In an era of rising health insurance costs and new mandates built into federal reform, employers of all sizes are discovering the advantages of controlling their own destiny with self-funded ERISA health plans. With a large pool of employees, the employer could expect to save about 10 percent by paying medical claims directly rather than purchasing fully insured coverage. The key is to pick the right partners, address outlier risk with stop-loss insurance, and rigorously control costs. Strategies to Reduce Risks Self-funding may sound scary to some employers, especially in a climate of high-cost medical care. A recent study found that the rate of $1 million medical claims in 2000 was less than one per every million covered members; by 2005, the rate was 11 claims per million.1 Many companies cannot afford to take the chance of having an employee need high-cost services.

Here are six strategies to reduce the risk an employer takes on when it self-funds:

1. Use stop-loss insurance. Stop-loss insurance is designed to allow self-funded employers to protect themselves from excessive medical costs. A specific stop-loss policy provides coverage for an individual employee whose medical care claims exceed a ceiling established by the employer, such as $100,000 or $125,000. An aggregate stop-loss policy addresses an employer’s total expenditures for health care by establishing a ceiling, such as $1 million. 2. Cover organ transplants separately. With the number of organ transplants rising, it may make sense to purchase transplant-specific insurance. At the end of 2007, more than 180,000 people were living with a functioning transplanted organ – a 50% increase over 1999.2 Today, more than 100,000 people are registered on an organ waiting list. Costs to treat transplant cases can range from $260,000 for a kidney to more than $1 million for a heart-lung transplant. Having a separate policy to cover these expensive, life-saving procedures protects the employer from unexpected costs.

3. Address specialty pharmaceuticals. A 2009 study found that almost 300 drugs are now classified as specialty pharmaceuticals – largely expensive medicines that treat cancer, hemophilia and other chronic diseases – by most health plans.3 The cost for a single patient over the course of a year can range from $5,000 to $300,000. Contracting with a pharmaceutical benefits management team that specializes in this area can reduce costs by obtaining discounts, eliminating the “buy and bill” approach that allows doctors to charge a markup, and using rigorous utilization review. 4. Manage dialysis treatment carefully. Both the number of people and the costs associated with end-stage renal disease are rising. In 2007, about 111,000 new patients entered treatment for end-stage renal disease and 365,000 people were undergoing dialysis.4 Public and private spending on treatment reached more than $35 billion. Because the typical dialysis case can cost between $30,000 and $50,000 per month, self-funded employers may find it beneficial to contract with dialysis management specialists to control costs. Techniques include invoking Usual and Reasonable rates to reduce invoices, helping to arrange for home dialysis when appropriate, and obtaining discounted pricing for the anemia-fighting drug Epogen.

5. Encourage employees to manage chronic conditions. Estimates for the nation’s annual cost of chronic conditions, such as diabetes and cardiovascular disease, range from $174 billion to $403 billion. Costs can be reduced when patients carefully follow their doctor’s instructions. For example, studies have shown that diabetic patients who properly comply with their treatment plan 80 to 100% of the time have less than half the medical care expenses of patients who only comply less than 19% of the time. Self-funded employers can hold down the cost of chronic disease by arranging for patient focused case management and offering wellness plans that reward employee participation. 1 “Unprecedented Growth in Catastrophic Claims May Leave Health Plans Exposed,” Evergreen Re, undated press release, http://www.evergreenre.com/news/news-claims.htm. 2Wolfe, R.A.; Roys, E.C.; and Merion, R.M., Trends in Organ Donation and Transplantation in the United States, 1999-2008, American Journal of Transplantation 2010, 10 (Part 2): pp 961-972. 3 Hargrave, Elizabeth; Hoadley, Jack; and Merrell, Katie, Drugs on Specialty Tiers in Part D, February 2009, pp 10. 4 Kidney and Urologic Diseases Statistics for the United States, National Institutes of Health, http://kidney.niddk.nih.gov/kudiseases/pubs/kustats/, April 2010. Legal Disclaimer: Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that the authors are not engaged in rendering legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem

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