This is the second of a two-part series about the impact of health care reform on a Texas-based small business, Software Advice, and how the CEO, Don Fornes, plans to keep providing quality benefits while controlling costs.
In my first post, "Health-Care Case Study: One CEO's Take on Obamacare," I discussed how healthcare will change dramatically in 2014 due to the Affordable Care Act (ACA). Now, I'll talk about one of the things my business is considering doing in response.
Whether or not my business will be classified as a large group or a small group has a big impact on ACA requirements and health-care coverage costs. Yet a pending Texas State Senate bill leaves us uncertain as to how we'll be classified. If we remain a large group -- and are therefore not subject to community rating -- we'll stick with our current health insurance coverage. If we're classified as a small group, our costs would increase 30 to 40 percent due to community rating and we may consider self-funding.
You are probably familiar with a fully-insured plan, which is what my company currently has through Blue Cross and Blue Shield of Texas (BCBSTX). We pay premiums to BCBSTX, and they pay our employees' health care claims. Both the benefits and the premium per employee are fixed for the year, regardless of the volume of claims filed.
Under a self-funded plan, our company would pay these claims -- partially funded by deductions from employees' paychecks. We'd be assuming more risk, but if our employees incur fewer health-care costs, the company would keep the difference. And we'd get to choose what coverage our plan would offer, how much to charge employees for premiums and how high to set copays and deductibles.
Paying health care claims is a complex burden. Under our fully-insured plan, our insurer handles the administration, which is built into our premiums. Under self-funding, we'd have three options:
- Administer the plan ourselves. This is only recommended for large firms with the necessary resources and expertise. We can't take this option.
- Elect Administrative Services Only (ASO) from a carrier like BCBSTX. They'd handle claims administration, and we'd cut them a check to pay the claims, plus a yearly administration fee.
- Hire a Third Party Administrator (TPA). The TPA would administer the claims and we'd reimburse them as well as pay them an administration fee.
We'd prefer option number two, since we'd gain access to the carrier's broad provider network, but many ASO offerings are limited to companies with at least 100 employees. So that might leave us having to pursue a TPA option and "rent" a carrier's network.
We'd then have to forecast our expected annual claims amount. This is largely determined by the claims history for all employees: Costs in previous years provide an idea of what costs will be for the year ahead. And we'd budget for 125 percent of this amount to cover worst-case scenarios.
I already learned my lesson when it comes to worst-case scenarios. In 2012, I racked up $40,000 in health care claims when I crashed my road bike. No matter how well we budget, there's always the risk that an employee will have a catastrophic accident or illness.
That's where stop-loss insurance comes in. It is purchased from a carrier, or provided, under ASO, to provide a safety net for employers. We'd set liability limits -- the maximum amount per month or year our company would pay -- at both an individual and a company-wide level. The stop-loss carrier would reimburse us for everything exceeding these limits.
No fully-insured plan is as flexible as a self-funded plan, in which I can choose types of coverage and set costs. If premiums are paid into an interest-bearing account, I could even make a slight return on investment during months when we take in more than we pay out.
With a fully-insured plan, I pay taxes on premiums. With self-funding, I wouldn't. There are taxes on stop-loss coverage, but they're a fraction of the fully-insured cost. We'd still save about two percent each year.
That said, self-funding means assuming a lot of risk. There's no way to fully predict claims costs. True, stop-loss insurance can help cover me in worst-case scenarios. But its cost will go up after such incidents, and it may be hard to switch carriers or go back to a fully-insured plan without paying higher prices.
If any legal action is brought against my self-funded plan, my company's assets are also on the line. A carrier or TPA can help us stay legally compliant, but it's a potential risk.
A high-quality provider network may also be harder to get. Insurance carriers like BCBSTX have the best and cheapest access to providers. But we may not meet the size requirements for ASO. And TPAs typically don't have access to the same quality or quantity of providers that carrier networks do -- at least, not for the same price. That means my employees might lose access to, or pay more for, the doctors and clinics they prefer.
The bottom line: There are many factors to consider when it comes to self-funded insurance plans -- most of which will depend on what size group we are. The rest will come down to weighing the pros and cons and running the numbers.