HR Slashes Costs with Creative New Insurance Program

September 1, 1999
Two years ago, Nampa, Idaho-basedAIM Companies, marketers of nutritional and health products, began researchingself-insurance for its 130 employees. The human resources team worked with athird-party administrator to audit its own insurance program and to determinethe premium costs versus industry-wide claim averages. What it finally opted forwas a partially self-funded insurance program.

In a self-funded insurance program,a company pays all the costs of insurance for its employees, regardless of theamount. With partially self-funded programs, companies pay claims and losses upto a predetermined amount per employee, and contract with a reinsurance companyto cover catastrophic losses, thus reducing overall risk.

What AIM Companies found was that,on average, if the company paid medical costs directly, it could offer the sameamount of coverage to its employees for less than the cost of the premiums -even after looking at all the “what-if” scenarios: cancer, Alzheimer’s,major surgery, etc.

To learn more about how AIMCompanies made the switch to a partially self-funded insurance program,Workforce interviewed Lynn McConnell, CCP, the company’s human resourcesmanager. 

At what point and why did you decide to look into switching to a partially self-funded insurance program?
Back in the early 1990s, the process of self-funding and the potential liability was just too overwhelming, especially in light of increasing health-care costs. So we decided to look into partially self-funded programs, mostly because we didn’t know our actual claims costs.

We experimented with a hybrid solution, where we purchased a higher deductible plan ($1,000/$3,000) from our carrier, then partially funded the deductible so that what our employees saw was a $300/$600 deductible. We felt this was a better option than the medical savings accounts, and gave us a better indication of what our experience ratings were. Then, based on the success of this program, we went partially self-funded in 1997.

What sort of research into the various programs did you conduct before making your final decision?
We did cost comparison between our current coverage and what we anticipated our claims costs to be, taking the worst case scenario. We conducted interviews with different companies who had the same number of employees and who had gone partially self-funded. We also talked to our own employees to find out what they were interested in as far as benefits coverage. The entire process took roughly nine months. We didn’t want to rush it.

What was it about the partially self-funded insurance program that made sense for your company in the end?
The flexibility of coverage benefits we could offer employees. When a company buys coverage through an insurance carrier, it’s stuck offering what the carrier will allow. By being self-funded, we could look at what employees were really asking for - a wellness program, alternative health care. It gave the employees a sense of how they can help the company save health-care dollars, and by saving those dollars we could implement changes. It gave them more of a sense of ownership in saving the company money and designing a health-care plan that met their needs.

How exactly does the program work?
The company deposits funds and the employees pay their premiums into a trust account. The claims go to a third-party administrator to determine eligibility. Claims are paid directly out of that trust. We pay all approved costs after the deductible and co-payments are met, up to a maximum of $10,000 per planned member. After that point, the reinsurance carrier takes over.

How much money did you save, and how?
Even with the expanded benefits, a number of larger claims, premium and administrative costs, we experienced a net savings of over $23,000 last year. During the first half of this year we’re actually doing better than we were doing the first half of last year. The company is on track to save well over $30,000.

Can’t these types of programs fluctuate dramatically?
Heavens yes. But we have a pretty healthy workforce. We’ve had a few high-dollar claims, but not many. Our third-party administrator tells us that our prescription costs are way below norm for a company our size. 

Last year, your company expanded its range of benefits to include such things as mammograms and immunizations. Did the partially self-funded insurance program help you expand the range of benefits offered to employees?
Previously, the company offered employees medical, dental, vision, life and long- and short-term disability insurance. By recouping a large amount of savings last year, we were able to expand medical coverage to include a wellness benefit that covers mammograms, pap smears and regular immunizations.

In addition, we added a flexible savings account option so employees can defer pre-tax dollars for any medical costs that are not covered in the policy. The savings account can also be used to pay for non-traditional therapies not normally paid for by insurance companies. We were also able to increase the amount of life insurance we provided employees, as well as offer a supplemental policy they could purchase for themselves or their families.

How did you manage to keep the employees from getting nervous about the change to their insurance program?
In the beginning, we formed a team of employees from across the company who were involved with the research, and they would go back and talk to their co-workers and keep them informed on where we were in the process.

Once we made the switch, we developed new communication materials that were easy to read and understand. We conducted countless employee meetings, and we even invited employees’ spouses. Also, we didn’t make huge changes to the deductibles and co-payments, and we tried to keep the premiums the same or lower. We have a vocal employee population here. If there had been a problem, we would have heard about it.

What suggestions can you offer other human resources managers about looking into partially self-funded insurance programs?
Hire a third-party administrator who can guide you through the process and help you make wise choices. I would research and interview them just as I would a new employee. Talk to other companies that have gone partially self-funded, and be sure you know all the costs involved.

And finally, I would involve employees in the process - that really helped us sell the idea to the company. They can help create a program that really works by matching coverage to their needs, and they share in the savings. Reinvesting some of the savings into expanded benefits, whether in health insurance or other benefit areas, makes good financial sense.

Workforce, September 1999,Vol 78, No 9, pp. 99-100  SubscribeNow!