The Leap to Self-Insurance

Health insurance, like any insurance, is about pooling risk and paying premiums to create some financial cushion against costly events. For years, though, many large employers — what constitutes large means varies, but it’s typically 500 or more employees — have self-insured, meaning they have taken on the responsibility of setting funds aside to pay healthcare claims instead of a health insurer. In other words, they act as their own insurer, although they often hire a health insurer as a third-party administrator (TPA) to process claims and to take advantage of that insurer’s provider networks. Under the Employee Retirement Income Security Act of 1974 (ERISA), companies that self-insure are exempt from state health insurance mandates. ERISA exemption means those large employers can offer the same benefit package to their far-flung workforces working and living in different states and very likely save money by not covering some of the state-level health insurance benefits.

Most employees aren’t aware that their employer is self-insured because the TPA is often a widely recognized insurer — UnitedHealth Group, Cigna, one of the regional Blues plans — and, from the employees’ perspective, it handles many of the functions of an insurer.

But self-insurance is no longer just the province of large employers. An increasing number of small- and medium-sized employers are jumping out of the conventional group insurance market and self-insuring. Experts say they are doing so for many of the same reasons that large employers do. Moreover, insurance brokers and insurance companies have worked to make self-insurance more appealing to smaller employees by bundling TPA services with stop-loss insurance that functions like insurance for high-cost claims.

Mark Katz Meiselbach, Ph.D.

The flight to self-insurance has some economists and policy experts worried. It blunts the effect of insurance mandates that help certain groups and that the public, through state legislatures, has said it wants. And if employers with healthier workforces exit the group insurance, leaving those with less-healthy workforces behind in the conventional group insurance market, it could set in motion a dynamic that ultimately makes group insurance unaffordable if more and more employers with healthier employees leave the market. “The economics term for this is a death spiral,” says Mark Katz Meiselbach, Ph.D., an assistant professor at Johns Hopkins Bloomberg School of Public Health in Washington, D.C., who has studied self-insurance and the small group market.

Although ERISA keeps states from regulating the employers who self-
insure, states can step in and regulate stop-loss insurance. California did so, and Meiselbach says research he has done yielded “directional evidence” that the regulations helped stabilize the fully insured market.

But aside from any broader effects on insurance markets and affordability, self-insurance may have some largely unrecognized pitfalls for the employers themselves. There is good evidence, for example, that the health plans of self-insured employers tend to pay higher rates to hospitals and other providers than health plans that the same company’s fully insured health plans.

Shawn Gremminger

“The insurance company has a stronger incentive to keep their own costs down because the only way they can pass on those costs is by raising premiums,” says Shawn Gremminger, M.P.P., president and CEO of the National Alliance of Healthcare Purchaser Coalitions in Washington, D.C. “Whereas on the self-insured side, it’s just a straight pass-through
[to the employer.]”

Francois de Brantes, MBA

Self-insuring also means the employer is taking on fiduciary responsibility for the management of health benefits. “A self-insured employer has fiduciary responsibilities that a fully insured employer doesn’t,” says François de Brantes, executive vice president of payment innovation and network performance for XO Health, a company that sells health plan services to self-insured employers, and a member of Managed Healthcare Executive’s editorial advisory board. “Those fiduciary responsibilities don’t change whether you have 50 lives or 500,000.”

De Brantes, pointing to a number of recent lawsuits, says that recent federal regulations have reinforced the fiduciary responsibilities of self-
insured employers and that several employee lawsuits have been filed. Companies new to self-insurance need to understand how brokers and benefit consultants are being compensated and their incentives as well as TPA’s financial and transparency arrangements, he says. In de Brantes’ view, many of the companies that are already self-insured haven’t scrutinized their benefit consultants and TPAs closely enough.

“There’s all those who are currently in the self-insured world who have been, over the year, boiled in increasingly hot water like a frog and don’t realize it — and as a result … are now completely askance of the regulations that govern self-insurance and fiduciary obligations. They have no idea how much jeopardy they are in,” he says.

Trends in self-insurance

Meiselbach and his colleagues reported results in Health Affairs earlier this year showing an overall increase in enrollment in employer-sponsored health plans that are self-insured. Using a database that included data from private-sector and public-sector employees (not including federal employees), they compared 2015 with 2021. In 2015, 55% of the enrollment in employer-sponsored health insurance was in self-insured plans. By 2021, that proportion had increased to 60%. That year, according to the researchers, five companies controlled 71% of the self-funded market: Health Care Service Corporation (the parent company of Blues plans in Texas, Illinois, Montana, New Mexico and Oklahoma), Cigna, CVS Health, UnitedHealth Group and Elevance Health (formerly known as Anthem). Elevance Health, with 17 million enrollees, had the largest chunk, 19%, in terms of enrollees. Their findings show how TPA services and self-insurance have become a large line of business for companies that are known as insurers. For example, between 2015 and 2021, the proportion of CVS Health’s employer-sponsored health insurance enrollees in self-funded plans grew from 68% to 81%. In 2021, Cigna, like CVS, had more than 80% of its employer-sponsored health insurance enrollees in plans self-insured by employers, according to Meiselbach and his colleagues.

