Since open enrollment and renewal season is upon us, your employee benefits are probably weighing on your mind. Maybe you have a fully insured renewal sitting on your desk with an unexpected increase. Maybe you’re thinking about all of the other rising costs you’re facing due to inflation (with medical inflation lagging not far behind). Appropriately, you may be looking for ways to cut spending, and transforming your employee benefits plan could help you tackle a significant source of it.
When we think of health insurance, most of us immediately think of old-fashioned types of plans. You pay a premium to an insurance company, and it handles your claims. That sounds straightforward, but it’s not the only way to finance your benefits, let alone the best. While it may seem counter-intuitive for small and medium-sized businesses to think about self-insurance, we have developed cutting-edge risk-management practices that make it not only a possible, but positively necessary, solution.
In light of these challenging economic times, with inflation rates rising and the looming threat of recession, any chance to save money on health benefits deserves a close look. For many employers, employee benefits are one of the largest line-item expenses. However, you can combat these rising costs without sacrificing the quality of care that your employees receive. ParetoHealth’s solution, which I will explain in detail in this article, saves new members an average of 7.5% on total health care costs during their first year alone, and the savings grow with time.
The fact of the matter is that the companies that are large enough to self-insure almost always do. 63% of all U.S. employers self-insure. This includes 94% of all businesses with 5,000 or more employees and 56% of those with 200–999 employees. An increasing number of employers with fewer than 200 employees are climbing on the self-insurance bandwagon. These companies ditched the traditional fully insured model, electing to pay claims themselves rather than overpay insurance premiums.
While traditional thinking suggests that bigger businesses are more able to self-insure because they have more capital at their disposal, small businesses shouldn’t count themselves out of the self-insurance space and its invaluable benefits. Additional layers of risk management may be required, but that doesn’t complicate the process. In fact, the opposite is true.
Group captives are the superior alternative to fully insured and individual self-insured models. Captives are insurance companies that are owned by their insureds who share risk in order to take control of their health care dollars and realize opportunities for savings. Group benefits captives optimize self-insurance for small and mid-sized employers.
When ParetoHealth was formed in 2011, we wanted to disrupt the broken insurance industry and enable small and mid-sized employers to take control of their benefits and health care spending. Since then, we have grown to become the nation’s largest health benefits captive, with more than $800 million in stop loss premium under management, 1,800 members and 600,000 covered lives. Pareto captives are wholly owned by the members, and our sole purpose is to advance the interests of the entire captive. Our members have reaped great rewards from this method of benefits financing. The proof is in the numbers: 97% of the businesses that join ParetoHealth renew with us each year.
Finally, we have more experience in this area than anyone else. We guide newly self-insured employers every step of the way with our turnkey cost management and individualized support, which is why so many IMARK members have chosen to join ParetoHealth.
But before we get ahead of ourselves, let’s go over the basic differences between fully insured plans, self-insured plans and captive insurance at ParetoHealth.
Fully Insured is Actually Just ‘Fully Deferred’
While fully insured plans offer the convenience of a regular payment schedule in the form of monthly premiums, these premiums often increase steadily, even following a year of relatively “good” claims experience, and sharply following a year with high claims.
For example, let’s say you pay $1 million premium but only have claims of $800,000 that year. Your insurance company keeps the difference as profit. Even though you were “profitable” for the insurance company, they hand you a 5% increase for the upcoming year. In a year with a lot of bad claims, you could get slapped with a 50%, 75% or greater renewal increase. A decrease in premium is unheard of.
Fully insured carriers hope you only look at the costs one year at a time, and too many short-sighted employers fall into that exact trap. They accept the relatively small renewal increase that comes after a good year and don’t bother to look for a better solution until disaster strikes. But it’s not a matter of if you have a bad year with unexpected claims. It’s a matter of when. Statistically, bad years happen about one in every five years. Fully insured plans don’t offer protection from annual changes in costs and volatility.
If you wait until a disastrous “bad” year strikes, you’ll be too late. The options available to you now may not be available then, at least not at the same price. And in the intervening years, those modest renewal increases will add up.
