When it comes to managing group health plans, there are generally two kinds of employers – one (the hare) focuses on the short term and the other (the tortoise) on the longer term. There’s a big difference in outcomes, according to Rob Pariseau, executive vice president and employee benefit practice leader at Lykes Insurance, a premier Florida-based insurance firm.
“The first group focuses on a series of 12-month events rather than a continuous improvement process. With a goal of minimizing change and concentrating on the lowest rate, their short-term decisions can jeopardize longer term results,” says Pariseau. “The tortoises, on the other hand, take a longer term view to develop and execute three- to five-year plans that address rising health care costs.”
As an example, Pariseau says that an organization with 100 employees and a $1 million annual health premium increasing at 9 percent will spend $6 million in five years, $15 million in 10 years and almost $30 million in 15 years. The hare and the tortoise will take different approaches.
So, what are their options?
According to Pariseau, it depends. Most midsized employers are fully insured – more than 80 percent of them. They pay monthly premiums including 4-5 percent in taxes. The insurance company takes all the risk and usually ends up with 3-4 percent profit. Large claims are pooled, and spread out over many other organizations.
Unfortunately, the only cost management tool these employers have is to change carriers or shift costs to employees or both -- and no one likes either. Limited to off-the-shelf plan designs with no access to plan data, they wouldn’t know how to manage their plan even if they could. Increasingly they find themselves in a less healthy pool of employers as more innovative employers leave to seek alternatives.
By comparison, more than 90 percent of large employers self-fund their health plans. They pay a carrier or third-party administrator to manage a network and pay claims. They buy stop loss insurance to protect against both the severity and frequency of claims. They save about 8 percent in taxes and carrier profits and enjoy cash flow savings by not prepaying for claims. They hire outside specialists to manage the specific health challenges they identify within their population and culture.
Midsized employers face a risk in self-funding because stop loss insurance is rarely pooled. Large ongoing claims can be excluded at renewal or stop loss premiums can skyrocket making budgeting unpredictable.
Enter “Captive” insurance
Many midsized employers are looking at captives, a group of employers banding together in a kind of purchasing cooperative. The captive is actually owned by the members. They pool their stop loss to reduce risk and volatility and, because of their scale, they have access to best in class care management specialists who wouldn’t otherwise work with employers with fewer than several thousand employees.
Most important, members of a captive are able to plan, rather than having to change carriers every few years. Instead they start execution of their own plan, based on their culture and specific needs.
They are the tortoise. With yearly planning that identifies challenges and programs accordingly, they follow a customized continuous improvement process that has the best chance to reduce trend. A 2 percent reduction of trend on that $1 million saves more than $3 million or 20 percent over that 10-year period.
Thus, the tortoise wins this race.