Self-Funded Plus Voluntary: A Cost-Effective One-Two Punch

Controlling costs without leaving employees vulnerable

by Ron Fields

Mr. Fields is vice president of Broker Sales for Aflac. He is responsible for developing and strengthening relationships with national and regional brokers, and accounts in the United States.Visit aflac.com/brokers, call 1.888.861.0251 or send an email to [email protected] to learn more.

In June 2012, the Supreme Court paved the way for health care reform’s full implementation; in November, Barack Obama’s re-election all but eliminated the chance it would be repealed. Yet from an employer’s standpoint, 2013 could be the most eventful year yet in the life of the Patient Protection and Affordable Care Act (PPACA).

Why? Because this is the final reckoning for employers before a laundry list of new regulations goes into effect. By Jan. 1, 2014, businesses will have to decide whether they want to provide medical insurance for their workforce or pay a $2,000 fine per employee and send them to state-sponsored insurance exchanges. And their employees could start getting hit with fines if they don’t have insurance by that date.

According to a 2011 report from McKinsey & Company, a global management consulting firm, 36.6 percent of businesses with fewer than 50 employees are considering the latter option — dropping health coverage altogether.1 But they’ll have to weigh that option against the fact that the strength of a company’s benefits package remains critical to attracting and retaining top employees.
Voluntary benefits can go a long way toward filling gaps that employers may have little choice but to leave in their major medical coverage — and producers can go a long way toward establishing themselves as a benefits expert by showing employers how it fits into a larger benefit strategy. Using a self-funded major medical plan and bolstering it with voluntary benefits could provide a way for business to control costs without leaving their employees financially vulnerable.

The Do-It-Yourself Solution

With self-funded insurance, a business determines how much it’s willing to cover and sets aside money in an account to pay employee claims. While businesses may pay third-party firms to administer those plans, the employers pay 100 percent of the claims and assume 100 percent of the risk.
Once upon a time, this option was considered viable only for larger companies with employee pools big enough to spread out that risk. Increasingly, though, smaller businesses are turning to self-funded insurance as well. From 2008 to 2010, the rate of companies with fewer than 200 employees opting for self-funded health insurance jumped from 12 to 16 percent.2 And the trend is accelerating — today, 42 percent of businesses with fewer than 100 employees are self-funded, 30 percent of which net less than $5 million in total annual revenue.3

What’s in it for small businesses? Lower costs, for one. Because employers agree to cover claims up to a certain level based on the total number of anticipated claims over one year, they can exercise a degree of control over their costs while still delivering the coverage their employees demand.
In the context of the current health-care climate, though, there may be an even bigger benefit: Self-funded plans are exempt from PPACA and most state insurance regulations. That means employers aren’t required to provide any specific minimum level of essential health benefits, nor are they on the hook for the premium tax that insurance companies are required to pay.

Among the small businesses satisfied with self-funded insurance is Gould’s Discount Medical, a medical equipment and respiratory care supplier with four locations in the Louisville, Ky., metro area. As recently as five years ago, says owner Ken Gould, his business would’ve had a hard time moving to self-funded coverage. But rising premiums prompted him to review the company’s options, and Gould’s made the switch official on July 1, 2012.

“Health insurance companies have fine-tuned these plans to make them more doable,” Gould explains. “We picked a plan that rewards employees for seeing primary-care physicians and only seeing specialists based on a primary-care physician’s referral. We did so knowing it was a bit of a gamble — we couldn’t know exactly what to expect. Self-funded put more of the risk-reward on us, but it also gave us flexibility and gave employees incentives to pursue a healthier lifestyle.”

The Downside of D.I.Y.

The “risk-reward” Gould speaks of is the main factor deterring small businesses from switching to self-funded insurance. Under that model, they agree to cover claims up to a pre-determined point, but if, say, a catastrophic claim pushes them past that point, they’re still liable unless they’ve taken steps to mitigate that risk. A stop-loss policy, which reimburses companies for costs associated with greater-than-expected claims, is one of the most common ways of doing so.