When you’re fully insured, you face restrictions on the plan design and receive little to no information on how your health care dollars are being spent. You don’t know what benefits your employees are and aren’t utilizing. As a result, you’re ill-equipped and unable to make informed decisions about reducing costs.
In addition, don’t be fooled into thinking that paying a premium effectively shifts all the risk onto the insurance company. Sure, you have financial certainty for the next 12 months. But after those 12 months, your insurance carrier can increase your premium based on your claims in that prior period. So, you aren’t transferring risk; rather, you’re just deferring it until next year. In short, to quote the adage, “the house always wins.”
Being Self-Insured on Your Own is Volatile and Risky
So, is self-insurance the better way? The answer isn’t that simple.
As a small to midsized employer, going self-insured on your own can be risky. There are fewer taxes and fees because you are not paying overheads to an insurance company. Instead, you pay your employees’ claims as they come in, and you don’t have to worry about overpaying premium. Payments vary based on claims which means budgeting for claims can be unpredictable, and a big claim can be catastrophic to your bottom line.
This can be mitigated by stop-loss insurance, a type of insurance that is designed to cover only very large claims or an unexpected influx of many smaller claims. However, as with fully insured policies, stop-loss policies can bring hefty renewal increases.
You’re also vulnerable to lasers. Simply put, a laser is a higher deductible issued when an individual is experiencing a higher claim year that will probably continue long term, such as someone with cancer or diabetes. In these cases, insurance carriers will set a higher deductible (laser) on that individual for at least the next year. This transfers the costs of those high, ongoing claims back onto the employer.
And while being self-insured gives you access to claims data, you might lack the expertise to make sense of it and form an effective strategy to reduce costs. You are unlikely to have access to cost containment programs and options that larger businesses do.
All of this means that you cannot take advantage of all the benefits available to you, and you’re taking on a huge amount of risk yourself. As a small business, if you have a cash surplus to pay your claims, you can make self-insurance work. But this often isn’t the case.
You have long-term goals for your business, so why not demand long-term goals and strategies for your employee benefit programs?
This is where the captive comes in.
A Better Solution
Joining a ParetoHealth captive provides an additional layer of risk management, and it allows you to leverage far greater buying power than you would have on your own. Unlike traditional self-insurance, which only gives you two layers of risk management, the captive provides an intermediate layer that handles medium claims. You won’t have wide variances in the amount you spend on your benefits in a single year, allowing you to plan for the future.
The most important aspects of a captive are size and scale. At ParetoHealth, we think about it like this: imagine you have a 50-gallon drum of salt, and you dump it into the ocean. The salinity of the ocean doesn’t change. Now imagine you dumped 50 gallons of salt into a swimming pool. It would have an effect. If you dumped 50 gallons of salt into a bathtub, you’d end up with more salt than water.
If the salt represents risk, it’s a no-brainer that the ocean is the safest scenario. As with salt in the ocean, you want to spread risk over a large population so that catastrophic claims don’t cause as much impact as they would if you had to absorb them on your own. Like I said before, you’ll inevitably experience some bad claims at some point, but rather than bearing the brunt of them on your own, they’ll be spread across the entire captive and absorbed.
When you join a captive, you accept a portion of the other members’ risks, and they accept a portion of yours. This means that in a good year with “good” claims experience, you might pay a small amount more than you would otherwise—let’s say your costs in the first year are 5% higher than they would be in a best-case scenario of a fully insured plan. However, it also means that your costs in a bad year will be far lower than they would be otherwise.
Our scale also contributes to our bargaining power as we negotiate terms of the stop-loss contracts. Because our members collectively account for such a large amount of stop-loss premium, we can negotiate best-in-industry contract terms with the insurance carriers.
