Self-funding can create real savings for employers

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Why am I so adamant about the issue of self-funding? This was the question posed by an adviser guest recently at one of our summits for our top adviser clients.

By moving employers to self-funding, we have seen some of them reduce their year-over-year benefits costs by 15% or more in the first year alone. But moving from fully insured to self-funding was not the reason for these cost savings; it’s just the first step.

To be sure, the traditional rationale for moving to self-funding is to save money, which is fair enough if the employee group has a good claims year. Those cost savings – in the form of unspent claim dollars – which would be kept by the carrier in a fully insured plan, instead are retained by the self-funded employer.

An estimated 15% of the group healthcare dollar is spent on administration, according to the Congressional Budget Office. So claims make up the remaining 85% of plan costs. A major difference between the two is that while administrative cost are fixed, claims costs are variable, determined by employee healthcare utilization during the plan year. Potential – but not guaranteed – cost savings in a self-funded health plan are the result of employees spending less money on healthcare than the plan has allocated for claims that year.

Health plan dollars go in one of two buckets, one for administrative costs and one for claims. For example, if the employer funds a plan at $1 million, the administrative cost bucket would have about $150,000, leaving $850,000 in the claims bucket to pay medical claims.

If the employees spend only $750,000 on healthcare during the year, the claims bucket would still have $100,000, which the employer would retain. Thus, the employer’s actual health plan cost for that year would be just $900,000, not the $1 million allocated. (Of course, a fully-insured carrier would keep the $100,000 in unspent claims dollars.)

Self-funded employers hope for a good claims year that will leave unspent dollars in the claims bucket. But hope is not a strategy. Without a strategy to reduce the frequency and severity of claims, self-funding alone will not guarantee annual cost savings. Rather, it’s merely the beginning. Here at NextGen Benefits Advisers, we’ve found that the real work doesn’t begin until after the move to self-funding.

Self-funding is not about savings, it’s about control – control of the plan design; claims data; and, most important, the healthcare supply chain.

Most brokers make some use of plan design and claims data with self-funding. They stop there, however, missing the opportunity to lower healthcare costs by managing the supply chain of healthcare that employees purchase, e.g., doctor visits, prescription drugs, surgeries, and hospitalization.

“Healthcare supply chain manager” is an essential new role for benefits advisers. Their management tools include utilization and medical management, fiduciary pharmacy benefits management, reference-based re-pricing, direct hospital contracting, specialty medication cost mitigation, bundled-price surgeries and direct primary care. All of these require a self-funded plan.

In self-funded plans, advisers are managing the healthcare supply chain to reduce the year-over-year cost of healthcare by 15% or more. Forget low renewal increases; these disruptive advisers are delivering real cost savings – bottom-line results to employers, results with which status quo brokers simply cannot compete.

The bottom line: If you want to deliver year-over-year reduction of the healthcare spend, it begins with self-funding.

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