How to Get the Benefits of Self-Funding without the Risks

There are typically two approaches to securing health coverage for your staff – group health insurance or self-funding.

Self-funding, however, can be costly and risky and is usually only done by larger organizations with thousands of employees. But there is a hybrid model that can help small and mid-sized employers provide their staff with affordable health coverage: partial self-insuring.

To understand how partial self-insuring works, we should start with the basics of what a self-insured plan is. In a fully self-insured plan, the employer bears the risk of all costs incurred under the plan for claims and administration.

In essence, the employer acts as the insurer and pays claims from a fund that it pays into along with employees, who pay their share of premiums into the fund.

Also, the employer will usually contract with a third-party administrator or an insurance company to process claims and provide access to a network of physicians and other health care providers.

How partial self-insuring works

Partially self-insured arrangements provide some of the benefits of being self-funded but without all the risks, while plans will have the same benefits as insured plans have. Here’s how they work:

  • Employers and their employees still pay premiums, a portion of which goes into an account that will be tapped to pay the first portion of claims that are filed. That means that the employer is acting as the insurer for those claims.
  • The other portion of the premium is paid to an insurance company. This is sometimes known as a stop-loss policy.
  • Plans have an aggregate deductible for all claims filed by employees, meaning that once that deductible is reached an insurer starts paying the claims instead.
  • Premiums are calculated to fund the claims to the aggregate deductible amount. In other words, the employer and employees are paying for the worst-case scenario in each policy year.
  • It is possible for the employer to get a refund at the end of the policy year if the total claims come in at a level that is less than expected. The employer can either be reimbursed for this amount or use those funds for the next policy year.

Lower risk than fully self-insured plan

Typically, an employer should have at least 25 workers if it is considering a partial self-funded arrangement, but we’ve seen plans with fewer enrollees.

Many employers will opt for a partially self-insured plan to save money, but these types of plans also allow an employer to design a more useful and valuable plan for its workers.

The key to making this work is cost control, without which claims can spiral and drive up premiums at renewal.

Knowing exactly how much to set aside for reserves and how much you should set your employees’ premiums, deductibles and other cost-sharing can be complicated.

But with the right mixture of benefits, plan design and education, you can control behavior, which drives claims, in order to keep renewal rates from increasing too much each year.

The fine print

That said, there are some reasons partial self-insuring isn’t for all employers:

  • There is additional responsibility, as the employer basically becomes an insurer or sorts.
  • There is additional paperwork for these plans since the employer also becomes a payer.
  • There are compliance issues that the employer needs to consider (ERISA and the Affordable Care Act, for example).
  • There is some additional risk to the employer, as it is paying claims.
  • If you have too many claims, you could face a non-renewal by your stop-loss insurer. If you are cancelled, it may be difficult to seamlessly enter the insured market.

As Specialty Drug Costs Bite, Employers Have Options

A new study has found that while group health plan costs will continue growing at the same rate as in the last few years (about 4% a year), the increases would be far less were it not for the spiraling costs of high-cost specialty prescription drugs. 

The 2020 “Segal Health Plan Cost Trend Survey,” which polled health insurers, third party administrators, pharmacy benefit managers (PBMs) and other payers, found that chemotherapy drugs and other specialty pharmaceuticals are having an outsized effect on overall health claims payments.

Unfortunately, this is forcing plan sponsors to figure out how to balance coverage of life-saving drugs with plan affordability. But there are steps you can take to rein in drug cost inflation.

Payers expect that pharmaceutical costs will increase by 7.1% in 2020 from this year and that the cost of specialty drugs will double that inflationary rate at 15.4%.

Rebates account for a significant part of the pharmaceutical equation. Survey respondents said that they expect the average impact of rebates would reduce overall drug price inflation by about 1.5%.

The rising cost of brand-name drug expenditures is due to drug price inflation primarily, although one-third of the increase is due to more prescriptions being filled.

Other findings in the report by Segal, a health and retirement consulting firm, are:

  • Price increases are the primary driver of medical and drug trends.
  • Double-digit specialty drug costs are mostly driven by price increases and the introduction of new and more expensive drugs.
  • Reimbursement rates for hospital networks are projected to increase at a higher rate than physician claims.
  • Plan cost trends continue to outpace both inflation and wage growth by a factor of more than two.

