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Do-It-Yourself Health

by Jay Jacob Hornick
Local small, mid-size and large businesses are taking charge of their costs with self-funded insurance programs.

Health insurance premiums have climbed ever higher in the past decade—and are poised for more increases, as the insurance industry braces for changes associated with the new federal health reform. Likewise, other insurance costs, such as liability and workers’ compensation, have also been on the rise.

At the Lenape Regional High School District, they’ve changed health insurance providers five times in the past eight years, in the quest to keep premiums in check. But in order to maintain other insurance costs, they’ve taken a different tack: self-insurance, through a Burlington County joint insurance pool. “Our premium has barely increased over the past five years,” says business administrator Jim Hager.

Self-insurance has been increasing in popularity for public and private organizations across South Jersey in recent years, but ballooning health care costs have been giving the solution, an unorthodox one when it comes to health coverage, more appeal among insurance administrators looking to cap health costs.

This coming January, Virtua will become the latest South Jersey business to part ways with traditional health insurance in favor of self-insurance, a move that puts the Marlton-based health care system in greater control of its employee’s health care claims and services.

The changes will not substantially alter coverage for the company’s 5,000 employees and their families, but is dramatic all the same. In moving to self-funded insurance, Virtua will pay only for health insurance costs its employees incur, rather than an insurance premium for services, including those they may never have to use. But it also means that Virtua assumes greater financial risk for its medical expenses, which an insurance company would otherwise bear

“Being self insured allows us to design and plan programs … as we want them,” says Andrew Faupel, Virtua’s Director of Benefits and Wellness. “Our commitment is to keep [benefits] the same, if not make them better.”

Some new features will likely focus on employee wellness and offer greater rewards for members to use Virtua’s own extensive network, as opposed to outside services for programs such as smoking cessation or gym memberships.

For companies like Virtua, the rewards of such a program can be substantial, including lower operating costs, more flexibility to cater health plans to employees’ needs and increased cash flow. For companies in the Garden State, self-funding carries an extra attraction: because it is governed by federal rules, businesses can opt not to cover some of the more costly state-mandated benefits, including autism care and fertility treatments.

But employee health can be unpredictable. While a company with healthy employees can reap huge rewards through self-funding, there could be a year when sick or injured workers, or their covered family members, require catastrophically costly medical care.

To avoid getting hit with massive medical expenses, employers typically buy insurance known as stop-loss coverage, which kicks in when a claim exceeds a set amount, typically $50,000 to $100,000 per claim.

Nearly half of workers at companies with 200 to 999 people had self-funded plans in 2009, according to a 2010 survey by the Kaiser Family Foundation and the Health Research and Educational Trust. That figure rose to 88 percent for businesses with at least 5,000 employees.

While self-funding is clearly more common among larger businesses, the growth is now with mid-sized companies, says Allison Hoffman, a spokesperson for Qual Care, a managed health care company that will oversee Virtua’s new plan.

“Self-funding traditionally hasn’t been looked at by companies with fewer than 1,000 employees,” says Hoffman. “But in the last four to five years, we’ve seen a lot of companies with 200-plus employees taking a serious look. There’s been substantial growth in products for these smaller groups.”

Newer services offered by Qual Care and others now allow companies with as few as 35 employees to band together with other businesses to take advantage of self-funding, Hoffman explains.

For those who do, the cost savings may be significant. Between 2005 and 2010, premiums for average policies grew by 35 percent for fully funded health plans, compared with 26 percent for self-funded plans, according to a Kaiser study. The switch to self-funding typically saves companies from 15 to 25 percent in the first year, and even more over time, according to experts.

One reason for those savings is that employers may choose not to cover benefits for rare but costly medical ailments that traditional plans cover. In a good year, in which insured members were generally healthy, the company can build cash reserves, explains Shay Cowan, a principal at Cherry Hill-based Katz/Pierz, which develops benefits programs for small and mid-sized companies. In a bad year—say an employee needs emergency heart bypass surgery or a premature baby requires extensive treatments—the stop-loss coverage will be used.

“Employees could, in a really bad year, technically pay slightly more what it would be if it were fully insured,” says Cowan. “But the odds are you’re always under what a fully charted insurance company charges.”

Flexibility is another signature of self-funding, says Paul Kelly, president of Cherry Hill-based Insurance Administrator of America. As a third-party administrator, IAA can customize insurance benefits by combining different aspects of the various networks at a competitive price. Its role includes overseeing managed care networks and services such as pharmacy, vision, dental, mental health and wellness benefits, as well as claims adjudication.

“We can create plans that meet the company’s needs,” says Kelly. “The difference is being able to interchange parts and tie them into [health] networks.”

Once a company switches to self-funding, data about health claims is much more transparent and can be used to better tailor plans to meet a company’s needs. While not member specific, the information may show that members are seeking care with a health group or hospital that charges more money than a local competitor. The company could than add incentives to steer members to the doctor group that offers better pricing or more comprehensive services, says Qual Care’s Hoffman.

“The real beauty is it puts the employer in the driver’s seat, in terms of knowing a plan’s real expenses and understanding what it can do to provide better program for employees,” she says.

In the long run, self-funding fits into Virtua's grander plan. In March, Virtua purchased 10 percent of Qual Care, sharing ownership with 12 other New Jersey-based nonprofit hospitals and physician-hospital organizations.

“Qual Care adds to our own strategy in terms of being a fully integrated health care organization, “notes Bob Segin, Virtua’s executive vice president and CFO. “It allows us, in the future, to have an insurance infrastructure to possibly create our own private label insurance in the marketplace.”

Published (and copyrighted) in South Jersey Biz, Volume 1, Issue 9 (September, 2011).
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