While many employers pay for health insurance costs through traditional fully-insured plans, others use alternative methods and self-insure the majority of medical costs. With self-insurance, however, comes greater risk. Self-insured employers still need protection from medical bills that might skyrocket from catastrophic accidents and illness, and regardless of any contingency plans, health insurance costs could rise year after year, affecting both the cost of direct medical expenses and catastrophic coverage.
As an employer, when you are self-insured, you cover most or all of the cost of your staff’s health care: Self-insured employers pay for the direct cost of each health care claim, although many use their insurance carrier to process claim paperwork and ensure compliance with all HIPAA and ADA regulations. In order to prevent unexpected expenses because of a major illness or accident, many self-insured employers buy stop-loss coverage, which is a form of reinsurance that protects self-insured employers from the expense of major illnesses or accidents. If the direct health care costs rise above the agreed-upon level (or trigger point), the stop-loss coverage pays for claims for the term of the contract.
Minimum Premium Plans
Minimum premium plans (MPP) are a form of stop-loss coverage. You, as the employer, pay for all health costs up to an agreed-upon dollar amount. Then, the insurance company pays for any medical claims over that amount. With an MPP, the insurance company often retains administrative responsibilities, including medical claims processing. In the short run, the employer doesn’t have much risk of running over budget. However, if you have high claims because of several critically ill employees or plan abuse, then the insurance company has to pay those high medical costs, and you will likely see higher premiums in subsequent years. Inversely, if you have a young, healthy workforce of employees with no dependents, then an MPP could cost you more than a traditional plan. If your employees submit few claims, you could end up paying more for those claims than you would pay with a traditional premium plan.
If you choose an MPP, you should also take on the responsibility of monitoring all health costs. While you are restrained to respect HIPAA privacy laws, you also have to ensure that your employees are using the health plan appropriately. For example, using the emergency room instead of an urgent-care clinic can quickly drive up claims.
Health care costs will always rise year over year. When self-insured companies refuse to increase the stop-loss trigger point to keep pace with medical inflation rates, reinsurance companies increase premiums to make up for the increased risk. For example, if your company pays $50,000 of direct medical costs against a total of $60,000 this year, the reinsurance company has to cover the additional $10,000 of medical costs. However, assuming a 10 percent medical inflation rate, medical costs of $60,000 this year will cost $66,000 next year. In order to keep pace with the inflation rate, your company has to increase its trigger point from $50,000 to $56,000 to make up for the increase due to inflation – that’s a 12 percent increase.
In other words, a $50,000 deductible won’t cover as many medical costs next year as it does this year. This process — when stop-loss insurance rates increase faster than medical inflation rates — is known as a leveraged trend. Because of medical inflation, either the company’s deductible will increase each year or the premium for the stop-loss insurance plan will increase.
Cumulative Monthly Contingency Plans
A rapid-onset illness or a catastrophic accident could occur in any given month, driving up costs unexpectedly. Even if this dramatic increase in medical expenses doesn’t cross the threshold of the annual trigger point for the stop-loss policy, a self-insured employer could experience a short-term cash crunch because of unexpected medical costs. To combat this, some stop-loss reinsurance plans come with a cumulative monthly contingency plan. If an employer typically pays $5,000 for direct medical costs but sees an increase of 50 percent in costs because of an employee’s sudden illness, the reinsurance plan can be triggered even if the medical costs for the year haven’t crossed the annual deductible threshold. This kind of contingency plan can be critical to ensure cash flow and business continuity. Without a cumulative monthly alternative, you could be left without enough cash to cover medical costs and routine business expenses.
Self-insuring can be an effective way to manage health insurance costs. However, even with stop-loss contingency plans, self-insuring comes with risk and more exposure to the effects of medical inflation rates.
Dylan Murray has an MBA from San Diego State University and a bachelor’s degree in communication from Boston University. He is a licensed insurance agent in California, but he works as a professional researcher and writer reporting on business trends in estate law, insurance and private security. Dylan has worked as a script analyst with the Sundance Institute and the Scriptwriters Network in Los Angeles. He lives in San Diego, California, and Marseille, France.