Hey, guys. I’m Spencer Smith, and this is Pete Doran of ParetoHealth, and you’re watching fully insured versus self funded.
So why don’t we start with what a lot of people know, Pete? What does it mean when we say somebody is fully insured?
Sure. Spencer, great meeting with you today. Absolutely. Look at the landscape of healthcare today. Employers that are under 500 lives or 500 lives on the plan or under are mainly fully insured.
Fully insured carriers do a great job of bundling up a nice package. Employers get the chance to choose plan designs, both on the medical side and on the Rx side. Right? And they get annual premiums divided by 12. You know, nice simple way to get your bill to do the same thing every month. It’s easy.
Yep. When somebody’s in that fully insured environment, though, there’s a lot of limitations. Right? So what are some of the things that an employer is handcuffed with when they’re fully insured?
Well, I think if you ask CFOs across the country, one element that is frustrating for being fully insured is the lack of data, the lack of transparency.
When you ask CFOs and you ask them what’s their second or third largest item on their P and L, many times it’s employee benefits. The frustration comes because they don’t have any idea if people are going to the doctor, what they’re going to the doctor for.
They’re spending, in some cases, millions of dollars from premium and not really having a general understanding of what they’re paying for.
Yeah. I like to think of fully insured as prepaid insurance.
You go to a carrier and say, hey, I want this plan design. Here’s my census. Maybe they have some history, maybe they don’t. And that carrier says, okay, well, here’s your annual premium.
Right? You told me they they chunk it up into monthly payments. You make those payments regardless of what the claims are for that year. Right?
They’re gonna pay that amount of premium. It’s fixed. That’s prepaying for your insurance. Right? So at the end of the year, if there’s money left over in the bucket that the fully insured carrier charged you, they’re keeping that.
That’s correct.
So other limitations, though. Right? You have very few levers that you can actually pull. I think of things like, oh, well, maybe I’ll make my plan design worse.
Right? That’s a common thing. So what happens there? Why would somebody actually make their plan design worse for their employees?
Well, the issue is that in a fully insured world, your renewal is directly reflected on how you ran the prior year. Right? So if you have a year with high claims and high utilization, you’re going to get a larger renewal increase from the fully insured carrier. In some cases, 25, 30, even higher, maybe 40%. The problem for CFOs is they budgeted for something less, you know, 10%, 12%, 15%. The broker is going to do a great job in negotiating that high renewal down to something more palatable, but they’re still gonna be over budget. The CFO now is spending more money than they had the prior year.
Yeah. See, you negotiate really hard. Right? You do your best job to negotiate, but you have those constraints.
You make the plan design worse, which often happens. You raise those deductibles. You raise those co-pays.
The employee ends up getting punished for that. Right? As the employer is trying to wrangle those costs. Or worst case, you completely move carriers, disrupt the plan design, you have network issues, provider access issues, things like that.
All those things are fairly limited and they lead to what we call the stair step effect. So why don’t you explain what we mean by that?
Well, that simply means that whatever you get this year from your fully insured carrier, right, if you have a worse year next year and you have a bigger renewal, you’re just going to stack that on top of the renewal that you got from the prior year.
Yeah.
Right? So if you have a great year, you get a single digit increase from the fully insured carrier. Next year, you have a bad year, you get a bigger increase, you’re going to stack those renewals on top of each other. And if you ask brokers and consultants across the country, how many times in the last three or four years have they seen their fully insured clients get a decrease in premium?
I guarantee that number is going to be zero or maybe one time.
I actually was in a market in Florida a couple days ago, and so I asked this question of every broker that was there. I was like, what’s the worst increase you’re seeing this year? Because I didn’t want to assume. I heard a 72% increase.
You mentioned 25%, 30%, got a couple of 40% increases. So the point being is no matter what, really, when you’re fully insured, you never get the opportunity to reset your baseline. It’s always going to go up. So when we get into self funding in a second, we’ll contrast even more.
But when you’re self funded, what’s the opportunity?
How are we able to, in bad or good years, actually control some of those costs?
Well, self funding is a mechanism where you only pay for the claims when your employees incur those claims. So there are some cases in some years where you might pay more than fully insured. But when you go back to running how you have been running in prior years, you’re going to spend less. So you don’t have that same stair stepping approach that you do with fully insured. There’s an opportunity to pay less in claims if your employees use the plan less.
Well, there’s a slide that we like to talk about or will show sometimes in our employer one on ones, our consultant one on ones, that shows the compounding effect of fully insured stair stepping premium over a ten year basis. So I’ll describe a little bit and I want you to weigh in. what it looks like, and we may pull this slide up. But you have an average fully insured employer with $2,000,000 in premium. We assume a 9% annual trend, which we’ve already established is super, super conservative. And then we look out over a ten year horizon because most people get laser focused on twelve month increments, they’re only worried about reacting to that. If you zoom out, you do $2,000,000 of baseline premium, 9% annual trend over ten years, That’s a $30 plus million dollar unfunded liability on their P and L.
So why do we like to emphasize that? Right? That big picture, zooming out for those employers.
Well, that’s a huge number. Right? Employers, as you mentioned, they’re thinking about buying insurance over a twelve month period.
But when you really extend that out and lay that number on the table, that brings that number to the forefront. They start to think about, wow, $30 million in ten years? How can I figure out a way to get into that number and save more on my premium? How can I manage my plan a little bit better than I’m managing it today through fully insured?
Absolutely. For employers and consultants, if that problem is this big, I need to react to it. I need to do something about it. Self-funding is an option to counteract that trend.
