(Oct. 18, 2013) As health insurance costs continue to rise rapidly, the Town of Ocean City heard, and approved, a proposal this week to save over a half-million dollars in 2014 by adopting a self-insured payment method for its employee health coverage.
As with many post-2008 cost-saving methods, the self-insured model will involve the town assuming the dynamic risk and reward of its employees’ heath, instead of the insurance company taking it on.
“On a fully-insured product, the carrier retains all of the risk,” explained Rosanne Calzetta of Bolton Partners, the city’s health insurance and benefits consultant. “They charge you something for that risk, and in good years they keep anything they don’t spend on health care, and in bad years they can cover some of that extra cost.”
Under a fully-insured plan, the city would pay a flat rate to its insurance provider in order for that provider to cover the cost of any health care claims employees make, regardless of the net cost. The rate charged would be based on the insurer’s expectation of how much care the employee base will need, and naturally rises as the overall cost of medical care in the country increases.
Under a self-insured plan, the city would simply pay its employee’s medical claims directly, using the insurer’s estimate to determine how much money it should set aside to do so. If the year’s claims turned out to be worth less, the city would keep the excess in an account for use in later years, which could be invested if it grows large enough.
If the claims turned out to be worth more, the city would be on the hook for the liability, but only to a certain point.
“CareFirst [the city’s provider] does have what I would call a hybrid arrangement, midway between fully-insured and self-insured,” Calzetta said. “The difference is that it’s not open-ended. There is a cap.”
The CareFirst plan recommended by Bolton would have a five percent call obligation, meaning that the town would be liable for all claims up to 105 percent of its original cost estimate. Any liability over this amount would roll over and be tacked on to the next year, and the claims paid out by the insurer in the interim.
“We have a number of clients who have been on this arrangement for over 10 years,” Calzetta said. “Most of them are keeping two years’ worth of that five percent call obligation in their accounts so they don’t have any budget shocks if their claims are more than they expect.”
However, the town’s claims experience has been relatively good, meaning it stands a good chance of building up a surplus.
In Calzetta’s example, pulled from a Maryland school district which uses the same plan, the system only experienced a loss in three out of the last 10 years. As a result, it was able to build and keep a $3.5 million surplus account for future use.
“You don’t get that now. CareFirst keeps it,” Calzetta said.
Further, paying to be fully insured also comes with extra ancillary costs, which are on the rise due to federal legislation. The Affordable Care Act – popularly known as Obamacare – adds additional taxes and fees for fully insured plans.
This, in theory, encourages large employers to take responsibility for their insurance risk themselves, rather than allowing insurance companies to profit from it.
“A big chunk of why the cost is higher comes in fees that will kick in with the ACA,” Calzetta said.
Under the self-insured model, the city’s claims expectancy for 2014 will be 6.1 percent higher than in 2013. But if the town was fully insured, it would be paying a premium 7.6 percent higher.
Calzetta also recommended that, if going with the self-insured model, the town purchase insurance against the possibility of a large excess on its liability projections, a practice known as re-insurance.
“I think the concern that any responsible employer of your size would have is ‘what if we have one very, very sick employee. That could destroy our projections.’ There is support for that in this arrangement,” Calzetta said.
With the re-insurance policy, the carry-over of claims would be limited to 25 percent above the 105 percent call margin. Anything greater than this would not carry over to next year’s liability, but instead be paid by the re-insurer, thus reducing the danger of a catastrophically bad year for employee health. Further, the re-insurance will exempt the town from any one person’s claims in excess of $125,000 in one year.
“If someone has a million-dollar claim, you’re only paying the first $125,000. The rest will be absorbed by the re-insurer,” Calzetta said.
Overall, the self-insurance package will be $522,460 less than the equivalent fully-insured premium.
Further, in order to increase the likelihood of a surplus, Calzetta recommended that the town cease to offer its PPO and HMO coverage to new hires, and instead only offer the high-deductible health plan with Health Savings Account contributions, a program introduced for 2012.
“It’s the richest benefit of your plans,” Calzetta said. “People need to learn how to use it, but those who do figure out pretty quickly how effective it is.”
Under the program, the town and the individual employee pay a much lower rate for insurance based on a higher deductible – $1,250 for individuals and $2,500 for families. However, the city gives each employee this amount of money every year, which goes into their HSA and continues to grow if they do not spend it on healthcare.
This plan is much cheaper than lower-deductible coverage, and more predictable in cost given the flat contribution. Because relatively few employees – especially young, healthy ones – exceed their deductible, the town is hit with far less insurance claims, offsetting the more frequent claims experience of older, less healthy employees.
“They’re paying for those people who cost way more than their premium could ever cover,” Calzetta said. “Any whether they’re healthy or sick, it’s a fixed cost every year.”
“Say they don’t go to the doctor at all. In ten years, they could have $12,000 saved for when they’re older,” posited Councilman Brent Ashley, a member of the former council majority that pushed the introduction of the HSA.
Councilman Joe Mitrecic asked if any of the changes would have an impact on current employees, which they would not.
“In that case, I would motion that we accept these recommendations…except where prevented by contractual agreement,” Mitrecic said.
The city’s union contracts with the Fraternal Order of Police and International Association of Fire Fighters specify all plans be offered, meaning the town could not mandate the HSA until it goes back to the bargaining table.