Consider Alternative Funding Strategies to Help Control Health Plan Spending

JUNE 4, 2024

Employers often make cuts to benefits in an effort to reduce spending, but making changes without understanding what’s driving costs is only a temporary fix. Organizations serious about controlling health plan spending should evaluate how they fund and manage their claims risk.

Get What You Pay For

Under a fully insured plan, employers pay the premium, and the insurance company processes the claims. The premium typically includes the anticipated cost of claims as well as a pooling charge to cover any high-cost claimants. At the end of the plan year, the insurance company retains any premium not used for covered medical expenses. The insurance company also factors in a margin so it can still make a profit even if your organization has a worse-than-expected claims year. If you have a particularly good claims year, the insurance company profits from both the premium and the margin. Because of the ability to profit either way, insurance companies are incentivized to push fully insured plans.

Large employers that manage their risk and pay their own claims have realized that actual costs per person may be significantly lower than what they are being charged by insurers under a fully insured plan. This is why most employers with 1,000+ employees use some form of self-funded or alternatively funded plan — removing much of the insurance company’s profits from the equation. For example, switching from a fully insured plan to a partially self-funded one often reduces insurance costs by 10% to 15% when all factors are considered. For a mid-sized employer of 500 employees, that can amount to $600,000 in premium savings.

Alternative Funding Strategies

When it comes to managing claims risk, employers have several options. Those that want to control costs like a large organization can consider one of the alternative funding strategies listed below.

Partially self-funded: Employers contract with an insurance company or third-party administrator (TPA) to manage claims administration, but the employer funds the claim payments. Partially self-funded plans are less expensive because you pay a low monthly fixed cost for administration and for stop-loss coverage to protect against large claims, and actual claims are invoiced to you monthly as they are processed by the insurance company. You may also hold your own reserves for claims incurred but not yet reimbursed. Read our previous article for additional benefits of partially self-funded plans.

Level-funded: This type of plan is closer to a traditional fully insured plan — you pay a consistent (or “level”) premium over 12 months, and the insurance company manages the administration and pays the claims. Level-funded premiums are generally lower than fully insured premiums, and there’s also an opportunity to receive a refund if claims costs are lower than the premium paid.

Both funding strategies see additional savings from a lower premium tax and fewer mandated coverages. These strategies also allow for greater claims transparency, creating more opportunities for employers to better manage the cost of care.

For groups with over 100 employees, actual claims experience plays the most significant role in determining health insurance rates. Alternative funding strategies offer a different way to manage the rest of the cost while reducing or removing carrier profit margins. Given the inherent tax and fee advantages of alternative funding arrangements, long-term savings are highly likely.

Optimize Your Alternative Funding Strategy

As more employers migrate from fully insured plans to alternative funding arrangements, insurance companies have found new ways to profit from level-funded and partially self-funded plans.

For these self-funded arrangements, carriers and TPAs charge a per employee per month (PEPM) fee for claims administration, typically less than 5% of the total costs. However, carriers and TPAs usually include additional claims-based fees embedded within the renewal, such as a shared savings charge or network access fees. This means that while a carrier may appear to have the most favorable terms based on its administration fees, it could actually be the highest-cost option when you factor in these additional fees.

With extensive expertise in carrier consulting, USI underwriters and actuaries have created an interactive proprietary tool to analyze renewals for self-funded plans that can determine the impact of carrier fees buried in the claims and optimize employer savings. This tool and analysis provide transparency to an otherwise opaque and frustrating process, and can help identify an additional 3% to 8% savings embedded within the renewal. With a firm understanding of carriers’ total revenue, USI underwriters are better positioned to negotiate more favorable rates for clients at renewal.

USI can also help employers maximize the savings of a partially self-funded plan with proactive claims management strategies, such as incentivized physician engagement, targeted disease management, and pharmacy management programs.

Learn how USI can help your organization evaluate alternative funding options and better control your benefits costs. Contact your local USI benefits consultant or email ebsolutions@usi.com.