The study notes that projected costs in earlier surveys have always been lower than actual inflation of medical treatment and drug outlays. To deal with these increasing costs, Segal identified the top health plan cost-containment strategies that are in use in 2019:

  • Use of health care transparency tools.
  • Expanding pharmaceutical management for non-specialty drugs.
  • Expanding pharmaceutical management for specialty drugs.
  • Offering telehealth/virtual care.
  • Value-based contracting. 

What you can do

Segal recommends the following tactics for managing drug benefit costs, as well as for contracts with PBMs:

Aim for innovative contracting with PBMs ― Hold PBMs contractually accountable for controlling costs. Contract terms can include unique specialty-drug pricing guarantees, performance-based rebates, direct contracting with regional specialty pharmacies and adoption of value-based formularies.

Expand clinical checks ― Amend plan terms to include clinical safeguards like step therapy, targeted prior authorization for high-cost services and quantity-duration limits based on Food and Drug Administration guidelines.

Plan benefit design ― Use benefit designs to increase the use of generics and lower-cost brand-name drugs, in order to help manage drug cost inflation. This can include the use of tiered designs which place clinically effective, lower-cost drugs into lower tiers at lower cost-sharing. 
Also, more plan sponsors that charge drug coinsurance offer point-of-sale rebates that lower participants’ out-of-pocket expenses.

Auditing ― Conduct periodic audits of your PBM and carefully evaluate drug classification against contract terms and pricing guarantees. This is important because some PBMs continue to apply complicated pricing reclassifications that can increase your costs.

Trump Administration Decides Not to End PBM Rebates

The Trump administration has decided not to pursue a policy that would have put an end to rebates paid to pharmacy benefit managers, which could put the focus again on how drug companies set their prices.

The proposal would have barred drug companies from paying rebates to PBMs that participate in Medicare and other government programs. According to the administration, the proposed rules were shelved because Congress had taken up the issue to control drug costs.

The spotlight has been harsh on some of the country’s largest PBMs, which have been accused of pocketing a substantial portion of the rebates for themselves while passing on only a sliver of the rebates to the insurance companies that hire them and the health plan enrollees that pay out of pocket for the drugs.

Rebates had become a popular target of criticism in Washington after drug companies lobbied aggressively to cast them as the reason for high prices. PBMs negotiate drug discounts in the form of rebates, often keeping some of that money for themselves.

However, many pundits say that the rebate system put in place by large, national PBMs incentivizes drug companies to keep list prices high, which in turn defeats the purpose of the PBMs – that is, to reduce the out-of-pocket costs that health plan enrollees pay for their prescription drugs.

Like insurers and PBMs, some of which have sought to undermine the practice with accumulator adjustment programs, the Trump administration believes such coupons may be driving up health care spending by getting patients to opt for higher-priced name-brand drugs over generics.

The Centers for Medicare & Medicaid Services proposal unveiled in January would have essentially blocked drug manufacturer rebates from going to PBMs and health plans that serve Medicare and Medicaid patients, starting next year.

Now that the push to eliminate rebates has come to end, the focus looks like it’s shifting to how drug companies price their products. We will keep you posted if any legislation surfaces in this area.

Many Workers Struggle with Medical Bills, Despite Having Insurance

A new survey has found that many American workers are struggling with medical bills even though they have employer-sponsored health plans.

The good news from the survey was that 81% of respondents said they had health insurance, which meant they were 19% more financially fit than people without insurance. They were also happier.

The survey found that:

  • One in 10 employees who have insurance and pay part of the premiums, also have annual out-of-pocket medical bills of more than $10,000.
  • 33% of insured employees carry medical debts that they are trying pay down.
  • Insured employees that carry medical debt are 42% less financially fit than those who do not have such debt.

Carrying debts related to medical care also affects employees’ health. The survey found that workers with money problems are:

  • Three times more likely to suffer from anxiety and panic attacks.
  • Eight times more likely to have sleep problems.
  • Four times more likely to suffer from depression and have suicidal thoughts.