Because employers agree to cover claims up to a certain level based on the total number of anticipated claims over one year, they can exercise a degree of control over their costs while still delivering the coverage their employees demand

“Having stop-loss insurance is a must when looking at a self-funded insurance model,” Gould says. “It’s a constant cost, but it’s necessary for any businesses using self-funded insurance. A business can only take the risk side so far.”

Health care reform has opened up opportunities for stop-loss providers: They can now offer coverage to companies with as few as five employees. But that’s not the only step Ken Gould has taken to make sure his overall benefits package doesn’t leave any holes — for employees or for the company.

Voluntary to the Rescue

Before offering Aflac’s supplemental insurance policies seven or eight years ago, Gould’s Discount Medical typically paid 90 percent of employees’ salaries if they went on short-term disability. An Aflac short-term disability plan, though, came at no additional benefit cost to the company and minimal cost to employees — and the workforce embraced it wholeheartedly, Gould says. “They feel good about having the voluntary options,” he says. “It’s an important part of a full benefits package. And knowing that voluntary insurance was there as a safety net for employees helped make the change to the self-funded insurance model easier.”

Not only can voluntary benefits provide peace of mind for businesses and employees worried about the risk of self-funded insurance, small businesses can tailor benefits to employees’ specific needs, reducing stress over the financial impact of accidents or sudden illnesses that can keep them out of work. And should an employee face daunting out-of-pocket costs from an unexpected health crisis, a voluntary critical illness, hospital indemnity or accident plan can provide vital cash benefits to help keep them afloat.

Because of all this, the availability of voluntary benefits can have a dramatic effect on employee morale and loyalty. According to the 2013 Aflac WorkForces Report, workers overwhelmingly agree that these benefits influence job satisfaction (84 percent), employer loyalty (81 percent) and work productivity (70 percent).3 The tangible effect on businesses’ bottom lines can be almost as dramatic — 25 percent of employers offering voluntary benefits have been able to reduce their workers’ compensation claims since it began offering them.3

Getting Creative Pays Off

The combination of self-funded major medical coverage and a solid slate of voluntary benefits has been a perfect fit for Gould’s Discount Medical. Ken Gould said he was prepared to wait a full year before seeing tangible differences between the self-funded plan and his previous insurance, but he’s already noticed moderate savings after the first nine months on self-funded coverage.
Just as importantly, his employees remain happy. Though the new major-medical plan carries a higher deductible, it’s offset to some extent by lower co-pays — and, by Aflac’s voluntary insurance policies that help employees cover their out-of-pocket costs. That’s part of the reason why the Louisville Courier-Journal named Gould’s Discount Medical a “Top Mid-Size Employer” in 2011 and 2012.

“Without Aflac, many of our employees wouldn’t be able to afford certain surgeries or procedures,” Gould says. “The range of Aflac’s supplemental policies we offer makes a real difference, helps round out our benefits packages and even enables us to compete against some of the area’s larger companies.”

As health-care reform presents ever more pressing dilemmas for small-business owners, those employers will increasingly look toward insurance agents to be not just salespeople but expert consultants. Producers who can devise a complete coverage package for a given company stands the best chance of winning the decision-maker’s trust — and the company’s business.

With that in mind, it’s important for producers to consider solutions such as a self-funded/voluntary combo that covers all the important bases while keeping costs manageable for employers. Even though self-funded health insurance does carry a greater degree of risk, employers can easily offset that risk with a good stop-loss policy and a well-designed slate of voluntary benefits that directly address employees’ needs and concerns. The result: lower costs, satisfied employees — and businesses that can head toward the next round of health-reform regulations with security and confidence.

ENDNOTES
1    McKinsey & Company “Employer Survey on U.S. Health Care Reform,” February 2011, http://www.mckinseyquarterly.com/How_US_health_care_reform_will_affect_employee_benefits_2813 accessed on March 6, 2013
2    The Kaiser Family Foundation and Health Research & Education Trust Employer Health Benefits 2010 Annual Survey, http://www.changehealthcare.com/downloads/industry/Kaiser-2010-Benefit-Survey.pdf, accessed on March 6, 2013
3    2013 Aflac WorkForces Report, a study conducted by Research Now on behalf of Aflac, January 2013