Who's afraid of self-insurance?

Who's afraid of self-insurance? When the FASB proposed its OPEB (other postemployment benefits) standard, companies were forced to take a hard look at their health care expenditures. What they saw was a steady acceleration in their health care spending--for all employees, not just retirees. But some corporations believe they've hit upon a solution to the problem.

Scores of companies have switched to self-insuring as a cost containment measure. Allied Signal's recent move to self-insurance grabbed many headlines. Even municipalities have gone the self-insurance route and realized significant savings.

But while lots of employers are toying with the idea of self-insurance, many still shy away. The main reason is a simple lack of understanding of what self-insurance involves and its potential for large savings. Companies fear the risk, they fear the unknown, they fear the change.

And those reactions certainly are understandable. After all, paying premiums to a big, traditional health insurance carrier has an undeniable comfort level. But what is that warm, fuzzy feeling costing you?

The truth is that self-insurance can reduce the employee health benefit costs of large employers--and without curtailing the benefits package.

Some companies find that combining self-insurance with some form of managed care further magnifies the savings. In fact, employee health care costs can actually go down, not just level off or escalate more slowly.

So, how can you decide if self-insurance is workable for your firm?

First you need to understand what self-insurance is. Instead of paying premiums to a major carrier, you pay claims directly for your employees, buy an inexpensive "stop-loss" insurance policy as a backstop, and farm out claims processing. In a typical large employer group, the net savings will be about one-fourth of the premiums you paid over the past 12 months.

Mechanically, the task of processing claims isn't ordinarily done by your company. Rather, it is contracted out to third-party administrator firms, or TPAs. So there is no added administrative burden on your end. In fact, you could cut your administrative burden.

As for who can make the most of self-insurance, usually it pays off for only larger firms, those with 150 or more employees. Beyond that, a company's premium and claims history for the past few years is an important determinant. Here's an example: If a company pays a traditional insurer $1 million a year in premiums and submits claims that equal $750,000, that firm can expect to save 25 percent of the $250,000 difference, or $62,500, with self-insurance. And that savings takes into account your payment of premiums on the stop-loss insurance and the administrative fees of a TPA.

If you decide that self-insurance is for you, where can you go for help in effecting the switch? Traditional insurance companies won't be too helpful. They stand to lose out whenever a group goes to self-insurance. However, you're not alone. Reputable TPAs and some independent insurance brokers can help.

Nuts and bolts 

Self-insuring doesn't necessarily mean changing the benefits package, although you do have that choice. It usually does mean better claims service for your employees, which in turn means fewer complaints wind up on the benefits manager's desk. The reason is that many of the outside administrators are more advanced than their insurance-company counterparts in terms of computerized claims handling.

Also, with self-insurance, a claim can be processed and a check issued the same day that the claim is received by the TPA--if you want it paid that quickly. Many self-insurers, however, prefer to stipulate a waiting period to earn extra interest on the funds set aside for employee claims. Such cash management can measurably benefit the balance sheet.

Under self-insurance, the only policy you need is called a "stop-loss" policy. Like any excess umbrella-type coverage, it kicks in whenever claims exceed the levels you have specified. Compared with first-dollar coverages, premiums for the stop-loss policies are very low, depending on the size of the group, its claims history, and the level at which you want it to activate. Even so, it pays to shop around each year for the best rates among the stronger reinsurers, since these rates fluctuate quite a bit and vary from company to company.

As for protecting your firm against such liabilities as overpayment or improper payment, your TPA should have insurance to cover these occurrences.

Tapping the right administrator

Since TPAs play an important part in making your choice of self-insurance work, it pays to choose the administrator carefully at the outset of any switchover. Your insurance broker, a local hospital or pharmacy, and other providers can recommend good TPAs. Here are some comparison-shopping guidelines to consider:

* Inquire among the better stop-loss insurance carriers and agents about the reputations of any TPAs they deal with. Some names will come up repeatedly as good.

* Ask the same question--about TPAs' reputations--of local doctors, hospitals, dentists, and pharmacists. These providers are on the receiving end of most benefit checks, so they'll know which TPAs are the most accurate, prompt, fair, and efficient in claims processing. They'll also know the bad ones, probably refusing to process their claims or accept benefit assignments.

* Ask candidate TPA firms about their 24-hour eligibility. Medical emergencies don't happen just during business hours. Today, many health care providers will routinely check eligibility before even starting treatment--particularly when a patient is away from his or her home. Make sure a representative from your TPA will be there when your employee needs him most.

* Examine the degree of automation and computerization among the prospective TPAs. Up-to-date administrators should be more than 95 percent computerized. This makes a big difference in the speed and accuracy of your claims handling.

* Look at what TPAs call locally adjusted "customary charges." What if one of your employees needs medical attention while on vacation elsewhere in the country? Local adjustment--down to zip codes--means you won't pay more than the customary rate in that locale.

* Compare claims turnaround time. There's no excuse for more than a 30-day turnaround on claims anymore. The more automated TPAs can give same-day service routinely. In fact, you should be the one to establish this turnaround time, balancing your cash management goals against the response time to employees that you want to achieve.

* Ask about the TPAs' payment-rate updating schedule. How often does the administrator change his price database to reflect changes in rates? A good measure is twice a month for prescriptions and twice a year for doctor, hospital, and dentist rates.

* Ask for and compare some sample management reports from potential TPAs. You'll find wide differences. See which supplies the information you think valuable.

* Compare the flexibility of the various administrators, remembering that they should adjust to your plan parameters, not the other way around. Unfortunately, not all TPAs can accommodate all plan parameters.

* Be sure to collect and compare references. You'll want evidence that the TPA you're considering is satisfying other clients, not just making promises to you.

* Ask the candidates how they shop for stop-loss coverage. Decide if they'll be looking out for you and shopping aggressively each year. After all, you're using self-insurance to save as much money as possible.

* Compare the qualifications of, training of, and motivation programs provided to the various TPAs' claims handlers--i.e., the people on the front line. Again, you're likely to find wide differences, and these will make a difference in how smoothly your own program runs.

* Don't forget to investigate the administrators' safeguards against overpayment. Ask about systems in the software, the people, the indemnification, the bonding. Your objective should be to become absolutely insulated from this risk.

After you choose the right TPA, you should feel free to seek the administrator's help and counsel every step of the way. After all, the TPA's people have been through it before; they deal with scores of other self-insured plans. So don't hesitate to take advantage of that experience.

Nicholas Carrara President Omega Network Systems, Inc.