Stress from medical debts can also affect worker productivity. Of employees with medical debt problems:

  • 24% have troubled relationships with co-workers.
  • 22% cannot finish their daily tasks.

Lost productivity from these two issues costs businesses up to 14% of payroll expenses, the survey found.

What can you do

Given that health care costs show no signs of abating, what can you do for your low-wage employees and also ensure that your own health insurance premiums don’t spiral out of control? Here are some options:

Vary premium level – If you have a mix of highly paid staff and lower-wage workers, you can create a tiered system where the latter receive greater premium contributions from you than do the former. About a quarter of large employers vary employee health insurance premiums. This is something that’s not feasible for all businesses, particularly if money is tight.

Offer plans with generous benefits – You can offer a slate of plans, from ones with larger copays and deductibles to those with low or no out-of-pocket costs for those employees willing to pay more in premium. This way, your low-wage workers have a choice of health plans which include lower deductibles and lower variability in potential out-of-pocket liability.

Offer skinny plans – Skinny plans still cover the 10 benefits required by the Affordable Care Act, but they typically have a narrow network of providers in exchange for low out-of-pocket costs for the enrollee. While this option is good for your younger and healthier worker, it is often a non-starter for those who have existing health issues.

Carefully review incentives and subsidies – Employers should design wellness incentives that do not penalize low-wage workers, who are more likely to smoke, (many employers impose a tobacco surcharge averaging $600 a year). Employers should couple tobacco surcharges with tobacco-cessation programs, and waive surcharges for employees who are trying to quit.

Offer plans with modern attributes – Telemedicine services can reduce health care costs, as they reduce the worker’s need to take time off for an appointment and also lower the cost of delivery of care.

Push for lower prices and costs – You should coordinate with us, so we can work with your health plans and providers to reduce costs.

Get an Early Start on Open Enrollment

As open enrollment is right around the corner, now is the time to make a plan to maximize employee enrollment and help your staff select the health plans that best suit them.

You’ll also need to make sure that you comply with the Affordable Care Act if it applies to your organization, as well as other laws and regulations.

Here are some pointers to make open enrollment fruitful for both your staff and your organization.

Review what you did last year

Review the results of last year’s enrollment efforts to make sure the process and the perks remain relevant and useful to workers.

Were the various approaches and communication channels you used effective, and did you receive any feedback about the process, either good or bad?

Start early with notifications

You should give your employees at least a month’s notice before open enrollment, and provide them with the materials they will need to make an informed decision.

This includes the various health plans that you are offering your staff for next year.

Encourage them to read the information and come to your human resources point person with questions.

Help in sorting through plans

You should be able to help them figure out which plan features fit their needs, and how much the plans will cost them out of their paycheck. Use technology to your advantage, particularly any registration portal that your plan provider offers. Provide a single landing page for all enrollment applications.

Also, hold meetings on the plans and put notices in your staff’s paycheck envelopes.

Plan materials

Communicate to your staff any changes to a health plan’s benefits for the next plan year through an updated summary plan description or a summary of material modifications.

Confirm that their open enrollment materials contain certain required participant notices, when applicable – such as the summary of benefits and coverage.

Check grandfathered status

A grandfathered plan is one that was in existence when the ACA was enacted on March 23, 2010, and is thus exempt from some of the law’s requirements.

If you have a grandfathered plan, talk to us to confirm whether it will maintain its grandfathered status for the next plan year. If it is, you must notify your employees of the plan status. If it’s not, you need to confirm with us that your plan comports with the ACA in terms of benefits offered.

ACA affordability standard

Under the ACA’s employer shared responsibility rules, applicable large employers must offer “affordable” plans, based on a percentage of the employee’s household income. For plan years that begin on or after Jan. 1 of next year, the affordability percentage is 9.86% of household income. At least one of your plans must meet this threshold.

Get spouses involved

Benefits enrollment is a family affair, so getting spouses involved is critical. You should encourage your employees to share the health plan information with their spouses, so they can make informed decisions on their health insurance together.

Also, encourage any spouses who have questions to schedule an appointment to get questions answered.

