As health insurance premiums continue to soar, some small and midsize employers that may not otherwise be candidates for self-insurance are turning to hybrid health plans that blend self-funding with fully insured coverage.
The programs are permitted under Section 105 of the Internal Revenue Code--the same section of U.S. tax law that the originators of the consumer-driven health plan concept used to develop health reimbursement arrangements.
But instead of creating individual health reimbursement arrangements, these hybrid arrangements use a single, employer-controlled account to self-fund claims that fall below a high-deductible health plan purchased by the employer and above lower deductibles assumed by individual employees.
As with health reimbursement arrangements, any funds remaining in Section 105 accounts at year’s end are carried over into subsequent years to pay future medical expenses. However, unlike health reimbursement arrangements, the balance in the Section 105 account is not allocated to individual employees; rather, the employer retains ownership and control of the account.
While some health care financing experts welcome this approach as an alternative to traditional self-funding arrangements for some small and midsize employers, others warn that it may not be feasible for employers with poor claims experience.
Still, advocates say the design is an innovative way for smaller employers to self-fund health care benefits.
"What the 105 program does is basically take a self-funded concept that employers with 5,000 employees have been using and bring it down to smaller employers," says Gregg Dennis, president of Investment Insurance Services, a benefits broker in Las Vegas.
IIS, which has been selling the programs for five years in Nevada, recently introduced an affinity group version of the program for members of the Better Business Bureau of Southern Colorado. The broker also is opening offices to market the programs in Palm Springs and Sacramento, California.
How it works
"Say an employer has a fully insured plan with a $250 calendar-year deductible, $20 office visit co-payments, 80/20 co-insurance in network, and a $1,500 out-of-pocket max. The employee sees no change in out of pocket. But the employer takes on a higher deductible and picks up the difference, less the employee coinsurance," says Steve Hicks, regional manager for IIS in Colorado Springs, Colorado.
The employer also continues to collect premiums from employees calculated at the lower deductible rate, leaving sums in excess of the high-deductible plan premiums in the Section 105 account to pay claims as they come in, he adds.
Depending on the size of the deductible the employer is willing to assume, premium savings can range from 30 percent to 50 percent or more, Hicks says. Some of those savings, though, could be offset by the employer's increased exposure to claims falling within the self-insured retention.
For example, first-year premium savings amounted to 55 percent for the University of Nevada School of Medicine Multi-specialty Group Practice South in Las Vegas, according to Craig Seiden, fiscal officer.
"We were getting double-digit increases annually," he says. "Premiums reached over $300 per employee per month."
With the medical group picking up 100 percent of the tab for employee-only coverage for its 150 employees, that came to a sizable sum, he notes.
But by switching from a $500 annual deductible plan to a $7,500 annual deductible plan, the medical group's premiums fell enough that in the second year of the program the employer dropped its employees' individual deductibles to $250 and added fully paid vision coverage, Seiden says. "Our savings to date exceed six figures," he says, declining to be more specific.
When told about this new twist on the use of Section 105 accounts, Tony Miller, president of Minneapolis-based Definity Health, the company that used the same part of the tax code to develop the HRA concept, welcomed this innovation in the health care financing marketplace.
"We think it's great that people are awakening to the opportunities created by Section 105," he says. "This is an innovative concept in terms of setting the price point lower for the consumer in terms of deductible and buying reinsurance above that and having the employer run that Section 105 between those two layers. It's an innovative way of actually taking advantage of that actuarial cost curve," he says. "I'm a big fan in that it's more innovation in the marketplace."
But while the switch to partial self-insurance so far is working for the University of Nevada School of Medicine, it may not be appropriate for all employers, Seiden says.
"IIS helped us in getting the claims history from our current carrier on our employees. If you don't have that, then you're really flying blind, because you need to see what the risk is on your employees," he says. "If you have an unhealthy employee population, it's going to be unfavorable in terms of cost."
However, "you don't necessarily need an entirely healthy employee base, but you need to have a mix, a balanced mix," he adds.
Some are skeptical
"I think it's an idea that's been tried before and, in general, has not been very successful," says Bill Sharon, a senior vice president with Aon Consulting in Tampa, Florida. "If an employer wants to self-fund, those advantages can be accomplished through traditional self-funding arrangements, the purchase of stop loss and minimum premium plans."
A minimum premium plan is somewhat similar to the Section 105 approach in that the employer pays a premium to cover fixed administrative costs and the cost of excess coverage, and then pays the claims as they come in, up to the excess coverage attachment point, he says.
Another skeptic, Eric Raymond, president of Corporate Synergies Group, a Mount Laurel, New Jersey-based employee benefits consulting firm, warns that good claims experience may not last for some employers.
"When you first start a self-funded program, you have what's called 'the lag.' The first few months, it's artificially low. It takes a few months before anyone submits claims. So there's a big, distorted savings up front," he says.
"The truth is, you have to fully analyze the options and the implications," Raymond says. "There might be some examples that look fantastic. But insurance companies price it so they don't lose money."
Switching to a layered health program also is harder to administer, Sharon points out.
"It's more complicated administratively because you still have to figure out whether it's a reimbursable claim between the $250 and the $5,000" or whatever deductible the employer has selected, he says. "It's a cumbersome process as opposed to having the carrier do it all themselves."
Indeed, when the medical group's employees use their health benefits, they first must file a claim with the insurer, which reviews it, and if it falls below the employer's $7,500 deductible, it sends a zero-pay correspondence to both the employee and the provider, Seiden says.
The employee would send this correspondence to the self-insured portion of the plan's third-party administrator, Southern Nevada Benefit Administrators, which is a subsidiary of Investment Insurance Services. Then the claim is adjudicated and IIS receives an explanation of benefits and a check drawn on the Section 105 account, which the employer then forwards to the provider.
A few downsides
Another downside to the arrangement is the fact that the plan technically is still a fully insured plan, making it subject to state benefit mandates, Dennis says. In addition, the plan is not individually underwritten, making it subject to general rate increases regardless of how good its claims experience may be, he adds.
But because those future rate increases are based on a smaller premium to begin with, the annual rate increases will also be a fraction of what they had been, Dennis says.
"Our clients are still going to get the same renewal increases," he says, "but it's on a number that was 50 percent less."
From the August 22, 2005, issue of Business Insurance. Written by Joanne Wojcik