Most CEOs are all too familiar with
the nearly 15 percent average annual increases in the direct cost of health insurance and the subsequent
impact on the company’s bottom line. It’s
when companies begin expanding through
mergers and acquisitions that the indirect
costs and the inflexibility of most health
insurance plans become apparent.
With vast regional differences among
health plans and coverage provisions,
health insurance issues often impact on
business expansion initiatives.
Mike Lutosky, employee benefits broker
with Westland Insurance Brokers, says that
there is no need for CEOs to become victims
of the business cycles of the health insurers
— a situation which has been further exacerbated by industry consolidation, causing
average HMO premiums to double over the
last few years. He says that what CEOs need
is an effective strategy that provides an alternative to traditional health insurance.
“What’s your current strategy to control
health coverage costs? If you are waiting
until 60 to 90 days before your current
renewal and then merely reacting to the
increase that your health insurer dishes up,
you aren’t strategically dealing with the
issue,” says Lutosky.
Smart Business spoke with Lutosky
about how CEOs can incorporate self-funding into their overall strategy for controlling the cost of health care.
What is self-funding?
Self-funding is an alternative to fully
insured group health insurance plans.
Instead of an insurance company collecting premiums and paying your claims, the
company funds the program, sets the rules
and has control over paying claims. More
than 60 percent of U.S. companies offering
benefits use a self-funded program.
What are the qualifications for offering a self-funded program?
Companies in any industry with as few as
50 employees should consider implementing a self-funded program. Frequently,
CEOs who want to establish their firm as an
‘employer of choice’ prefer self-funded programs because they have greater flexibility
in terms of plan design, claims payment
thresholds and claims processing speed.
Because consumer satisfaction with health
insurance is based upon personal experience, employee satisfaction is much higher
when companies offer a self-funded program that avoids yearly swings in premiums
and coverage limits. With greater consistency, employees feel more secure and have
fewer reasons to look for new opportunities.
How can CEOs benefit from self-funding
health coverage?
CEOs will regain an enormous amount of
control with a self-funded program. Financially, there is an increase in cash flow
through the ability to recapture the use of
plan reserves, and the company will earn
interest on the money held in reserve. Self-funded plans comply with federal guidelines
instead of state-mandated laws, and there is a
reduction in most of the state-imposed taxes.
Not only are the administrative fees lower
through a third-party administrator than
through traditional health insurance plans,
but with a self-funded plan you see where
every penny spent on health care goes.
I worked with one company that wanted
to make an out-of-state acquisition. There
was a key employee in the new firm who
was vital to the business, but because the
plan offered here in California was more
expensive and did not offer a comparable
level of benefits, the acquisition was
impacted. With a self-funded plan, this kind
of scenario can be avoided. You have the
flexibility with self-funding to design a separate plan for a group of key employees
when merging or acquiring.
How can CEOs limit risk with a self-funded
program?
We protect against catastrophic loss by
purchasing reinsurance from an A+ rated
carrier. Because the market is plentiful,
there are numerous choices for CEOs when
selecting a reinsurance company. With the
average monthly HMO premium standing at
$250 to $300 for each employee, self-funding
your benefits program makes more financial sense than ever. In more than 20 years,
we have only had a handful of employers
move back to a fully insured program for
financial cost reasons.
What are the steps to initiating self-funded
health coverage?
Self-funding is a much more proactive
way of dealing with the issues associated
with providing employee health coverage
than the reactive process of soliciting competitive bids 60 days prior to renewal. We
start by educating CEOs about self-funding. Then we provide a financial analysis to
see if it is financially viable for your organization to consider self-funding. Next, we
design a comprehensive transition plan for
the company and its employees.
Self-funding gives CEOs a strategy and a
plan to better understand and deal with the
financial impact of escalating health care
costs. This strategy gives CEOs a large
measure of financial control and understanding that does not exist in a fully
insured program.
MIKE LUTOSKY is an employee benefits broker with Westland Insurance Brokers. Reach him at [email protected] or (619)
641-3276.