Short-term Health Plans Skimp on Medical Payments

A new report by the trade publication Modern Healthcare shows just how little short-term care plans spend on enrollees’ medical claims.

The report found that some plans spent as little as 9 cents of every premium dollar they collected on medical care.

The average paid out among the short-term plans analyzed in a report by the National Association of Insurance Commissioners was 39.2%. That’s a far cry from the 80% of premiums health plans are required to spend on medical care to comply with the Affordable Care Act.

The figures shine a harsh light on just how little short-term health plan policyholders benefit from the plans they purchase. 

The Trump administration issued regulations in 2018 that extended the amount of time someone can enroll in a short-term health plan to 12 months, and policyholders can renew coverage for a maximum of 36 months.

These plans do not have to comport with the ACA, like not covering 10 essential benefits and not having to cover pre-existing conditions – and they can even exclude coverage for medications.

2018 short-term health plan medical outlays*

Cambia Health Solutions: 9.3%
Spectrum Health: 36.1%
Genève Holdings: 36.2%
UnitedHealth Group: 37.3%
Medical Mutual of Ohio: 40.4%
Blue Cross and Blue Shield of SC: 44.2%
* As a percentage of premium charged

The above chart means that for every dollar collected in premium, the average short-term plan spent 39 cents on medical care for policyholders – with the rest spent on administration or kept as profit.

Short-term plans usually lack the consumer protections found in ACA-compliant plans and they have gaps in coverage that may not be readily apparent in marketing materials, which makes it difficult to compare plans and understand the full scope of coverage.

Importantly, as stated above, they are not required to and usually don’t cover the 10 essential health benefits that the ACA requires compliant plans to cover at no cost to the enrollee.

This scant coverage makes these plans much cheaper than ACA-compliant plans.

Here are some of the features of short-term plans that ACA-compliant plans are not permitted to offer:

Use health histories to determine who can get coverage – Applicants for short-term plans must often answer a health questionnaire used to screen out applicants with symptoms of an illness or condition – even if not yet diagnosed or treated. Some plans also exclude coverage for conditions for which medical advice, diagnosis, care or treatment was recommended or received in the prior 12 months.

Exclude key service categories from covered benefits – Few if any short-term plans cover maternity. Prescription drugs are not always covered, or they are only partially covered. Some plans exclude coverage for mental health, substance use disorder services, and tobacco cessation treatment.

No pre-existing conditions – Few short-term plans cover any pre-existing conditions. Typically, they cover only what’s listed in the Schedule of Benefits. If one of those is a pre-existing condition, it will likely have a cap of no more than $30,000. Also, insurers will often deny claims or cancel coverage for conditions they consider to be pre-existing.

Covered services limited – Many short-term plans have covered benefit limits like:

  • $1,000 per day for a hospital room and board
  • $1,250 a day for intensive care
  • $50 a day for doctor visits while in hospital
  • Total benefits are often capped at little more than $100,000 per year.

Renewal not guaranteed – Short-term plans will rarely guarantee renewal. If an enrollee suddenly develops a new health condition, the plan will likely not renew them.

Small Employers Can Reimburse for Medicare Part B, D Premiums

As the workforce ages and many employers want to keep on baby-boomer staff who have the experience and institutional knowledge that is irreplaceable, one issue that always comes up is how to handle health insurance.

Once your older workers reach the age of eligibility for Medicare, under current law you can help them pay for Part B and D premiums with a Medicare Premium Reimbursement Arrangement. These types of arrangements became legal after legislation was signed into law in 2013 to help employers provide benefits to their Medicare-eligible staff.

But the issue surfaced again recently when the Trump administration came out with new guidance for health reimbursement arrangements that paves the way for employers to set up HRAs to reimburse staff for health premiums in their personal (not company group) health plans.

Anybody who is about to turn 65 has a six-month period to sign up for basic Medicare, but if they want additional coverage they can pay for Medicare supplemental coverage such as Parts B and D.

Part B covers two types of services:

Medically necessary services: Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice.

Preventive services: Health care to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best.

Part D, meanwhile, covers prescription drug costs.

The dilemma for employers has often been whether to keep the Medicare-eligible employee on the company health plan or cut them free on Medicare.

