When researching alternative-funding, you will hear about arrangements like “Level-Funding,” “Captives,” “Consortiums,” “Reference-Based Pricing,” among other terms. All of these have been a great fit for many clients, but there is not a one-size-fits-all approach.
These arrangements give financial protection from high-cost claims, but also provide financial savings in years with good claims experience. Additionally, companies will get more insight into their population’s health with increased claims reporting. They also have increased autonomy in adjusting plan designs.
Here are six important questions to ask your benefits consultant while evaluating your alternative-funding options at renewal.
1. Who are all the administrators involved, and what are their financial incentives?
One of the upsides to many of these alternative-funding arrangements is significantly more financial transparency. Specifically, greater transparency in medical claims reporting, administrative fees and commissions. Make sure to have your benefits consultant break down these costs. While most of these costs are market driven (competitively priced), it’s important to understand the incentives for all parties involved.
2. What are the non-financial costs of alternative-funding?
Every alternative-funding arrangement will have varying degrees of non-financial administrative burdens. Some examples include additional filing requirements to the IRS, additional compliance notices to employees, independent audits of trust accounts (this will be a financial cost too), surplus fund reimbursement processes, and potentially many others. Make sure to clarify with your benefits consultant what your new obligations will be in any new healthcare plan. Ask them whether they will help with any of these added responsibilities.
While many arrangements have a robust administrative setup, others are much more “bare-bones.” At the end of the day, every organization has different priorities. Some companies will exclusively look at the bottom line and bear the brunt of any non-financial administrative cost (or more likely, their Finance and HR team will!). However, being aware of these costs on the front end is important for planning and bandwidth purposes.
3. What are the true benefits of increased claims reporting? (Beware of the over-sell!)
Most of these arrangements will allow access to enhanced claims reporting. Among many things, this will help you and your benefits consultant proactively prepare for your renewal. Having this access can be a great benefit given the lack of claims transparency in the traditional fully-insured market. Avoiding the surprise of a big renewal increase helps any organization. In years with favorable claims experience, it can give you leverage in renewal negotiations. Additionally, you can pinpoint certain employee utilization trends and adjust the benefit designs accordingly (i.e. adjust deductibles/copays on Emergency Room/Urgent Care visits or telehealth to drive certain behavior).
Transparency in claims data is a positive in so many ways, but there are limitations. Occasionally, we hear stories of employers who were told by a benefits consultant that they’d automatically see their rates decrease 15% simply because they had access to claims data. Don’t be fooled into believing the transparency necessarily equals a renewal decrease.
4. What impact(s) will there be on employees?
The changes felt at the employee level can vary depending on the arrangement. In some cases, it will simply be new ID cards. However, in other cases (such as reference-based pricing, or an arrangement exclusive to a local/regional health network), there will be significant impact on the employees’ user experience.
It’s important to review with your employees the “how” and “why” of any changes made to their health insurance. Your benefits consultant should help walk your employees through scenarios where they will need to change their doctors, pharmacies, or hospitals. Avoid the dynamic of an undereducated employee population. Prevent situations like balance-billing from out-of-network doctors and hospitals. If employees need to change their pharmacy, address it proactively.
Make sure your employees know 1) how much thought and preparation you and the company put into the decision and 2) that the decision was made on their behalf to save money for them and their families. In some cases, it will require ongoing educational meetings outside of Open Enrollment. Work with your benefits consultant to craft this communication strategy.
5. How does a claims fund surplus get refunded (or does it)? What strings, if any, are attached?
For companies with fewer than 150 employees considering alternative-funding, your premium is typically set at the maximum liability. If your claims history is favorable, you are eligible for reimbursement of a portion of the prior year’s premium. Work with your benefits consultant to understand how this surplus gets reimbursed. Each arrangement varies and often there are strings attached.
A reimbursement typically will come 3-4 months after the end of your plan year. Some arrangements will reimburse you 100% of any claims budget surplus. However, others will only reimburse a portion of the surplus. Additionally, many of these arrangements will only reimburse you if you renew in the following year.
Usually a reimbursement will be issued as a credit on a subsequent billing statement. Some arrangements will send a check to the employer. There are regulations about co-mingled money between employer and employees—make sure to work with your benefits consultant and document how you handled the reimbursement.
6. Do I lose autonomy/independence in this arrangement?
Be aware of any alternative-funding arrangement that contractually binds you with other employers. Captives and similar arrangements combine your claims with other employers—also known as “pooling”—to help stabilize premiums and take advantage of being a larger purchasing group to save on administrative and insurance costs.
They can be a great financial solution, but invariably there will be years that your organization is subsidizing the group. In some cases, there is also a down-payment on the front end to join the arrangement. In the event your organization leaves the arrangement down the road, there would be additional costs to consider. There may be non-financial administrative costs as well. For example, typically you can only join a captive at certain times throughout the year. It may not coincide with your existing plan year. Your benefits consultant should help assess how to handle this transition.
While none of these are in any way a “deal breaker,” have your benefits consultant fully explain how these solutions work to avoid surprises or conflict down the road. Be certain to regularly evaluate how the arrangement is performing for your organization.
It is becoming more and more essential for CFOs and HR Directors to understand these different alternative-funding arrangements. However, whether or not your organization is the right fit for one of these arrangements is an individual analysis. Work closely with your benefits consultant to address these concerns and find the solution that’s the best fit for you.
Chris Sill- Senior Benefits Consultant
This blog post is not intended to exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.