Self-funded insurance plans have risen in popularity in this rapidly changing healthcare market. For many employers, the numerous advantages of self-funding outweigh the risks.
The advantages to self-funding a health plan are well documented:
- Improved cash flow and reduced taxes
- Plan design flexibility
- Ability to unbundle services and vendors
- Access to more claims detail
- Stop-loss flexibility
- Reduced carrier fees
Paying your actual claim costs versus the carrier’s expected claim costs can also be an advantage if your claims tend to be less than the insurer’s projection. However, there is no guarantee they will.
Recently, a new advantage to self-funding has surfaced, and it may be due to many carriers’ slow responses in addressing high-cost drugs in their fully insured plan’s experienced rating formulas.
A Bit of Background
For decades the experience rating formulas used by major carriers has included a stop-loss (or pooling) feature. Pooling is a necessary feature for small- to mid-size employer plans because it minimizes the effect of occasional catastrophic claims. Medical claim costs for covered members over a predetermined amount ($100,000, for example) are removed from an employer’s plan utilization before being projected into the new policy period. In essence, the excess amount does not impact the projected cost of the future period.
Instead, the carrier applies a pooling charge across its entire book of business to cover the excess amount on these catastrophic claims. Traditionally, that provision did not include prescription drug claims, since the term “catastrophic” typically meant long-term hospitalization expenses. But not so today. Today, a catastrophic claim could be due to the high cost of specialty drugs.
Specialty drugs comprise about 1/3 of the total U.S. prescription drug spend.
Specialty drugs are a constantly growing segment of today’s medical treatment plans for complex diseases, including cancer, multiple sclerosis, rheumatoid arthritis and hepatitis C. Specialty drugs cost an exorbitant amount; they now make up roughly one-third of the total U.S. prescription drug spend.1
However, the high cost has become secondary in the minds of patients because these specialty drugs are successful. Employer-based medical plans with a basic employee co-pay design (where the drug co-pays typically cap out at $60-$75 per prescription) encourage this mindset.
It’s not uncommon for two or three individuals’ prescription expenses for one or two specialty drugs to represent more than half of an employer plan’s entire drug spend. And as a result, it’s also not uncommon for an employer plan’s prescription claim costs to increase 30-40% in one year. In many cases, this is an anomaly within the plan because the actual treatment is often short term. For example, some employers have seen this scenario play out with a hepatitis C drug treatment whose one-time, 12-week treatment costs the plan $94,000.
If there is no provision within the carrier’s fully insured rating formula to temper the effect of that one-time cost, the employer plan could see a major spike in prescription drug premium rates at renewal. Some fully insured carriers are already on top of this, and are including prescription claim expenses (along with the medical claims) when determining excess claim amounts over a stop-loss limit within their fully insured rating formula. There are, however, many fully insured medical carriers that do not.
This gives self-funded plans an advantage. When an employer with a self-funded plan selects a stop-loss carrier and individual stop-loss coverage, they have the option to include drug expenses in determining high-claimant costs subject to the individual stop-loss limit under their stop-loss coverage.
Self-funding advocates can tout this option as an advantage now, but it may be eliminated once fully insured carriers begin including drug expenses in the stop-loss feature of the experience rating formula.
Ask your employee benefits broker if self-funding is right for your organization.
1 Congressional Research Service, “Specialty Drugs: Background and Policy Concerns”
- Managing the Cost Challenges of Specialty Drugs
- Why Smaller and Mid-size Employers are Considering Self-funding
- 2 Ways to Maximize Value in a Self-Funded Medical Plan
©2016 Corporate Synergies Group, LLC. No part of this material may be republished or distributed without prior written consent.