Smaller employers – those with 20 full-time-equivalent employees – have the option to open a Medicare Premium Reimbursement Arrangement for those employees if they are coming off a group health plan and into Medicare.

For small employers, it’s legal to set up an arrangement like that, as long as doing so is at the employee’s discretion. Employers are not allowed to push an employee into a Medicare Premium Reimbursement Arrangement in order to get them off the company’s health plan.

The good news for employers is that they often can reimburse their employees in full for Part B and D, as well as Medicare Supplement, and still pay less than they would pay in group employee premiums alone. 

On top of that, the employee gets a lower deductible and overall out-of-pocket experience with less, if any, premium contribution.  

What you need to know

Here’s what you should know if you’re considering one of these arrangements:

A Medicare reimbursement arrangement is one where the employer reimburses some or all of Medicare part B or D premiums for employees, as long as the employer’s payment plan is integrated with the group’s health plan.

To be integrated with the group health plan:

  • The employer must offer a minimum-value group health plan,
  • The employee must be enrolled in Medicare Parts A and B,
  • The plan must only available to employees enrolled in Medicare Parts A and B, or D, and
  • The reimbursement is limited to Medicare Parts B or D, including Medigap premiums.

Note: Certain employers are subject to Medicare Secondary Payer rules that prohibit incentives to the Medicare-eligible population.

IRS Eases Access to Chronic Disease Treatment

New guidance from the IRS will help people enrolled in high-deductible health plans get coverage for pharmaceuticals to treat a number of chronic conditions.

Under the guidance, medicinal coverage for patients with HDHPs that have certain chronic conditions – like asthma, heart disease, diabetes, hypertension and more – will be classified as preventative health services, which must be covered free with no cost-sharing under the Affordable Care Act.

The background

The guidance, which takes effect immediately, is the result of a June 24 executive order issued by President Trump directing the IRS to find ways to expand the use of health savings accounts and their attached HDHPs to pay for medical care that helps maintain health status for individuals with chronic conditions.

The executive order was in response to a number of reports that have shown that people with HDHPs will often skip getting the medications they need or take less than they should because they cannot afford to foot the full cost of the medication even before they meet their deductible.

This can lead to worse issues like heart attacks and strokes, which then require more and even costlier care, according to the guidance.

The latest move is a significant step that should greatly reduce the cost burden on individuals with chronic conditions, as many of the medications they need to treat their diseases can be extremely expensive.

The IRS, the Treasury Department and the Department of Health and Human Services have listed 13 services that can now be covered without a deductible, and have promised to review add or subtract services from the list on a periodic basis, according to the guidance.

Here is the full list of the treatments, and the conditions they are for:

Angiotensin-converting enzyme (ACE) inhibitors – Congestive heart failure, diabetes, and/or coronary artery disease.

Anti-resorptive therapy – Osteoporosis and/or osteopenia.

Beta-blockers – Congestive heart failure and/or coronary artery disease.

Blood pressure monitor – Hypertension.

Inhaled corticosteroids – Asthma.

Insulin- and other glucose-lowering agents – Diabetes.

Retinopathy screening – Diabetes.

Peak-flow meter – Asthma.

Glucometer – Diabetes.

Hemoglobin A1c testing – Diabetes.

International Normalized Ratio testing – Liver disease and/or bleeding disorders.

Low-density lipoprotein testing – Heart disease.

Selective serotonin reuptake inhibitors – Depression.

Statins – Heart disease and/or diabetes.

The items above were chosen because they are low-cost, proven methods for preventing chronic conditions from worsening or preventing the patient from developing secondary conditions that require further and more expensive treatment.

Circuit Court Seems Poised to Shoot Down Individual Mandate

It’s looking more and more likely that a federal appeals court will strike down the Affordable Care Act’s individual mandate, which requires Americans to carry health insurance, either through coverage they receive from their employer or buying it themselves.

The case challenging the landmark health insurance law is currently before the 5th U.S. Circuit Court of Appeals and is being heard by a three-judge panel.

Two of the judges, appointed by Republicans, have signaled that they would strike down the individual mandate but not the remainder of the law, including the employer mandate, because of the lack of an individual penalty.

