Self-Insuring Healthcare A key strategy to help clients minimize costs of reform By Joseph Berardo Jr. Mr. Berardo is President and Chief Executive Officer, MagnaCare. Connect with him by e-mail: jberardo@magnacare.com. The Affordable Care Act (ACA) has significantly complicated the question of how employers offer health benefits – or if they should offer them at all once state-run healthcare exchanges go online. The ACA’s health insurance tax is expected to increase the cost of healthcare coverage for employers relying on insured products to cover their workforce. The tax will be particularly onerous for the fully-insured market, exceeding $100 billion over the next 10 years, which will be largely passed through to consumers in the form of higher premiums.”1 For now, the U.S. government has pushed back the deadline for the employer mandate to 2015, and will not penalize businesses that fail to provide health insurance next year.2 Nevertheless, brokers should take advantage of such delays to help large clients prepare, and deliver cost-effective solutions, such as self-insurance, the increasingly popular alternative to traditional insurance plans – and a smart move for employers feeling the pressures of healthcare reform. Understanding the Issues – and Offering Solutions Should employers continue to offer health insurance? Employers must choose carefully when deciding whether or not to continue to provide healthcare benefits. Many small employers – fewer than 50 employees – that currently provide coverage will not face penalties if they choose to drop coverage once exchanges are up and running. Instead, they may opt to give raises, and leave employees to find plan options on the healthcare exchanges. The potential problem, however, is that individuals who would be eligible for subsidies might not have the financial resources to pay for insurance up front.3 In fact, most of the middle-class, and particularly the lower-middle class, will struggle to pay premiums in advance, creating the risk of having more uninsured people. Ultimately, for the employer the decision will come down to a cost-benefit analysis. Another point to consider is that, with higher premiums, more paperwork, and competition from the government’s individual subsidies, employer health plans could end up costing employees more. Because of the way subsidies are structured, there is the potential that employees and their family members could be blocked from getting a tax credit through the new market places.4 That said, health benefit packages that include healthcare coverage remain a key factor in attracting and retaining top talent. How can employers minimize rising premium rates? The employer mandate delay does not directly impact small business employers, which were not subject to the employer mandate provisions in the first place.5 For individual and small employer health insurance plans, new ACA mandates become effective with the first policy renewal year that begins on or after January 1, 2014. Therefore, throughout the rest of 2013, employers and brokers should be focused on strategizing the best way to position benefit programs in a way that aligns with all ACA mandates, and ensures compliance going forward. For businesses with more than 50 full-time employees, the delay effectively provides another year before being required
to either provide government-approved health benefits to employees or face a $2,000 per-employee penalty. Instead of complying in January of 2014, businesses have until January of 2015.6 Because of ACA policies mandating more comprehensive coverage, premiums for policies may be more expensive than the policies that individuals and employers currently hold.7 Therefore, brokers should make it their immediate goal to maintain a cost-effective program that is not subject to mandates, at least for a period of time, and to position the client in the best possible way for the future. By moving as many January 1, 2014 renewals to October or December 1, 2014 renewals, employers can lock in 2014 rates for most of 2015. However, it’s important for sales and accounting staff to emphasize that the plan year change is made for a valid business purpose, i.e., to curb costs, and not simply to avoid the employer mandate/pay-orplay penalty. Likewise, brokers should approach prospective clients with the goal of developing a valid, documented business purpose for any early renewals. For example, securing lower costs and expenses may constitute a valid business purpose. More importantly, brokers should emphasize that employers adhere to every ACA provision, and that, if they modify the plan year and comply with every ACA requirement applicable to employer plans as of Jan 1, 2014, they will remain in full compliance. Also, it should be determined whether plan and plan-related documents would need to be amended to reflect any new plan year, and whether a form 5500 would have to be filed at the conclusion of any “short” plan year created by an “early renewal.” Self-Insurance: The Ultimate Solution With a self-insured health plan, employers pay for individual employee health claims out of cash flow rather than as a monthly fixed premium to a health insurance carrier. While employers assume the direct risk for payment of claims, costs are based on actual plan member healthcare use and catastrophic claims are covered by stop loss coverage. This makes self-insuring cost-efficient and more effective than the one-size-fits-all model of the fully insured plan. How can employers avoid some of the ACA provisions, such as full premium taxes? The new tax leaves traditional self-insured plans exempt from the fee on health insurance carriers. As the majority of large businesses, labor unions, and governments self-insure, the new health insurance tax will result in smaller percentage increases in average health insurance premiums for large firms and cause greater increases for small firms that rely on insured coverage, as well as non-group health insurance coverage.8 Furthermore, self-insured companies do not have to offer the government-mandated “essential health benefits,” allowing them to tailor benefits to the needs of a company and the demographics of its workers. Other key ACA burdens set to hit insurance-based plans include: • Essential health benefits requirements • Comprehensive coverage for health benefits package • Jurisdiction of state ombudsmen • Ensuring that consumers get value for their dollars requiring annual rate reviews of insured products Self-insurance offers an employer greater flexibility than commercial insurance, while providing the kind of practical and economic advantages that curb costs, such as: • Helping employers tailor plans to the specific health needs of a workforce population, especially if guided by the right healthcare management firm • Maximizing cash flow because claims are funded as they are paid, rather than functioning based on prepayment • Generating as much as three percent immediate savings because state taxes are eliminated on most self-insured plans • Eliminating carrier profit margins and risk charges One exception: a Multiple Employer Welfare Arrangement (MEWA) receiving greater than $25 million in premium is subject to the fee since the MEWA is viewed as taking risk. Furthermore, the ACA does not subject self-insured health plans to the jurisdiction of the states, while insurance-based plans must comply with the varying coverage mandates, insurance statutes and regulations of the 50 states. In addition, self-insured plans continue to be exempted from state mandates and regulation by virtue of ERISA’s preemption of state action in connection with self-insured health and welfare benefit plans. For the most part, self-insured plans are not subject to litigation in state courts or the appeal and complaint procedures of the insurance departments of each of the states.
How can a self-insured client mitigate the risk associated with self-insuring? When companies are self-insured, they assume a portion of the financial risk of providing health benefits to employees. Instead of paying premiums to insurers, they pay claims filed by employees and healthcare providers. To avoid huge losses, they often purchase stop-loss insurance to protect against unexpected or catastrophic claims.10 Self-insurance with stop-loss, which is also exempt from the fee on health insurance carriers, serves as a financial buffer for the employer if, for example, an employee is found to have cancer or needs an organ transplant. By understanding the benefits of self-insured health plans, including a full understanding of the scope of financial obligations, opportunities to safeguard against catastrophic health events, and other techniques to lower healthcare costs, employers can begin to control healthcare costs. For brokers, understanding the full implications of ACA mandates will help them leverage opportunities for their clients. Offering critical strategies aimed at making coverage more affordable, such as self-insurance, can serve to differentiate them in a tough marketplace. Self-insuring enables companies to offer quality, cost-effective healthcare at a time when many employers are forced to cut costs, often at the expense of their workforce. In the long run, once all of the ACA guidelines are fully vetted, the plan that employers choose must ultimately make sense for the bottom line – and the future of the company.