Jim’s Take

Exploring Partially Self-Funded Health Care and Its Risks

If you’re a CFO or CEO you think about EBITDA.  A lot.  Heck, that’s really your job, isn’t it?

And the fact is that one of the biggest “EBITDA Vampires” is your company’s health plan.  I’ll even tell you how much it’s probably stealing from you – $1,500 – $3,500 per covered employee per year.

That ain’t hay, for sure.

Some of that is wasted, unnecessary health care.  That’s about one-third of all medical care in the US according to many estimates.

Some of it is lost to greed.  Greed of the insurers, greed of your broker, greed of your providers (less from your doctors than from facilities).  Some is due to errors – more common than you think.

But it all costs you money.  Bummer.

But in fact, you can turn it all around.  Recently I wrote about how partial self-funding works (http://jimedholm.com/health-insurance-self-funding/), but that was just the mechanics of it.

Today, let’s talk about what frightens most business owners/executives — and maybe you, too — about partial Self-Funding.  Sun Life did a survey of business owners and execs and here’s what they found frightened them:

I’m not going to try to deal with all of those in one post, but let’s start working from left to right and talk about each one.

Financial Risk

This is the biggie – half of all executives were worried about financial risk of self-funding.  To discuss that, let’s look back at the chart I put up in the earlier post about how self-funding functions.  There were two charts, actually. The first show where various components kick in.  Here it is:

And the second shows the approximate cost figures:

The blue areas are fixed costs, and the orange are variable costs.

So what can cause you financial risk?  Well, to what period are you referring?  This year?  Well, this year the fully insured plan has NO FINANCIAL RISK.

You’re going to pay what you’re going to pay, no matter what.

But if your world view is longer than a year (and if you’re an executive I certainly hope it is), then you have to understand that with fully insured plans, you’re going to pay next year for:

  • Whatever happened this year. (I assume you’re >50 lives; if so, you’re “experience-rated” and part of what your premium will be next year will be based on what your claims were this year.)
  • Whatever the carrier thinks might happen in general in the coming year.

But here’s the REAL risk – you have no control whatsoever over either of those factors.

You’re not going to stop buying insurance.  You don’t play any part in the care your people get, and you can’t change very many parameters of the plan, and you have NO INFLUENCE WHATSOEVER over how the insurance company runs its business.

You are a cork bobbing on a stormy sea.  The currents will take you where the currents want to take you.  Like the StarKist folks used to say to Charlie the Tuna, “Sorry Charlie.”

But look at self-funding.  You’ll note that in the first year (that’s what the blue/orange chart is based on – Year #1) the worst case scenario is generally higher than the fully insured premium.

But don’t be a scaredy-cat. Turn off your right-brain-creative-nightmares for a minute.  Here’s how the carrier sets up the worst case maximum cost (they insure you against going over that amount):

  1. Administrative costs
  2. + Specific stop loss insurance premiums
  3. + Aggregate stop loss insurance premiums
  4. + Actuarially expected claims (what your age and zip and family mix suggest that you might incur)
  5. + 25% risk corridor to protect the carrier.
  6. = Total Worst Case Scenario Costs.

The expected cost is generally from 92-94% of what your fully insured premium is.  That takes out taxes and what the carrier’s probable profit would be.

And the worst case adds in that safety corridor to protect the stop loss carrier.  Depending on the fixed cost of the plan, the worst case  will usually be 10–14% MORE than the fully insured cost.

That occurs because you’re moving into the unknown.  Rule of thumb – at 50 lives, you’ll spend less than the worst case scenario 4 years out of five.  At 200 lives you’ll be below that level 98 years out of 100.

So What Happens if You Have a Bad Year?

Well, in the fully insured world, nothing happens this year – you pay your premiums that were set out at the beginning of the year.

But then, Katie, Bar the Door!!  The carrier is going to use that bad year as a reason to whack you good.  Really good.

So you’re going to get some really big increase (by the way – the larger increases also tend to drive away the OTHER fully insured carriers — they think “where there’s smoke there’s fire,” so you’re not terribly likely to get a great offer from any other carrier, either.)

So you pay.  Through the nose.  For the entire renewal year.  No matter how good or bad your claims are.

But what happens if your bad year happens when you’re self-funded??  Generally, most bad years don’t happen because you have bad claims all the time.  They happen because you had more people than normal get sick, or there was one catastrophic claim, frequently a short term, one-time-only event.

So with self-funding you get a bump in the “worst case scenario,” but in year #2 if your claims improve, it doesn’t matter what your maximum is because you don’t come anywhere near it.

But That’s Only the Tip of the Iceberg

The real key to assessing self-funding risk — which we’re going to have to cover in future posts — is that the difference between what you’re doing NOW, as a fully insured account, leaves you with NO CONTROL WHATSOEVER over what your claims are.  You can’t control:

  • Where your employees go
  • What quality of doctor or facility they choose
  • The relative cost of one facility vs. another
  • Whether the initial diagnosis of their illness is correct
  • What they and you pay for prescriptions
  • Where they get their MRI, CT Scan, radiology or lab work done.

Different story with self-funding.  You can play a part.  You can help your employees get BETTER CARE and BETTER OUTCOMES at LOWER PRICES.

You can help them avoid unnecessary treatment (about 25% of what you’re paying for now … yes, totally unnecessary “care.”)

You can improve the day to day picture all the time.  Yeah, you’re still going to have unexpected events … but the thousands of expected events are so much cheaper, so much more effective that it wipes out the cost of the unexpected event.

So you have TWO CHOICES, really:

  1. You can operate blind, without any controls and hope for the best but receive year after year increases in your cost, or
  2. You can gulp, jump in the water, knowing that there is maybe a 14% first year extra risk but that going forward you can begin cutting spending by $1,500-$3,500 per EMPLOYEE per YEAR.

Your money; your choice.

If you’d like to talk about a sophisticated, strategic, longer-term plan to health care independence, send me (jedholm@bbibenefits.com) an email.  Give me your contact info and simply say, “Jim, put me into a strategic health care cost reduction strategy!”

I’ll bring you a no-obligation strategic overview of how you can break away from your current advisor, Andrew Aboriginal, and keep more of your EBITDA.