Medium and large employers have found that they can save an average of 30% self insuring the health care of their employees.
And while policymakers and pundits lament the need for healthcare reform, self insured groups have the power to save an additional 20% themselves, with the simple addition of quota share stop loss coverage and a triage service based on price, outcomes and location..
In the United States, a self-funded health plan is generally established by an employer as its own legal entity, similar to a trust. The health plan has its own assets, which, under the Employee Retirement Income Security Act of 1974 (“ERISA”), must be segregated from the employer’s general assets. The health plan’s assets are derived from pre-tax (in most cases) contributions made by employees, and sometimes additional contributions made by the employer.
The contributions to the health plan’s assets are required to be immediately segregated from the employer’s general assets. Any claims incurred by plan members in excess of the amount contained within the health plan’s pool of assets are the sole responsibility of the employer. The employer, in that case, must deposit its own funds into the health plan’s trust account sufficiently to fund any outstanding claims liabilities.
There are currently over 80 million employees in the US whose health care is partially or completely covered by employer's self insurance.
Healthcare is unique as the largest industry in the US lacking meaningful transparency for consumers in terms of pricing and quality of care. Because consumers typically don't pay for healthcare services themselves they have no incentive to comparison shop. And while health care facilities do not post their prices to the public like most every business is forced to do, data on pricing and outcome quality is available by reviewing data that facilities submit to Medicare.
In reviewing this data, a couple of very striking issues stand out.
Prices for the same procedure range by up to 200% or more even within the same region. And prices Nationwide can range even more. For example a heart transplant in Stanford California will cost you $2.2 million. However the same heart transplant in Dallas will cost you only $400,000 one fifth of the price. Ironically the man set to overtake the world record for longest survivorship of a heart transplant is Ralph Thornton in Dallas who had his heart transplant in Dallas.
The disparity in prices do not match the disparity in quality of care. this is Illustrated attic get away with the example above but detailed review of health care facilities and their outcomes demonstrate that pricing is a result of young facilities cost structures, pricing policies or other factors and not necessarily a result of Market forces as most Industries.
Referring healthcare providers based on price and outcomes, instead of by random chance opens up very large cost savings opportunities. By taking into account the location and considerations of the facility such as price and quality it may in many circumstances actually be more practical to refer employees across town or even out of state at their discretion as a sort of paid vacation or domestic medical tourism.
This process is not difficult and does not need to inconvenience employees. As stated above the ultimate decision of where to go can be left to the discretion or approval of the employee. And while employees may nominally say that they are concerned about quality rather than price, the reality is that most patients do very little research into the healthcare facilities they are referred to. Rather they typically go to wherever they are referred to.
In fact, given the large price disparities, an employer could offer incentives such as travel allowances and even cash bonuses for using lower cost facilities. And, with the availability of outcome data they will often see that there are cheaper alternatives with better outcomes in more enjoyable settings for them. Indeed, the whole process could be be structured as an employee perk or sabattical or paid vacation.
We have analyzed and graphed over 15,000 medical procedures by price around the country by DRG code, facility, and state. The following andomly chosen graphs of procedures demonstrate the large disparity in prices even within the same state. (contact the author for free copies of other state or procedures comparisons).
A large percentage of medical procedures provided are a result of random referrals by healthcare providers, rather than by a comprehensive review of price, quality and location. Large health care systems are increasingly developing preferred provider arrangements with certain providers, which they often call ‘centers of excellence’. However, even among large insurance providers this is still not systematically done. Self insured employer groups stand to benefit even more as they typically do not even do this for the most typical medical procedures (e.g. knee surgery and hip replacement). Self insured groups could save hundreds of thousands or millions of dollars a year by simply researching, or having a service to research the best facility by price and location and outcome for their employee.
Quota Share Stop Loss Insurance
Stop loss insurance a form of reinsurance that insures self-funded plans and their assets.
Due to potentially large insurance claims, an employer could easily find itself bankrupt if its employees incur a large number of high-dollar claims and the employer is unable to fund them all. Hence the concept of stop-loss insurance which provides the employer with an additional source for funding to pay for catastrophic losses.
Businesses can shift inflated insurance premiums paid to brokers and commercial carriers into a self-directed insurance and asset protection vehicle that broadens coverage, lowers cost, preserves capital, increases equity, and realizes tax benefits.
These carriers are stripped of much of the cost of operating a traditional insurance carrier. These ‘purpose built’ or captive insurance companies have ‘fronting’ arrangements that allow them to do business in a state as well as treaties with major reinsurance companies that allow them to offload risk.
Some of these carriers also offer innovative programs that rebate a percentage (e.g. 20%) of premiums that are not used for medical claims. This provides an incentive for employers to manage their healthcare costs as well as to eliminate the ‘fat’ of insurance costs.
As businesses grow, to save costs, they tend to migrate to self insurance arrangements to cover some or all of their employees health care costs. By utilizing a triage service that provides employees with additional information and incentives, an employer can save up to 50% compared to allowing primary care providers to refer out health care wily nily. Employers can further save with a self insurance coverage that provides a quota share or refund where medical costs are less than premium.
Mike Bishop, JD
Slim Ventures, LLC