Maybe it is Time We Rethink the Health Insurance Model

Health Insurance premiums are a derivative of healthcare cost. The more healthcare costs the more it is to provide insurance. The richer the benefits package, the higher the premiums to enjoy those benefits.

In the United States of America we have some of the best healthcare in the world.  The five year cancer survival rate for U.S. Women is 63% compared to 56% of European women. US men fair even better with a 66% survival rate versus 47% of European men. Better care is probably worth paying more for, but how much more.

Prior to the Patient Protection and Affordable Care Act (PPACA), each state governed it health laws. Some states had more requirements than others.  An insurance mandate is a requirement that an insurance company must follow in that particular state, such as mental health coverage.  If mental health coverage is mandated by the state, then all carriers must provide that coverage.  There are over 2000 different mandates when counting both individual state and federal mandates. Although mandates continue to be added, many remain controversial.  Patient advocates believe they help ensure adequate health coverage, while others complain that mandates increase the cost of healthcare and insurance.  The Affordable Healthcare Act added many federally mandated benefits we now see in the cost of your premiums.

Traditional Health Insurance

Establishing the right health plan is an important part of the success of a business or school district. If you can reduce health insurance cost, you can use those funds elsewhere. With traditional, fully insured, health insurance your school district collects a premium.  The premium is set by the insurance company and is fixed for a year.  The only way it changes is if there is a reduction or an addition in the workforce. The health care plan pays claims based on the policy purchased.  The insured is responsible for any deductible or co-pays.

The Affordable Care Act has changed the rules of the game.  Now plans with a lot of mandates come with a higher price tag and higher-out-of pocket expenses.  Recently, the El-Paso (Texas) independent school district has decided to petition the teachers’ retirement system to leave the state wide health insurance program due to rising cost to the district and the employees.  Their rates have doubled since 2002 and now have the highest out-of-pocket maximum ($6350) allowed under the healthcare law.

Self-Funded Plans

With many school district budget constraints, maybe it is time to rethink how health benefits are delivered.  A self-funded plan may be a way to gain control of your districts health care expenses.  With a self funded plan you pay only for the health services your group actually uses.

The cost of a self-funded plan has fixed components similar to insurance premiums.  These are fixed cost to the employee.  The district might want to purchase an additional “Stop Loss” policy.  This plan will cap the district’s expenses at a certain amount then kick over to the insurance carrier.  A large group of over 200 employees is often self insured up to $100,000 or maybe $500,000.  Smaller groups of less than 200 employees often have the stop loss set at between $50,000 and $100,000.

The district then basically pays claims from the premium collected rather than paying the insurer for assuming the financial risk.  Some larger organizations may handle everything internally; however, most will have a third party administrator to oversee the plan. This would allow the school district to have the flexibility of the self funded plan without having to take on the management of the program.

When premiums are set by the employer, it has to take into account claims expenses, administration costs, as well as some variable costs.  It also needs to take into account the premium for the stop-loss insurance. This cannot always be perfectly predicted during any given month. When starting a plan data from past years claims expenses should be collected.

Self-Funded Plans and the Affordable Care Act

One of the biggest advantages of a self-funded plan is cash flow. These plans are exempt from premium taxes in most states. There are many reforms from the ACA that do not apply to self funded plans. Beginning in 2014, all non-grandfathered individual and group plans were required to offer a comprehensive package of items and services known as the ten essential health benefits. The ACA identified, in broad terms, the 10 benefits that must be included in all plans.  Self funded group insurance plans are not required to cover the ten essential benefits. Another exemption for self funded plans is the Health Insurance industry tax.  This fee applies to fully insured plans and is paid by the insurance companies directly. This fee is passed on to the consumer.  It is expected that this fee will add 4% to premiums in future years.  Also self funded plans only pay state taxes on the stop loss portion of the plan instead of the entire cost of the plan.

While introducing these expensive mandates to the individual and commercial health insurance marketplace, Congress decided not to disrupt the self-insurance market, and exempted self-funded arrangements from many of the ACA requirements.

The premiums collected should be placed in an account where they can gain interest from the bank until they are needed. Also if claims are less than expected, you can use this to build a “claims fund” cash reserve or refund a portion at year’s end. It would also give you the option of reducing premiums the following year. The money collected is only paid out when a claim actually occurs.  Another advantage is you can customize your benefits and allow flexibility as to what you want to offer. This could depend on the district collective bargaining agreement as well.

The main disadvantage of a self- funded plan is the situation when claims are higher than expected.  While you have the stop loss that will keep you from paying excessive claims, if you did not collect enough in premium, you will be operating at a loss for a few months, or even a year.  Most districts will benefit from self funding as long as they can make an accurate assessment of the cost they are likely to have and set rates accordingly.

While there are many advantages of moving toward a self funded type program, and most will benefit from this, one should not assume they will automatically save money right away.  When deciding if this type of plan is right for your district you should look at current claims utilization, current cash flow, as well as the current health status of current employees.  Different parts of the country tend to have their own health needs and characteristics.  This is one reason that prior to the Affordable Care Act, health insurance was in the hands of the states.

In most cases, if self-funded plans are managed properly, both large and small school districts can reduce healthcare costs and put the saving back into the school.