KFF’s Employer Health Benefits Survey, considered one of the most reliable sources of information about insurance trends, shows the proportion of employees covered by self-insured plans increasing from 44% in 1999 to 65% in 2023. The steepest percentage increase — from 13% in 1999 to 18% in 2023 — was at small firms, which KFF defines as those with three to 199 employees. Among medium-sized firms (200-999 employees), the proportion climbed more modestly, from 51% in 1999 to 61% in 2023.

A brief report in August 2023 by Paul Fronstin, Ph.D., director of health benefits research for the Employee Benefit Research Institute in Washington, D.C., paints a slightly different picture. Using data collected by the U.S. Census Bureau, Fronstin found that the proportion of private-sector establishments offering a self-insured plan peaked in 2016 and has fluctuated ever since. Still, he found that a proportion of small (fewer than 100 employees) and medium-sized (100-499 employees) employers offering at least one self-insured health plan had increased since 2018. Overall, Fronstin reported, the percentage of workers in self-insured plans has been “bouncing around” between 58% and 60% since 2010, when the Affordable Care Act (ACA) was signed into law.

Reasons to self-insure

An increase in self-insurance was one of the unintended consequences of the ACA. Self-insuring didn’t mean just escaping state insurance mandates, explains Christine Eibner, Ph.D., principal senior economist and director of the healthcare payment, cost and coverage program at RAND Corporation. “The ACA imposed a lot of regulations on small firms, so small firms could get out of those regulations by self-insuring.”

Christine Eibner, Ph.D.

Other factors were also at play. De Brantes says don’t dismiss the effect of state insurance mandates on premiums: “In many instances, they can increase the total premium cost by several points.” Eibner notes that employers in fully insured plans are effectively pooled with other employers whose employees may have worse risk profile. It is a form of cross-subsidizing. “If you feel like your workers are healthier, then you might want to self-insure because that would be a better deal for you,” she says.

Eibner says another tick in the plus column for self-insurance is that it can give employers a clearer picture of their healthcare claims of their employees. “You have the ability to understand your workforce population better, and potentially, you can design benefit programs that give you a little bit more flexibility.”

Most of the companies that belong to purchaser coalitions that Gremminger represents are self-insured. Insurers understandably build in a margin for risk, not just profit, he says. But, he says, “you’re often substantially overpaying compared [with] how much your actual costs are going to be, but you can’t recoup any of that. Whereas if you’reself-insured, if you end up spending less in the previous year than you thought you would, all that money can just flow back into next year. It is your money.”

Level funding

With the exception perhaps of very large companies, self-insuring carries the risk of a handful of employees having high healthcare expenses that can wipe out any savings from self-insuring. Those expenses could result from relatively rare but still likely enough occurrences: trauma care after a car accident, a rare genetic disease, a premature birth. To buffer the financial effects of those expensive healthcare claims, self-insured employers buy stop-loss insurance that insures them against high-cost claims. According to KFF, about two-thirds (67%) of employees in self-insured plans are covered by stop-loss insurance. The amount at which the stop-loss insurance kicks in is called the “attachment point.” Stop-loss policies can also be written so coverage kicks in when the total amount of claims costs for an employer reaches a certain amount or a certain percentage above the projected amount. Particularly for smaller employers, the premium for stop-loss insurance is not cheap, says de Brantes. “In many instances, the stop-loss insurance can be as much as 20% to 30% of your total healthcare costs,” he notes. Many insurance companies have set up their own stop-loss insurance business, called “captives.”

“It’s not a wicked scheme,” says de Brantes of level funding.“It is a way of helping the employer bear the cost of stop-loss and come out better than they would if they had a fully insured product.”

Eibner says that in the past several years, insurers have started to bundle TPA services with stop-loss insurance with relatively low attachment points. The employer is still self-insured with respect to insurance mandates, but if the attachment point is low, much of the insurance shifts back on to the insurer — and the difference between self-insurance and being fully insured gets hazy. KFF says that insurers sell employers versions of these bundled services that wrap up the premium for the stop-loss coverage, the estimated cost of the healthcare expenses and the administrative fee into a single payment. These are called level-funded plans because the employer pays the same (“level”)amount each month. At the end of the year, there may be some adjustment (called reconciliation) if the healthcare expenses for the year were significantly higher or lower than expected. KFF says, though, at a practical level, small employers in these level-funded plans are often protected from any meaningful additional liability.

According to KFF’s write-up of its 2023 Employer Health Benefits Survey,level-funded plans have taken off. In 2018, just 6% of workers for small employers (less than 200 employees) were covered by level-funded pans. In 2023, 38% were.

De Brantes says level funding is really just a pooling mechanism that involves taking individual firms and aggregating their expenses so the funding of the expense comes out to the expense itself. But Eibner says the growing prevalence of level funding has caught the eye of policy makers and others, who are asking whether some additional oversight is needed. Some states have already stepped in and set minimums for attachment points, partly so self-insured plans don’t function like fully insured plans. New York and Delaware have rules that prevent insurers from selling stop-loss to very small employers.

