By Dennis Kadel
For many companies, cost-control measures of the past—such as increasing cost sharing or employee contributions—have been short-term fixes that cannot be sustained indefinitely. While the costs of health coverage have long been on the rise, many would argue that the Affordable Care Act has increased costs further, rather than reduce or control them. For example:
• The ACA imposed new fees, penalties, and excise taxes on employers with as few as 50 employees (or on their carriers, who have passed the costs on to employers in the form of rate increases).
• All employers with up to 50 employees are required to move to community rating standards by late 2015, and many are seeing rate increases in the range of 20 to 40 percent.
• Employers with between 51 and 100 employees will also be subject to community rating starting in late 2016, and similarly dramatic rate increases are expected.
• In order to avoid hefty “Play or Pay” penalties under the employer mandate, employers with 50 or more full-time employees are required to pay at least 90.5 percent of employee-only premiums, a higher percentage than many have traditionally paid.
• Employers with between 50 and 100 employees are subject to both the law’s Play-or-Pay mandate and its community-rating rules, a combination that creates confusion due to numerous overlapping (and sometimes contradictory) requirements.
Those factors have created an incentive for more—and smaller—employers to consider new ways to reduce the cost and complexity of providing health coverage to their employees.
Employers seeking to control rising costs may want to consider an alternative funding mechanism such as self-insurance or participation in a health-coverage captive. With self-insurance, employers are responsible to pay only the amount of claims actually incurred throughout the year (plus administrative expenses). To minimize risk, most self-insured plans purchase stop-loss coverage, a type of insurance that reimburses companies for health claims in excess of a contractually agreed upon amount.
The most definable, immediate cost benefit from self-insurance is that it allows employers to avoid ACA taxes of up to 5 percent per year. Self-insured plans also experience substantial savings in the form of rebates for excess premiums paid into the plan when the amount of incurred claims is less than the premiums paid by the employer and its employees into the plan.
In return for those savings, self-funded employers assume more financial risk than fully insured ones. This can be reduced by joining a captive, which also utilizes a self-insured funding mechanism but allows multiple employers to join together in a single plan, pool their risk, and thereby minimize risk, volatility, and long-term costs.
Historically, self-funding has been primarily a feature of large employer plans—those with more than 500 employees. In the past decade, according to the Employee Benefit Research Institute, more than 80 percent of such plans have been self-insured. For smaller employers, the percentage of self-insured plans is only 25 percent for employers with 100-499 employees and 13 percent for those with fewer than 100 employees.
In Missouri and Kansas, the insurance industry is poised for a dramatic change. New self-insured products for smaller employers are now being offered by UnitedHealthcare, Aetna, and Cigna, with Humana and Blue Cross Blue Shield of Kansas City not far behind. Depending on the specific product, you may choose to go with a plan that looks very similar to a large self-insured plan, one that functions nearly identically to a fully insured plan, or somewhere in between. Stop-loss carriers have become increasingly willing to insure smaller groups as well.
Alternative funding arrangements such as self-insurance and captives are not for everyone. Some factors to consider:
1. You must be willing to take a more active role in monitoring and managing the plan.
2. You have to be comfortable with increased fiduciary responsibilities and financial risk that come with a self-insured arrangement.
3. Ideally, you should be interested in using wellness incentives to encourage employees to make healthy choices and reduce medical costs.
4. For captives, the ideal employer has between 50 and 250 employees, is privately held, financially stable, and is not in a high-growth or acquisition mode.
Providing benefits—particularly health- care coverage—continues to be an important tool for recruiting and retaining employees. With that in mind, you owe it to yourself to learn more about alternative funding options. It just might be your ticket to controlling costs.
Dennis Kadel is an employee benefits adviser for The Miller Group in Overland Park.