Self Funding – Broker Alert: Self-Insurance Minimizes Impact of Health Insurance Tax and Other Reform Mandates by Joseph Berardo Jr. The Affordable Care Act’s (ACA) health insurance tax of 2014 is expected to increase the cost of healthcare coverage for employers that rely 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. The tax will be largely passed through to consumers in the form of higher premiums. The numbers are staggering: $8 billion in 2014 will increase to $14.3 billion in 2018, increasing thereafter based on premium trend. Premiums in the insured market will increase, on average, by 1.9% to 2.3% in 2014, and 2.8% to 3.7% by 2023, according to America’s Health Insurance Plans (AHIP). Savvy brokers are examining new approaches to help clients minimize the impact of the tax and other ACA mandates. 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 increases in average health insurance premiums for large firms while causing greater increases for small firms that rely on insured coverage, as well as non-group health insurance coverage. The Benefits of Self-Insurance Astute brokers are urging employers, of every size, to self-insure. According to a recent article in the New York Times: • To cope with the uncertainties created by the new law, Autonomous Solutions, a developer of robotic equipment, began a self-insured health plan for its mostly young and healthy 44 employees. • This year, Label Solutions, an industrial label-printing company with 42 employees, switched to a selfinsurance plan to hold down costs that were going up in response to government regulation. • The Township of Freehold, N.J., wanted to gain more control over benefits and costs for its 260 employees. The township, which spends more than $5 million a year on employee health benefits, had been seeing premiums rise 10% to 20% a year. With self-insurance, the township expects to stabilize rates and keep its savings, rather than giving it to health insurance companies as profit. About 59% of private sector workers with health coverage were in self-insured plans in 2011, up from 41% in 1998, according to a study by the Employee Benefit Research Institute. The number is even higher among large employers, with 82% of companies with more than 200 employees choosing to self-insure. Self-insurance offers employers more flexibility than does commercial insurance while providing these kinds of practical and economic advantages to curb costs: • Helping employers tailor plans to the health needs of a workforce, especially if guided by the right healthcare management firm. • Maximizing cash flow since claims are funded as they are paid, rather than functioning based on prepayment. • Generating as much as 3% in immediate savings because state taxes are eliminated on most self-insured plans. • Eliminating carrier profit margins and risk charges. What’s more, the ACA does not subject self-insured health plans to state jurisdiction while insurance-based plans must comply with the varying coverage mandates, insurance statutes, and regulations of the 50 states. In addition, self-insured are exempt 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, selfinsured plans are not subject to litigation in state courts or the appeal and complaint procedures of the insurance departments of each of the states.
Furthermore, 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. To maximize these benefits, self-insured plans often contract with a healthcare services company. 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. Self-insurance with stop-loss is also exempt from the fee on health insurance providers. It serves as a financial buffer for the employer if an employee is found to have cancer or needs an organ transplant, for example. Employers can begin to control healthcare costs by fully understanding the benefits of selfinsured health plans, including a the scope of financial obligations, opportunities to safeguard against catastrophic health events, and other techniques to lower healthcare costs. The first step is to understand these two types of stop-loss insurance: Specific Stop-Loss Insurance Specific stop-loss insurance protects against a catastrophic loss incurred by any individual covered by the plan, with the deductible set at a level that’s appropriate for the size and financial strength of the company or organization. The employer pays a fixed premium to the stop-loss carrier. Some stop-loss contracts don’t require the employer to fund the claim and wait for reimbursement. Rather, the administrator pays the claim directly from the carrier’s account. In a real-life example, a 32-year-old woman delivered a pre-term baby boy at seventh months. The baby, who had health issues, had to be treated in the neonatal intensive care unit for 60 days. The claims total was $285,000. The employer’s self-insured specific stop-loss insurance had an $80,000 deductible. The amount reimbursed by the stop-loss carrier was $205,000. Aggregate Stop-Loss Insurance Aggregate stop-loss insurance protects against excessive claim expenditures for the entire plan. Through actuarial studies, stop-loss underwriters can estimate smaller, predictable claims, although these projections are based on large, industry-wide samples and are, therefore, subject to variations and fluctuations. To better understand the advantages of self-insurance with stop-loss insurance protection, consider these examples: • Company A is insured with a fully insured carrier and pays $1.5 million annually for its health insurance plan. At the end of the year, the company shows only $1 million in claims and administration costs. Their carrier keeps $500,000 in profits. • Company B is self-insured with a health plan management company managing its stop-loss insurance. This firm’s potential worst-case scenario for the year is $1.6 million annually. The company pays $20,000 a month in projected costs and reserves $1.36 million for potential claims, which the company can invest, segregate, or use for day-to-day business until a claim occurs. At the end of the year, Company B’s claims are $1 million. It keeps the $360,000 remaining in the reserve, and sees a $260,000 savings. Health Insurance Tax: A Closer Look The health insurance tax is a fixed-dollar amount distributed across health insurance carriers: $8 billion in 2014, $11.3 billion in 2015 to 2016, $13.9 billion in 2017, and $14.3 billion in 2018. After 2018, the tax rises according to an index based on net premium growth. Over the first decade, the tax imposes an estimated $87.4 billion, but that number profoundly understates the long-run financial impact. The tax will not be fully implemented until 2018, so its full magnitude will
only be realized in the second decade (2021-2030), with 10 full years of a premium-indexed, fully implemented tax. Some industry experts put this figure at $200 billion to $300 billion. Clearly, the looming health insurance tax burden imposes additional pressure on employers and on brokers who must also find business solutions that curb costs. These solutions must address the effect of the ACA’s other key burdens aimed at insurance-based plans, including the following: • Essential health benefit requirements. • Comprehensive coverage for health benefit package. • Jurisdiction of state ombudsmen. • The assurance that consumers get value for their dollars. • Administrative simplification. Confronted with tax increases and mandates to offer richer benefits with less cost sharing, more employers are considering switching from fully insured plans to self-insurance. Brokers are well advised to provide the information and tools they need to make a successful transition. Furthermore, understanding the full implications of the health insurance tax and other ACA mandates will help brokers leverage opportunities for their clients and create differentiation in a tight marketplace. The bottom line is that self-insuring enables companies to offer quality, cost-effective healthcare when many employers are forced to cut costs, often at the expense of their workforce. –––––––– Joseph Berardo Jr. is president and chief executive officer of MagnaCare.