A peek behind the curtain of self-funded insurance.
Let's start with a peek behind the curtain.
Conceptually, insurance is easy to understand. We pay money to protect us from events unforeseen or known events coming to pass. Life insurance - we’ll die. Car insurance - we’ll wreck. Health insurance - we’ll get an earache. Some insurance and the access to usage of it is particularly complicated. Especially health insurance in America.
With a little insight though, it’s not so scary.
Let’s have a peek behind the curtain of the frightening industry term self-funded as it applies to a group health plan structure for a typical business entity in America today.
My business partner paints this picture when offering a brief 101 on group health plan structure.
All group health plans have the same design. Take a circle (pie chart) and designate about a 12% slice to represent administrative cost. This includes, the processing of claims, our insurance cards we carry in our wallets and the 1-800 numbers to dial/wait for help with issues plus other fees. These are what we call fixed cost. Next, we have the claims slice of the pie. Basically, a piggy bank is funded with money from a percentage of the monthly premiums paid by members and this portion is used to pay our claims. This is a variable dollar amount and while statistically we can forecast what claims might look like, there always lies around the corner that which we didn’t see, i.e., getting hit by a milk truck. And the third slice of the pie, smaller than the claims slice and bigger than the admin slice is the cost of the actual insurance itself. This slice is also a fixed cost for the 12-month contract period of the insurance policy and will be influenced at the renewal period by the usage of the claim’s slice activity.
Lots of claims equates to a big renewal increase. Fewer claims and a low or flat renewal increase should result. This structure applies to a fully insured plan offering as well as a self-funded plan offering.
The difference between the two is who is in control.
The control of self-funded.
In many areas of life, we give up control of certain engagements, willingly doing so for convenience, and we’re afforded a level of trust in the exchange. A traffic light comes to mind as an example, or having blood drawn at a doctor’s office.
In the group health insurance segment of the business, if it’s a fully-insured plan structure and it’s a bad claims year, we must pay the increase at renewal. If it’s a good claims year, we have the insurance carrier enjoying our piggy bank. A self-funded plan is subject to bad and good years as well, but the difference is a self-funded plan owns their piggy bank and they even have a say about protecting the piggy bank.
I heard a partner make this statement and recognized he’d cut directly to the quick of it. He said:
"The only question that matters is what am I doing for the next 12 months to control and influence my medical and Rx claims? Everything else is column fodder.”
The beauty of gaining an understanding of a self-funded plan structure is the decision makers of a group health plan get to utilize strategy and consideration in how to make the group health plan serve the company and its employee’s best interests. Think of all the other areas of business you control, and then wonder why this segment would go uncontrolled.
Decide how you want the next 12 months to look.
It’s a yearly dance. What are you doing for the next twelve months to control and influence the cost of your company’s medical and Rx claims? When the curtain is pulled back, we begin to understand the structure of group health insurance is the same.
One version of it has someone else in control and the other version gives us control. And with control, we can be the leaders we need to be for this important aspect of the company and its impact on employees lives relative to their health and money.