Fiduciary responsibility

The original ERISA legislation established decades ago that employers take on fiduciary responsibilities when they self-insure. Fiduciary responsibilities mean that those running the health plan must act “prudently” and in the best interest of the plan’s beneficiaries. The Consolidated Appropriations Act of 2021, along with new price transparency regulations, is newly emphasizing those responsibilities and may add some new ones about the quality and cost of healthcare. Perhaps just as importantly, employers are now being sued for mismanaging their health benefits. In the most high-profile case so far, a Johnson & Johnson employee filed a lawsuit against her employer in February for mismanaging pharmacy benefits. Legal experts say this litigation may follow in the footsteps of the lawsuits that have accused companies of paying excessive fees and mismanaging investments in 401(k) defined-contribution retirement plans.

“The trial lawyers don’t care whether the regulators are coming and knocking on your door,” says de Brantes. “If you have fiduciary obligation and you fail to meet that fiduciary obligation toward your employees, you’re legally liable.”

The Consolidated Appropriations Act imposed new disclosure requirements on benefit consultants, but de Brantes says employers need to ask benefit consultants a lot of questions. Are they paid on a commission basis? Are they pushing certain solutions on which they are making a commission?

Because of the heightened focus on fiduciary responsibilities, employers need to be similarly questioning — and demanding — of TPAs and pharmacy benefit managers (PBMs). How are they effectively bringing value to the company? Do they have true price transparency tools for plan members? Is the PBM hanging on to rebates from the manufacturer? If not, how much of that rebate is it passing on?

“You’ve got to look at the intermediaries — the TPAs, the PBMs. You have to get rid of all the crappy self-dealing, the bad incentives, that harm as opposed to help you manage your costs,” de Brantes says.

Prices paid

Last year, researchers at the Health Care Cost Institute reported the results of their study comparing costs and prices paid in 2021 by self-insured health plans with fully insured health plans. Using the institute’s vast database, Aditi P. Sen, Ph.D., who is now chief of the health policy studies unit of the Congressional Budget Office in Washington, D.C., and her colleagues found that the average spent per person annually was approximatelyhigher for people enrolled in self-insured plans than for people in fully insured plans ($5,083 vs. $4,606). But expenditure is a two-factor total determined by use and price. When they looked at just prices, they found that self-insured plans paid more for certain types of services. For example, a self-insured plan paid 6% more for a colonoscopy than a fully insured one and 4% more for an emergency room visit for a moderate to severe condition. The price differences narrowed after some adjustments for patient characteristics and type of health plan (point-of-service, health maintenance organization), but the prices were still higher for self-insured plans.

Other research has identified the same difference, and Gremminger says employers are well aware of it. The same companies selling self-insured plans and fully insured ones will work to get a better price for the fully insured plan even when it is the same hospital. “The TPAs often get a better deal for themselves when they’re on the hook [as a self-insured plan] than they get for the employees [who] have contracted with them on a self-insured product,” he says.

Gremminger said that before hospital and now insurer price transparency rules went into effect, employers were in the dark. “In the old days — and the old days [were] literally four years ago — employers just didn’t know. They were just told, ‘This is the price. This is what we negotiated. Take it or leave it.’ ”

Gremminger says that now, however, because of price transparency rules and all the available data, the takeaway is that “employers have to be doing a much better job.

“I think this is where the price transparency stuff is incredibly helpful in being able to identify that misallocation and say, ‘It cannot stand’ and being able to compare different carriers and their self-insured and fully insured products and say, ‘I am not going to be a patsy that’s paying a 20% premium.’ ”

Gremminger says his organization is spending a lot of time educating employers about the price transparency data, which have some blind spots because hospitals and insurers haven’t necessarily complied with the rules. As a practical matter, many employers are turning to an increasing number of vendors that gather and analyze the abundance of data, he says.

Employee perspective

The growth in self-insurance means fewer and fewer employees are subject to state insurance mandates. Meiselbach and his colleagues note that 46 states and Washington, D.C., have mandates to cover services for people with autism. Self-insured employers may elect to do so but are not required to cover those services, so employees and their families who need those services may find that they are not covered. On other hand, Eibner notes that self-insurance might give an employer the flexibility to be more generous with some benefits.

If an employer self-insures and passes on the cost savings to employees in the form of higher wages, lower premiums or cost sharing, those employees might experience considerable savings. But in the many-versus-a-few dynamic often seen in insurance, those savings may come at the expense of employees who pay for services that the self-
insured employer decides not to cover. Moreover, there is nothing to prevent employers from deciding to keep the cost savings from self-insuring for themselves. The higher prices paid by self-insured plans for healthcare services may result in higher costs for employees who use healthcare services, although Sen and her colleagues found that out-of-pocket costs were slightly lower for people enrolled in self-insured plans than for those in fully insured ones.

Peter Wehrwein is the managing editor of Managed Healthcare Executive.