Entrepreneurs are skilled at finding solutions to business problems, provided they understand all the rules of the game.
The Affordable Care Act (ACA), signed into law in March 2010, is over 900 pages long. Most of the built-in compliance penalties and reporting provisions have not been enforced, and interpretation of many of the compliance rules is near impossible.
The Trump administration has discussed multiple strategies to get rid of the ACA, including full demolition, slowly suffocating the program by cutting funding sources and a restructured replacement. Needless to say, the landscape of health care will once again change.
Traditionally, midmarket companies had limited choices for health care other than fully-insured plans. You could use the federal exchange or you could use a broker to shop the marketplace. In the end, you selected an insurance company to manage your fully insured program and that company alone determined what it would cost.
Of course, many of us toggled deductibles up, reduced coverage and implemented alternative funding sources, like health saving accounts (HSAs), to lessen the blow and help employees budget for medical care.
As an example of the volatility our group has experienced, we have endured increases of more than 15 percent in 2014, minus 1 percent in 2015, and an increase of 46 percent in 2016. This type of scenario is not fun for anyone, especially employees and their families. I appreciate that many entrepreneurs have been on this same roller coaster, which seems to always be traveling uphill and rarely down.
The self-funding option
So what can we do? I attended a networking event in November and I met up with Alliance Solutions Group CFO Matt Lyon.
We started talking and the annual health care dance — the painful exercise of partnering up with your insurance broker to shop the fully insured marketplace to see how much your health care premium is increasing — was brought up. Matt said he stopped that annual dance when he started working with Frank Miotke, a broker/consultant at Vantage Benefit Advisors, and implemented a self-funding model.
Traditionally, self-funding has been geared toward larger clients with hundreds of employees. However, the self-funding option now makes the option viable for nearly any size employer. The midmarket product typically is focused on customers ranging from 50-500 full-time equivalent employees. The midmarket self-funding captive group program allows small and midsize companies to join forces and minimize the effects of claim activity.
By joining the captive group, companies retain the claim dollars that are not paid out in a good year (low claims), but also spread the risk among all of the captive group companies in a high claim year. There is also the real possibility of retaining profits if the captive group doesn’t hit the maximum claim threshold. Many of the groups that participate save 10-20 percent in the first year, depending on their claim activity.
Conversely, when fully insured, a midmarket company that experiences a good claim year often has to absorb increases that the insurance carriers pass on to customers. In a self-funded program, increases are directly tied to the variable elements of the program and traditionally increase 0.5-2 percent a year, assuming a good claim year. In addition, self-funded premiums are not subject to state health insurance taxes, which can constitute 2-3 percent of the cost of the overall plan.
In a fully insured arrangement, the insurance carrier is 100 percent responsible for all claims. Additionally, the carrier performs many of the administrative functions related to billing, eligibility, compliance, etc. The insurance company essentially tells us what they think our claims will be, they add in their administrative services and their gross margin, resulting in large double-digit increases like we have experienced through the years.
Take control
By considering a self-funding arrangement, the employer becomes the claim payer. The employer directly participates in the experience of the plan (claim activity) on an ongoing basis. This allows small and midsize companies to take control of their health plan and help their companies become better consumers of health care.
This pivots the annual renewal dance of changing contributions and increasing deductibles to a more strategic discussion of how to control health care costs as a company asset for the long run.
So what’s the downside? Some companies may not be able to get into a captive group because of historically high claims activity, poor cash flow to cover smaller claims and some additional financial risk during an unusually large claim year.
Investigating a self-funded captive group program is definitely an option many employers should consider. While it might not be the right fit for every company, those that are frustrated with the fully insured rate increases and lack of control and influence in your health care program should at least consider the option.
Ask yourself one question: When was the last time the insurance carrier emailed you a renewal that said, “Congratulations! Since your plan ran below our target-loss ratio, we are going to reduce your costs by 20 percent for the upcoming plan year.” For those of us in the small to midsize market segment, this just does not happen. The self-funding model gives the entrepreneur the ability to manage their health care program by providing direct visibility to controllable elements so we can do what we do best, run our companies. ●
Kevin Weidinger is president at Laudan Properties LLC. Frank Miotke, broker/consultant, Vantage Benefit Advisors; and William McCormick, MBA, CEBS, president and CEO at Vantage Benefit Advisors, also contributed to this article.
