By self-insuring our healthcare benefits, our small company is able to save 20 to 30 percent annually on healthcare costs.
Our firm consists of 63 employees, most of whom rely on us for their healthcare insurance. Outside of payroll expense, healthcare insurance was our second largest expense as a company. From 2014 to 2018, our health insurance premiums increased 67 percent (or 17 percent on average per year). The cost of our single employee’s PPO election increased from $380 to $805 per month and our High Deductible Plan increased from $409 to $627 per month. The only reason the high deductible option did not increase as quickly as the PPO is because of increases in the deductible limits. Of course, our firm paid almost all of the premium expenses for our employees during this time, but in 2018 we had to make a tough decision on whether or not to pass the cost increases directly onto our team members.
Luckily, we learned of another option for our healthcare insurance. We decided to explore partially self-funding. Instead of using an insurance company to provide coverage, the employer becomes the insurer. Self-funding allowed us to cut out the middleman on healthcare expenses.
The first step we performed was to hire a consultant to guide us through the process. Our consultant immediately requested an audit of our claims history from the past several years as a firm. We were able to get the actual claims paid per month for 2016 to 2018. We compared the claims paid to the premiums paid and found, that despite some unusually large claims over those years, if we were 100 percent insured we would have made an 11 percent margin over the three-year period. However, we learned that by paying a negligible amount in stop-loss coverage, we could have increased that margin to over 20 percent.
My immediate next question was, “What is stop-loss coverage?” Stop-loss coverage is the insurance that companies can take out to insure against large ($50,000 or more) individual healthcare claims. Basically, it allowed our company to insure an individual between their deductible and the stop-loss limit, with the insurance company bearing the costs above the stop-loss limit.
There are two components of stop-loss insurance.
1.) Specific Stop-Loss – represents the maximum exposure per member.
2.) Aggregate Stop-Loss – represents the maximum exposure for the entire group and is designed to protect the plan as a whole.
Here is the math: assuming a specific stop-loss limit of $75,000 and an employee deductible of $5,000, we would pay the $70,000 after the $5,000 deductible is met by the employee. For an insured group of 60 employees, our maximum annual exposure would be $4,200,000 with a specific stop-loss plan. However, we were also using the aggregate stop-loss insurance to cap our total exposure for all of our employees to $354,000 each year, which represents our entire exposure for the amount inside of the $75,000 per employee. Given that it’s highly unlikely our collective employees would exceed the aggregate limit of $354,000, the aggregate limit only cost us a minimal amount extra per month. In the worse-case year, our total out of pocket claims exposure will never exceed $5,500 per employee.
Next, we selected a network our employees could utilize for their physicians. We decided to use Cigna’s network since it had the least disruption to our employee’s physician selections. With the help of the consultant, we selected a third-party claims administrator (or TPA) to perform claims processing since we are not in the business of reviewing and approving healthcare claims. All said, we were able to pull a package together for $295.85 per covered life per month for the administrative plan and the cost of the stop loss coverage. This cost would be a fixed expense on an employee-basis no matter what claims were filed by the employee each month.
Now I was starting to see how this could be put together. For a total of $296 per covered life per month, I could outsource the administrative duties and reduce my company’s total exposure through a stop-loss insurance plan. Given my current premium cost to a third-party insurance company, I was still able to see how we could save at least $200 to $300 per month per employee based on a typical year’s claims using our claims history from the past three years.
Another great benefit of being our own insurer is that we were able to customize our plan to our needs. With the potential savings realized, we were able to add a few items which benefited our employees, but also reinforced behavior which could reduce the costs to our firm over time. We elected to add a telemedicine portal and a patient advocacy group without any additional cost to the employee. The telemedicine portal helps prevent unnecessary and costly emergency room visits, while the patient advocacy company helps our employees shop for the cheapest option for their healthcare when they really need it. We also lowered the deductible limit on generic drugs to the lowest allowed by law (we would have offered them for free if we could). Lastly, we increased the health savings account (HSA) match to incentivize employees to save for their healthcare expenses.
With a little luck and through educating our employees, we have been able to significantly reduce our healthcare expenses since 2018 and the trend is projected to continue. Based on our performance so far, we should realize year-over-year savings of 30 to 40 percent depending on claims for the remainder of the year.
Jason L. Signor is the CEO of Caddis Healthcare Real Estate.