Couple talking to doctor

Mindset: Health Insurance vs. Health Financing

Saturday, September 7, 2019

In the early 2000s, many saw the explosion of “at the counter” financing in retail stores. It was easy to pick out a new (then) Plasma TV, and even secure 0% financing to pay it off over the next several years. These same individuals saw a sharp pull-back and catastrophic housing meltdown in 2008, where we all learned the implications of Adjustable Rate Mortgages, Balloon Payments, and more.

What does all of this have to do with healthcare? Everything. Consider the following, which can even be considered a pre-requisite for other content on our site. Adjustable Rate Mortgages can be useful in a time where interest rates are stable or trending downward. However, they create instability when interest rates increase. Health Insurance Carriers are limited to a set margin, which equates to 20% for groups under 50 employees, and 15% for groups over 50 as determined by their Applicable Large Employer (ALE) status. With their portion of margin, all operating expenses, as well as profit is captured. With rising healthcare costs, things are looking great for insurers, but not as well for their clients. If the plan performs better than expected, excess margins are retained by the insurer.

Thus, your health plan is essentially an 12 month Adjustable Rate Mortgage or ARM, as you are financing your health claims year-in and year-out. Many Employers who have remained in the confines of a fully-insured health plan may choose to re-finance their program regularly. When a business changes insurers, they may re-fi their insurer costs, but there is minimal impact on the overall cost of the underlying claims.

  • Moving from one network to another network is essentially cost-neutral. Nearly all neteffective discounts from health plan networks today are very similar. There is very little if any impact when it comes to changing networks.
  • Thus, the claims that the plan experienced last year will produce similar results if history
    repeats itself.

None of the above is a criticism against moving insurers, as sometimes a fresh start combined with an improved claims outlook can help moving forward. Sophisticated Employers have come to realize that they need to stop renting, leasing, or financing their health plan, and to start owning it.

How is this? When you are renting a home, you generally lack the flexibility to make changes, remodel, and more. You typically do not know the actual mortgage cost for the owner, nor do you know the cost of utilities, assuming they are included.

Even if you are in a position of using an insurer-based “self-funded” solution, often called Administrative Services Only (ASO) or Level-Funded, you also lack the ownership over the plan. The only way to own a health plan (which includes risks, rewards, data, and control) is to selfinsure.

There are several things, Employers, along with their HR, Benefits, and Finance teams should
focus on:

  1. Establishing key performance indicators (KPI’s) and metrics to measure the plan’s performance.
  2. Have a real conversation about the future of the company, including goals concerning its health plan (and costs).
  3. Conduct a detailed compliance review in the costliest areas of compliance.
  4. Considering and implementing unique solutions to tackle unique challenges.
  5. Seek education from your Advisor to understand if self-funding is right for you, based on the above items, and more.

Please feel free to review the below content with more insights on the items discussed here:

Six Signs You’re Not Ready For Self-Funding

Self-insurance Evaluation Scorecard

The Health Plan Success Playbook

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