For instance, premium renewals for ParetoHealth members are capped at a 30% increase, which equates to only a 7.5% average increase in total health care spending. To merit a 30% increase, a member usually has exceptionally poor claims experience or has significant known, ongoing claims—or both. In addition to the 30% renewal cap, we also guarantee ParetoHealth members that they won’t receive any new lasers as long as they remain in the captive. That gives employers peace of mind that their benefits strategy won’t be undone by a sudden, large, ongoing claimant.
Almost any insurance program includes some component of risk sharing. Even in the fully insured model, the reality is insurance carriers look at their entire line of business before setting next year’s rates. If you had a great year but anticipated claims across all business ran high, that will impact your renewal quote.
The simple reality is that fully insured groups share risk with complete strangers. You have no information about them, their claims or what (if anything) they’re doing to control costs. This isn’t the case for members of ParetoHealth. We vet and educate all potential members. The vetting process makes sure that an employer is financially viable—after all, you don’t want to share risks with someone whose house isn’t in order.
Second, we require groups to have a certain degree of engagement and initiative. We pride ourselves on the fact that our captives are comprised of like-minded employers with a common goal of decreasing healthcare costs without compromising quality. The last thing we want is to admit members who aren’t going to put forth a good faith effort to pull their weight and control their costs.
Captive membership is the foundation for a multi-year strategy that provides better protection and greater control over health care spending. Membership is also the only way to access ParetoHealth’s Integrated Cost Management (ICM) platform. ParetoHealth members can opt into this platform, which continually scans their claims data and proposes programs and initiatives that may reduce health care costs without compromising care.
For example, prescription drug costs typically drive 20-25% of an employer’s total health care spending. Our Pareto Rx Consortium (PRxC) helps our members control pharmacy costs. Through a combination of best-in-class Pharmacy Benefit Manager (PBM) contracts, a powerful Rx consulting firm, and a suite of innovative specialty drug solutions, members can save 25% or more on their prescription drug costs.
ICM also helps members save money on medical claims, offering members exclusive access to programs designed to manage certain types of claims, such as oncology and neonatal claims. We offer members access to care coordination programs, so when your employees have questions about their benefits, or need assistance navigating the health care system or health care bills, they have 24/7 access to a patient advocate. Not only is this a tremendous resource to employees, but it alleviates strain on your HR staff and reduces unnecessary costs.
ICM members also receive “Playbooks” that summarize their specific data and propose solutions most likely to reduce costs. This allows employers to devote money and resources to cost-management programs that are most likely to impact their claims and skip programs that aren’t likely to move the needle.
In addition to our ICM programs, captive members enjoy control and flexibility in plan design. This allows members to personalize their benefits and tailor them to the specific needs of their employees. Often, an employer will join ParetoHealth, and their employees don’t even realize there’s been a change unless and until the employer tells them.
Finally, when you join ParetoHealth, you join a community of like-minded employers committed to supporting one another on this journey. An annual highlight of membership is the Members’ Meeting—three days focused on captive governance, education and collaboration. You’ll hear about the experiences of your fellow members, share ideas and learn about emerging trends in claims and cost management.
If you’re interested in joining ParetoHealth, contact Risk Strategies to begin discussions. As an approved ParetoHealth consultant, Risk Strategies will help you assess whether ParetoHealth is the right solution for your group. They have the knowledge and expertise to guide you from implementation through your years of membership in the captive.
We asked IMARK member and Hubbard Supply President Wilson Teachey about the benefits of joining the captive.
“When it came time to renew at the end of our 2018-2019 insurance year, we were facing an 11% increase with our current PPO, so we decided to give the Pareto Captive a try,” Teachy said. “Joining Pareto avoided that increase, and premiums stayed flat while receiving better benefits from Pareto. Now that we are on the backside of 2020 and the year is closed out, we not only saved the 11% increase, but we saved an additional 9% on the ‘unused’ premium. So, you can see that our overall savings were close to 20%! From the employee’s perspective, they are receiving better coverage while keeping their existing network of doctors. This has been an all-around win for both the company and our team!”
To learn more and to see if ParetoHealth is right for you, contact Dee VanSchoick at 713-829-9143 or firstname.lastname@example.org.