The Justice Department would normally be defending the law of the land, but it has stepped away from the task and signaled that it would prefer to see the law abolished. At issue is the repeal by Congress in late 2017 of penalties for individuals that do not secure coverage as required by the law.

Attorneys general from Republican states banded together to challenge the entire law after the individual penalty was abolished after Trump signed a tax bill that reduced the tax penalty to zero dollars. They argued that if that penalty is no longer applicable, the rest of the ACA is null and void.

According to trade press reports, the two Republican-appointed judges probed the contention by Republican states’ attorneys general that the getting rid of the individual penalty nullifies the entire law. The two judges’ line of questioning hinted at their skepticism of that argument.

The background

The case is before the 5th Circuit after a federal district court judge sided with the argument by Republican state attorneys general that the individual mandate is unconstitutional and could not be severed from the rest of the ACA, and hence the entire law must be invalidated.

When the Justice Department declined to defend the law, attorneys general from several Democratic states House representatives appealed the ruling.

Lawyers for the Democratic states said that the plaintiffs needed to prove that Congress intended for the entire ACA to be struck down when it passed legislation to get rid of penalties.

The court has not made a decision on the case yet, but whatever its ruling, it will be appealed to the U.S. Supreme Court. Attempts to overturn the ACA at the Supreme Court have met stiff resistance.

In 2012, a divided U.S. Supreme Court upheld most of the law’s provisions, including the individual mandate, which requires people to obtain insurance or pay a penalty.

The Supreme Court’s conservative majority found Congress could not constitutionally order people to buy insurance. But Chief Justice John Roberts joined the court’s four liberal members to hold that the mandate was a valid exercise of Congress’s tax power.

Workers Getting Squeezed by Higher Health Plan Costs

While health insurance premiums aren’t going up as much as they used to, both employers and their workers are still struggling with higher health care costs.

According to the “2018 Health and Voluntary Workplace Benefits Survey,” published by the Employee Benefit Research Institute together with Greenwald & Associates, roughly half of all workers experienced an out-of-pocket cost increase in their workplace health insurance plans.

That’s roughly the same percentage as in 2017, but lower than the 61% who saw cost increases passed on to them from their employers in 2014.

And employees are feeling the pinch: About 28% of all workers affected by reductions in employee contributions to health care plans have decreased their own contributions to retirement plans such as IRAs, 401(k)s, 403(b)s and 457 plans.

Nearly half have cut back on other savings as well, to cover their rising share of health care costs.

The troubles don’t end there, though: About 25% of respondents reported they had trouble paying for basic necessities like shelter, rent and heat, and 36% reported difficulty with paying other bills.

About 27% told researchers they had already used up all or most of their savings, while about one-third have increased their level of credit card debt. Thirty percent have delayed retirement, and 21% have been forced to drop other insurance coverage. Twelve percent have taken a withdrawal or loan from a retirement plan.

The increased out-of-pocket costs on workers seem to be having some effect on consumer behavior as well, as more individuals are taking steps to control overall costs. For example, 73% are trying to control health care costs by taking better care of themselves.

One-quarter of respondents said they had not skipped prescription drugs to save money, while half reported delaying going to the doctor.

Employees like their plans

That said, half of workers surveyed expressed satisfaction with their own company health plans.

But price remains a sore spot: Only 17% of respondents said they were extremely satisfied or very satisfied with the cost of their health insurance plan, while just 15% reported satisfaction with the cost of health care services excluded by their plans.

However, only 12% reported that they were unsatisfied with their own health plan.

The takeaway

While workers are generally happy with the plans currently on offer from employers, they are anxious about what the future may hold for them and their families.

While nearly half of workers surveyed said they were very confident or extremely confident that they could get needed treatments today, only about one in three expressed confidence about being able to get needed medical care over the next 20 years.

For employers, that means providing better education and working with employees to provide them with specific voluntary benefits like long-term care insurance in case they suddenly have a medical emergency that will keep them laid up for some time.

You can also work with us to see where you can save money and pass those savings on to your employees, while at the same time improving their benefits package. If you are concerned about what employees are feeling, call us and we can go over your current benefits package to see where you can make improvements.

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