How Common Is Health Plan Overpayment?
About 80% of firms over-pay health insurance, letting the "sickest" 20% underpay. Actually, companies as small as 25 covered employees can benefit from "partial self-funding" their health insurance.
But they almost never do -- either their broker doesn't understand self-funding, or there are health or cash flow problems blocking the road.
The BBI Advisory called, "Saving Money on Health Insurance: An Executive Guide to Partial Self-funding for the Company with 25 - 100 Employees provides an overview of risks, rewards, considerations, and other factors you need to decide if self-funding makes sense for you.
To order, see the form at the bottom of this page.
Does this sound like your company?
- You have 25 - 250 employees.
- You're fully insured.
- Your employees are reasonably young, seemingly healthy.
- You don't know of any serious conditions within your group.
- You've been with the same carrier for more than three years.
Then you're probably overpaying for health insurance.
But Why Are You Overpaying?
Twenty years ago, if someone in your group had cancer or there had been large claims the year before, you couldn't get coverage for your group. Or your price was astronomical.
Those days are gone -- thank goodness -- but as a result we face a situation that almost guarantees that you're paying too much for your coverage.
Everyone Gets Coverage Today
To stop the predatory pricing and cherry-picking practices of yesterday, many states stepped in with reforms. As a result of those reforms, there are often limits on the pricing flexibility of carriers, particularly on groups smaller than 100 employees.
Then there's HIPAA. That Federal Regulation says that any employee must covered by a plan without any waiting period if he's been insured at all within the last 62 days.
And even if he hasn't been insured, the carrier can only make him wait a year (in Massachusetts the wait is only 6 months) to be covered, no matter how serious his disease is.
Carriers Multiply the Cost via Risk-Spreading
Health insurers -- even the nonprofit ones -- need to make money, and to stay within the laws of their state, they need to offer relatively evenly-priced coverage. Some states even limit the carriers' pricing flexibility and range on smaller groups, so renewal groups -- even with terrible claims -- have to be priced within a small percentage of a brand new group or a healthy group.
So carriers price all coverage based on overall claims results.
Oh, if you have more than 50 employees you may get some modification based on your own company's claims, but not until you reach 100 emloyees will you be able to see just what your claims are.
So you don't know whether you're overpaying or not. You have to trust your carrier... Does that make you feel confident?
Remember, the overall claims results include those 20% of employers that typically rack up 80% of the total claims. If you're not one of the employers with sick employees... you're overpaying.
The carriers feel as if they HAVE to overcharge the average group so as to assure that there's enough profit generated by you and the other 80% of employers to cover the massive losses they incur on the sickest 20%.
They're not wrong -- but you don't have to play the game.
And Your Broker May Be in Cahoots with the Carrier
And here's a really scary thought: the person you trust the most -- your broker -- may be "conspiring" with the carrier to make you pay more.
Outrageous? The guy or gal who's led you through multiple renewals, redesigned your plan, given you guidance... and he or she may be misleading you?
You're probably thinking, "There's no way Charlie would mislead me."
Maybe you're right, and maybe it's not intentional, but there are three things you should think about before you dismiss the possibility entirely:
- Every carrier has a bonus program that rewards brokers based on the number of new accounts they've sold, the total amount of premium the broker has with that carrier, and the percent of cases the broker renews every year. In short, it pays to keep business with a carrier.
- Brokers don't usually get bonuses on self-funded business (hey, the carrier doesn't get to keep your excess premium, so why should they reward the broker?). So the broker would rather keep you in a fully insured policy... he gets commission and bonuses.
- Most brokers -- particularly those who also do your company's Property and Casualty insurance or your personal estate planning -- don't understand self-funding. It's complex, the commissions are often lower, and in a bad year the broker knows you're going to blame him for "getting you into this mess."
Recently one of our clients got a real shock - his health insurance renewal increase was just 0.3%! He was thrilled - his business friends were seeing 8-12% increases and more.
But we said, "A near-zero increase usually means there's lots of room to save. Let's get to work and look at alternatives."
Little did we know just how much our client was overpaying. He had grown beyond 100 enrolled employees, so we were - for the first time - able to see his actual claims experience. When we did, we discovered that he was paying $257,684 more than necessary!
Here's what we found:
|Claims (12 months)||$ 437,888|
|Approximate administration costs||$ 97,427|
|Total Carrier Costs (including profit allowance)||$ 535,315|
|Premium Paid (12 months)||$ 792,999|
|"Excess" premium||$ 257,684|
Wow! Prior years' results suggested this was no fluke... the two proceeding years had also had lower-than-market increases.
But How Much Should the Client Have Paid?
Don't get me wrong - $535,000 isn't necessarily the right price. Hey, the carrier took all the risk, and they lost money on other employers -- but that's just the point. Generally speaking, the healthy majority of employers support the unhealthy minority.
Last year we had suggested the employer consider sharing risk via partial self-funding, but he didn't know what his claims were, so he balked.
If he had shared some risk with the carrier, he would have spent much less than the $792,999 he did spend.
But Would the Carrier Let Him Profit from His Good Results?
With these great results, would the carrier cut the employer any slack, cut his rates, give him a break?
C'mon, are you kidding?
The renewal proved that the carrier wanted the client to overpay this year, just like last year.
Skipping the boring details, we did an in-depth analysis that suggested the carrier could have lowered the renewal by 6-16% and still made out.
They figured the employer would probably be happy with a near-zero increase. And they'd have been right if he hadn't grown large enough to see the actual claims numbers.
When the client knew how much he'd overpaid, he jumped at our suggested partial self-funding program. In the program we created for him,
- The carrier-projected cost will be $37,979 below what they paid in premiums this year.
- Their absolute maximum, worst-case, drop-dead-ugly result will still be $40,747 less than what they were prepared to pay if they took the renewal.
- The risk of a bad claim - the biggest risk in self-funding - was reduced more than 40%
Is there risk? Of course. Is there reward? Yes, potentially. Potentially HUGE.
What's It Worth to Me, and Will it Work?
About how much are your total annual premiums? Knock 10% off that number -- that's about your probable savings. Are your premiums $1,000,000? Then you might save $100,000. $800,000 can save $80,000.
Will you make that every year? Nope.
Will you make it most years? Yep.
But in a bad year or if you have employees with serious health conditions, it's much more risky.
So it's hard to give an answer without some reservations.
But here's what we can do. If you're over 100 enrolled employees, we can help you get and evaluate your experience. That will give you a good head start.
But even without knowing your exact claims experience, we can still show you a way to make an intelligent, scientific assessment of your chances of success. You can see your options, project your costs, and determine how money much you might save.
But before you commit yourself to anything, ask yourself these questions:
- Are my people reasonably healthy, maybe healthier than average?
- Would I like to discover if I'm overpaying? Do I have a better use for the money?
- Will I consider swapping a little risk for potentially large rewards?
- Can I tolerate some cash flow fluctuations in exchange for greater profits?
If you can answer "yes" to some or all of those questions, you owe it to yourself to learn more about this under-used mechanism.
Yes, Let Me See if Self Funding My Health Insurance Makes Sense for Me!
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