Can Transitioning to a Self-Funded Health Plan Truly Benefit a Nonprofit?
The conventional wisdom in today’s health insurance marketplace holds that nonprofits should not consider a self-funded health insurance model because cash flow concerns make such a plan too risky. This notion is false, and it has been perpetuated for years by both the insurance carriers and the broker community. Why? Because the current market structure has misaligned both the carriers’ and the brokers’ incentives with the best interests of the nonprofits, and that is controlling the cost of their healthcare spend while delivering quality coverage for their employees.
The monthly premiums paid for fully insured plans are a carrier’s revenues. Have you ever heard of any company looking for ways to reduce their revenue? Under the Affordable Care Act, there is a cap on the medical loss ratio (MLR) for which the carriers must abide. They may only retain a certain fixed percentage of premiums paid above the amount of claims they pay. Based on this static profit margin, the only way to increase profits is to increase revenues. That is accomplished by increasing premiums every year. How have the carriers fared since this MLR requirement took effect on March 23, 2010? Let us look at the stock prices of the three largest health carriers on that date versus today:
|March 23, 2010||July 22, 2021|
|Anthem||$64 per share||$383 per share|
|Cigna||$37 per share||$231 per share|
|United Healthcare||$33 per share||$415 per share|
That’s an increase in share value of between 600% to 1,200% in just 11 years during an era in which increased government oversight was supposed to reduce profitability significantly!
Brokers also have no incentive to find ways to help reduce costs. Most brokers derive compensation via commissions; therefore, when a plan increases by 10% at renewal, the broker receives a 10% pay raise. The entire system is rigged, and it’s why nonprofits should consider a self-funded medical plan.
One core truth in the current healthcare system is that cost and quality of care change depending upon where you go for services. An MRI at a hospital may cost $3,000, while the same MRI at a free-standing facility may only be $750. A trip to the emergency room for a severe but non-life-threatening situation can easily cost $4,000 or more. If the employee were to go to an urgent care center instead, the employee might pay as little as $75 to $100. Nonprofits with a fully insured plan have no control over where their employees go for medical services, and the employees have no idea what providers charge versus the quality of the care they deliver. Based on fundamental data reported by hospitals themselves, in many cases, hospitals that charge higher fees for various procedures deliver the lowest quality of care. That may sound counter-intuitive, but it is an unfortunate reality. Under a self-funded plan, employees can obtain this critical information if the nonprofit utilizes a Health Concierge Advocacy Service that can educate and incentivize employees to use the providers and facilities with the best track records.
Another way to control costs is to utilize a Pharmacy Benefit Manager (PBM). PBMs use their members’ combined purchasing power to negotiate substantial discounts on the cost of prescription drugs from the manufacturers. As an example, there is a well-advertised drug that treats auto-immune disease. The cost of the drug for a single employee is $85,000 per year. A PBM can negotiate that cost down closer to $15,000. There are also Manufacturer’s Assistance Programs that can reduce that cost to $0 provided the employee earns less than $157,000 per year for a family of four. Nonprofits often employ many hourly employees who fall under that threshold, and it’s a good bet that larger nonprofits may have multiple employees taking that well-known drug. The carriers use their own PBMs to achieve the exact same things, but they keep the savings as part of their profits.
So, how can a nonprofit decide if a self-funded medical program is right for their organization? It starts by working with a knowledgeable health insurance consultant who can properly guide them. The key is obtaining and analyzing the actual claims history to determine if a self-funded plan is appropriate. If it is, then the consultant will use that data to attack the largest cost areas and bring in programs, such as the two mentioned above, to help contain future costs. Nonprofits that transition to a self-funded plan will usually see a small cost savings in the first year, but over a five-year period, the savings can often be 20% to 40%. Just think of all the ways those freed up dollars could positively impact the programs and services nonprofits deliver to the people they serve!