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Calculated risks

Take control of employee health insurance costs by selecting the right plan and benefits. Self-funding, captives and a level-funded program are your primary options.

Calculated risks
Whether you run a large hospital or own a small general practice, know that you have options with employee health insurance.

If you’re a veterinary practice owner who has decided to offer group health insurance benefits to your staff, you’ve likely done so for one of three reasons:

  • Your practice is large enough that you’re required to comply with the Affordable Care Act’s employer mandate (more than 50 full-time-equivalent employees) and you’d rather not pay penalties for noncompliance.
  • The market where you live and work has limited health insurance options — none suit your needs — so you offer group insurance because you need the coverage personally.
  • You recognize the importance of providing employees with access to quality and affordable health care coverage, and you genuinely want to use benefits as a tool to attract and retain top talent.

Whatever your reason is, controlling costs is paramount to the sustainability of your health insurance plan. The expense is likely the second- or third-largest expenditure behind payroll, and it’s becoming only more expensive.

How can you control costs so that you’re able to continue offering coverage? According to the National Business Group on Health, employers project that the total cost of providing medical and pharmacy benefits will rise for the fifth consecutive year in 2018, to $14,156 per worker.

Tough Decisions

Let’s assume your clinic is like the average general practice and has 17 full-time employees, 10 of whom participate in your health insurance program. That would put your annual expense, before any employee contributions, at $141,560. If just one more employee signs up next year, you’ll face a cost increase of almost $15,000 just to maintain the current level of benefits.

Most practice owners and managers try to minimize this cost increase in a handful of ways, none of them viable long term. For instance:

  • You can reduce the percentage of the premium that the practice pays, or you can increase deductibles and out-of-pocket limits. Both options shift more of the cost to employees and doesn’t make them happy.
  • You can raise your prices and pass the cost to your clients. That’s not an option for practices in a competitive market.
  • You eat the increase, which is what most will do. But it’s not really a solution.

Regardless of your hospital’s size or why you offer health insurance benefits, some alternate but often-unexplored solutions are worth considering.

The Big Guys

Large hospitals or practice groups — those with 200 or more employees — should consider self-insuring their health plan. Self-funding is an effective way to take control of rising health care costs.

Self-funding works this way: Instead of buying traditional health insurance from a provider, an employer pays the staff’s medical bills directly and purchases medical stop-loss insurance to protect against catastrophic large claims.

Self-funding divides the financial risk into two layers:

  • An employer layer (below the stop-loss threshold).
  • A stop-loss layer (above the threshold).

Employers hire a third-party administrator to handle day-to-day tasks such as processing claims, determining eligibility and providing customer service. These practices typically use a preferred provider organization (PPO) network such as Cigna or Aetna to access discounted medical services.

Why do employers self-fund? The main reasons are transparency and control. A self-funded plan is customizable, which allows employers to manage the costs while providing employees with the benefits they want and need. For example, if you wanted to increase the number of covered physical therapy visits, you could.

The Middle Rung

Self-funding might not be best for midsize practices (50 to 200 employees). A self-funded plan creates a risk/reward trade-off. The more risk an employer takes on, meaning the more employee claims a practice owner is willing to pay outright, the lower the program’s fixed expenses. If you want to transfer risk to someone else, fixed costs rise because you have to buy more insurance. This type of insurance is known as stop-loss coverage.

An employer trying to lower fixed costs can buy less stop-loss insurance, but the result can be more year-to-year volatility. If an employer buys more stop-loss insurance, the fixed costs will be higher. This is why deep-pocketed larger practices and hospital groups are more likely to self-insure than smaller independent practices are. They can afford to buy less stop-loss insurance and absorb each year’s financial ups and downs.

For midsize practices that want to self-fund, viable options exist. A group health insurance captive, or solution, allows midsize employers to join forces and mimic a large company’s size, giving them the same advantages when buying health care coverage.

The captive becomes a shared-risk pool spread among all participating employers and pays members’ claims that are above the individual employee stop-loss insurance maximum. Since the captive takes on some of the risk, the participating employer can transfer risk without having to buy more stop-loss insurance. Captives allow like-minded employers to collaborate and take advantage of the benefits of self-insurance when they might be too small to do it on their own.

The Small Fry

That leaves the small practices, or those with less than 50 employees. If you run one of these practices and offer health insurance, your plan is probably fully insured and you likely purchase coverage from UnitedHealthcare, Humana, Aetna or Anthem/Blue Cross. Self-funding would be challenging.

The benefits of being fully insured include:

  • Administrative ease. You can “set it and forget it.”
  • The practice faces no additional financial exposure beyond the monthly premium.
  • Monthly payments change only if employees are added or removed from the plan. Utilization of the plan doesn’t affect the premium.

If your staff is older than average or if you employ some high-risk individuals — those who need a joint replacement, take an expensive medication or receive oncology care, for example — you aren’t penalized. When the Affordable Care Act went into effect in 2014, insurance carriers could no longer price small-group plans on the basis of employee health or utilization.

By the same logic, because there is no longer medical underwriting in the small-business segment, younger or healthier groups aren’t rewarded. You can find insurance programs designed for small businesses that reward healthier groups by returning surplus premiums at the end of the year, which is the difference between what is paid in premiums versus what the insurance company paid in claims plus expenses.

These programs are known as level-funded health plans and have many of the same benefits as fully insured plans.

Weigh Your Choices

Whether you run a large hospital or own a small general practice, know that you have options with employee health insurance. Consider self-insurance, a captive program or a level-funded offering. Design a health plan that meets your employees’ needs and budget.

Over time, you can go further and design a plan that incentivizes the use of primary-care physicians and rewards other choices, like staying out of the emergency room in non-emergent situations and switching to generic medications over costly brand-name drugs.

Once you’ve designed a quality and affordable health plan, you must effectively communicate the value of the benefits to employees. Ask your insurance broker or consultant for benchmarking data and see how your plan compares. If it isn’t as rich as what other hospitals offer, or if it’s more expensive, work with your broker to make improvements.

If your plan is richer or costs employees less, make sure to share the data with them. Show the benchmarks, and then show how your plan compares. This will help with value perception, recruitment and retention.

In addition, work with your broker to create an education campaign, especially around open-enrollment time, and create custom benefit guides and handouts that reflect your practice’s brand. The more unique your benefit program feels, the more valued it will become.

Cory Friedman is vice president of benefits consulting at Alera Veterinary, a division of Alera Group.