned with the stop-loss contract's limits and exclusions. The plan document should not cover a service that is excluded under the stop-loss contract (note that under health care reform, there are no longer maximum lifetime caps on coverage of essential health benefits, although group health plans can continue to place limits on the amount covered for certain nonessential medical procedures).

Condition: Commitment Phobia

Too many organizations have trouble committing to what it takes to be a self-funded plan—ensuring sufficient reserves.

Treatment: Behave like an insurance carrier. Ineffective self-funded plans tend to reject the notion that they are largely acting like an insurance carrier. Self-funded plans accept risk, collect premiums, adjudicate claims and sometimes make claim fiduciary decisions—all functions similar to those of an insurance carrier. Like a carrier, self-funded plans should:

  • Set aside reserves from year to year. Avoid the pitfall of assuming that a low claim year will reoccur. Accumulate reserves during the good years to build a bulwark against high claims and utilization during the lean years.
  • Once self-funded, commit to following all the appropriate disciplines in order to be successful. Measure the plan's success over the long run, not just during the past 12 months.

Condition: Specialty Drug Addiction

High levels of prescription drug use involving high-cost specialty drugs can cost a plan dearly. In the past, specialty drugs were usually reserved for rare, short-term conditions. Increasingly, pharmaceutical manufacturers are producing specialty drugs that treat common, long-term chronic conditions.

Co-morbidity: prescription cost increases consistently above trend.Understanding that the complexities of pharmaceutical contracts might be challenging. Average wholesale price, discounts and rebates can be difficult to quantify. As a rule, if prescription costs are consistently above the average cost increase trend, it's a good bet you are not getting a good deal.

Treatment: negotiate prescription drug contracts with guaranteed rebates and periodic auditing and reconciliation if contractual guarantees are not attained. Look for specific utilization management opportunities that address the plan's prescription use instead of generic catch-all programs.

All major pharmacy benefit managers produce detailed utilization reports. Make sure that yours generates ideas to change unnecessarily high usage and lower costs. Ensure appropriate utilization of specialty drugs and engage in physician outreach to modify prescribing habits, which saves the plan and the patient money.

Condition: Myopic Vision

Too many plan administrators don't perceive clearly and fully what's going on in their plan.

Treatment: plan audit. The best-run self-funded plans conduct independent claims audits at regular intervals, typically a thorough review every three years. More frequent eligibility audits might be warranted, as well as verification of plan coverage rules to ensure that services being paid for are covered services under the plan.

Look for subrogation opportunities (to recoup expenses for a claim when another party should have been responsible for paying at least a portion of that claim), know your subrogation process, and check that it is being followed. Does the plan pay and pursue, or pursue and then pay? Verify that network discounts are being applied correctly and that the plan design, like cost share, is being administered properly.

Treatment: focus on ancillary functions. Administrative packages include a variety of ancillary services, like wellness care and disease management. As integral elements of the plan, these must demonstrate effectiveness. Measure return on investment of these programs and discontinue those with no evidence of efficacy. Evaluate clinical outcomes to ascertain whether care management programs engage the individuals targeted. Keep an eye out for new ancillary services and products that emerge on the scene periodically, like access management services that provide individuals with cost and quality data for various providers that offer particular services. These programs can help steer members to lower-cost, high-quality providers.


Today's health care space is more dynamic than ever, and running a successful self-funded plan has never been so daunting. But despite the complexities, a self-funded plan is best positioned to react to this state of flux. Managers who can recognize and respond to market forces will be best-positioned to establish and maintain successful plans.

Robert P. Marcantonio is a consultant in the health care practice at Cammack LaRhette Consulting. He develops plan designs, funding mechanisms and communication strategies that help employees become more engaged with their benefit programs.

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