$575 Billion! That is one forecasted reduction in 2020 healthcare spending due to COVID-19 as folks avoid seeking ordinary medical treatment. Will this temporary reduction in medical use at hospitals and other settings reduce ongoing medical inflation? It may take years to determine the cost of COVID-19, nationally or regionally. Health insurance actuaries must create models using their own estimates or predictions for COVID-19 as well as a dramatic, albeit temporary, drop in healthcare spending. It is a good bet that most traditional, fully insured cost projections will not lead to lower health insurance premiums for employers. Fully insured insurance carriers will pass along medical inflation increases, which reduce employee paychecks and employer profits.
Is there a method to avoid increases? Fully insured premium payments are advance funding for future expense of medical costs. Whether any medical treatment occurs or not, fully insured premiums are collected. Less medical usage, higher profit for fully funded health insurance carriers.
In November of 2018, consulting and actuarial firm, Milliman published a whitepaper indicating that fully insured costs are 5-10% higher than self-funding. The higher costs are due to state premium tax and Affordable Care Act “excise taxes”, carrier overhead and insurance company profit margins. Self-funding allows employers to fund claims costs as they occur (pay as you go), control plan design offerings, and not pay any excise or state premium taxes on employer paid medical claims (pay as you go portion). Covered members impact claims frequency and severity, not the plans offered, or the taxes charged.
Self-funding requires administrative expenses like fully insured. Itemizing these costs highlights potentially dramatic savings (up to 45%). Below identifies just some of the potential overhead expense savings, expressed as a Per Employee Per Month(PEPM).
Fully Insured Self-funded
Claims Administration Margin $100.00 $0.00
Pooling Charge $80.00 $0.00
Premium Tax $20.00 $0.00
Insurer Fee $40.00 $0.00
Claims Administration -Network $35.00 $45.00
Consulting Fees* $15.00 $35.00
Total $290.00 $80.00
*fully insured carriers pay $20 PEPM or more in most states
Benefits of self-funding include: Net medical cost expense reduction; access to data that includes transparency on pharmacy and medical use; flexible and controllable plan design; and providing return on investment for tailored health and welfare programs. $575 Billion! Acknowledging that fully insured carriers pass through medical claims costs plus the administrative burden and consistently report an underwriting profit, it makes sense to look for alternatives now!
Don McCully runs Medical Captive Underwriters LLC, (www.medicalcaptive.com). Focus is lowering medical trend and spend for enrolled employers. ClearCaptive is a 50-state open access medical stop-loss group captive solution for middle market employers with 50 employees enrolled or greater.