Should Your Company Talk About Health Care Insurance Risk With Insurers?

Across the country employers are considering sharing some of the risk of health insurance with their health carriers in an attempt to lower the ever-escalating cost of health care.

Over the last several years most brokers have primarily aided their clients by regularly moving them to cheesier plans. Higher copays for doctors and prescriptions, higher copays for hospital stays and surgeries have helped lower premiums.

Deductibles, absent from the health care scene in Massachusetts for almost a generation, have again reared their heads. But this isn't cost control; this is cost transfer. Sure, the premium is lower, but the cost of being sick is higher.

Candidly, this is defensible. Low copays at outrageous premiums are a wealth redistribution scheme based on health status rather than economic status. In such plans the healthy subsidize the sick. That's less true with higher copays and deductibles: initially all benefit from the lower premiums.

But then the healthy skate free while the sick pay a greater proportion of the costs, somehow satisfying.

But it stands to reason that if you want to actually spend less on health insurance, then at some level you have to spend less on health care. Rather than simply penalizing the sickly, it's somehow more rewarding to profit from health.

Risk sharing can allow you to do that.
How? Let's say that you have a plan with a $20 doctor copay and a $250 surgical/$500 hospital copay. That plan is a bit rich by today's standards, but it's a reasonable starting point.

If you switched to a plan with a $20 doctor visit and a $2,000 hospital/surgical deductible, the premiums would drop by about 30%. That's a meaningful chunk of change - look at your current premiums and reduce them by 30 percent and you're bound to get tempted. But remember that your employees would be eating that entire $1,500 - $1,750 increase in the risk incurred by moving from a $250/$500 copay to a $2,000 (single) deductible.

Risk sharing addresses that. By agreeing to absorb the increased risk via a Health Reimbursement Arrangement, the firm could pocket the premium savings, balancing it against whatever reimbursements end up getting paid out to the employees.

Do the numbers work? Not always, but often enough so that about 25 percent of our medium-size firms (10-50 employees) use such a system. In almost all cases it's profitable for them.

But you don't have to stop there - a couple of carriers go one step further and skirt the edges of true self-funding. Real self funding is very common over 100 employees, somewhat common between 50 - 100 employees, and virtually unknown below 50 lives. And that's both understandable and unfortunate because self funding can be a godsend to the right firm.

The most important thing to remember is that if you opt to consider self funding, let me assure you that you won't be dealing with the biggest names in health insurance, at least not until you get to 150 or more employees.

So you're going to be dealing with a carrier that isn't a household name. If your people won't put up with an unknown name, then you probably can't do self funding. But if your people are more interested in coverage at an affordable cost than they are the name on their health care card, then give it serious consideration.

Health insurance is very localized, and the carriers who write self funded coverage are often unknown in a given area. But they are often as large as many regional carriers. Their impact is national, so at the same size they are arguably more stable and less risky than is a carrier with one line of coverage (health) in any one state.

How much difference can there be? Well, one employer with more than 52 employees who was facing a 24+ percent increase tried this method. His cost via self funding? Potentially as much as a 4 percent decrease depending on plan design. That's a serious difference.