Category Archives: Self Funding Basics

All you need to know about self funding your health insurance plan

Advanced Benefits Strategy: The Five Pillars of Antifragile Plan Design

We look at the many forces at work today within the healthcare industry and it’s any wonder that companies are surviving.  With skyrocketing fee for service costs, increased utilization, the onset of Rx specialty drugs (still in its infancy and already concentrating towards a lethal dose for plan sponsors), and the administrative juggernaut of healthcare reform, plans are under assault.  Unfortunately, many employers are approaching the future’s looming uncertainty the wrong way, making them subject to greater cost increases, jeopardizing the plan’s financial stability and increasing its fragility to coming shocks.

Every plan is unfortunately subject to varying levels of fragility: some are barely avoiding a default event, others are financially stronger and will be able to hold on for a number of years, but all are still fragile to cost trends in the high single or double digits.  What most plans attempt to do is to become robust (defensively strengthened) against potential “foreseeable” events or conditions by following the crowd and staying with a “bigger is better” mentality when designing their benefits.  To survive, however, firms cannot simply accept the premise of high-single-digit annual cost trend, and then run to the largest PPO and simultaneously ratchet back benefits to survive.  The logical extreme of this scenario would eventually have every employer on the same network, receiving 99% discounts on $10 million procedures until bankruptcy ensues.

Drawing from the philosophy and definitions of Nassim Taleb’s book Antifragile: Things that Gain from Disorder, the reality is that the opposite of fragility, or “Antifragility” is what plans must seek to become, not robustness.  To clarify terms, Fragility is a trait of a system weakened by uncertainty.  Robustness is neither helped nor hurt by uncertainty.  Antifragility describes a system strengthened by uncertainty.  (Read: Fragile systems suck lemons.  Robust systems build lemon shields.  Antifragile systems make lemonade).

Unfortunately, most firms avoid the very Antifragile principles that would allow them to profit and find strategic advantage from uncertainty and chaos.  The allure of following a crowd and ease of lazy thinking puts them in a box preventing breakthrough performance, crippling their plan and their employees with unsustainable cost increases.  At best these cost increases are met with annual benefit reductions and further clinging to a PPO discount, at worst employees are dropped entirely or sent to an exchange, the pinnacle of lazy action and a full relinquishment of empowerment.

It need not be so.  In fact, many firms in the U.S. have health care costs increasing at or around the rate of inflation.  These firms are gaining significant strategic advantage over their competitors who follow a robustness crowd mentality.  These results are not easy to obtain, but they are achievable by taking simple actions on the following common sense “Pillar” principles:

1. Transparency:  For clear thinking and wise decision making, it is critical that the plan sponsor and members have accurate, transparent data.  This principle flies against the self interest of other parties, however, who profit from obscurity.  Specifically, the plan should seek:

(A) Pharmacy price transparency and pass through rebates.  The pharmacy network model is complex and convoluted and hurts the decision making ability of the plan.  A transparent, pass through model gives the plan control and transparency over where its costs truly lie, unencumbered by a spread, and access to the full rebates provided by manufacturers to again profit accurately from decisions made.

(B) Cost/Quality Transparency.  Neither the plan nor its members can make wise decisions about their about the cost of services without a price transparency tool to shed light on the costs for major services.  Likewise, members and plans need at least rudimentary means of distinguishing the quality of services offered by providers.

(C) Plan Data Transparency.  Plan Sponsors need to have clear, accurate, and timely data with respect to their own claims costs so they can gauge performance and make decisions about the risks and opportunities of the plan.

2. Independence: To be most responsive to shocks, changes, and opportunities, plans need the maximum amount of independence possible to make decisions and adjust course.  This requires plans to “un-bundle” their plan and “self-fund” their claims (note: this is referring specifically to large employers, around 200-300 enrolled employees and up).  The crowd mentality is to group in with a large network, and have the network use all its services to meet pharmacy, disease management, and stop loss needs, largely to the exclusion of all other vendors.  This holds the plan hostage, stifles innovation, and relinquishes stewardship and responsibility.  It is also a recipe for a high cost trend with little option of addressing it.

3. Coordination: Eliminate the waste between providers and diagnoses.  A huge portion of healthcare spend is on duplication of procedures and lack of communication and coordination between providers, vendors and members.  A big part of reducing cost trend can be achieved through vendor selection that facilitates communication between related parties.  This can be achieved through service centers that are highly trained for three way calling and health utilization analysis, as well as outside vendors that integrate fully with vendors and guide members.  I have seen cost savings in excess of 10% immediately upon using the technologies to merely communicate and eliminate redundancies.

4. Education: Members must become educated consumers of healthcare.  The natural progression of data access is data use: once members have transparency surrounding provider pricing and quality, and plan incentives exist to encourage the use of this data, members can begin to educate themselves and seek education to make wise decisions.  Plan sponsors can also take steps to educate their members around the highest cost drivers or areas with greatest waste.

5. Alignment: The rewards and the drawbacks need to be aligned between the plan and the members.  The vast majority of plans exhibit heavy incentive imbalances that hurt the ability of the plan to make rapid and sustained progress along cost lines.  Frequently the plan can experience downside or upside, but the member rarely has access to either, and lacks incentive to make wise decisions.  A superior plan will add downside to the member through high deductibles or other penalties for making expensive choices.  The plan design of the future will include both positive and negative incentives to members that align with the upside/downside calculation of the employer.  These plan designs are just now starting to appear on the landscape and offer far better incentive to wise decision making.

High healthcare costs are the natural punishments received by plans that do not know or do not have the discipline to implement the correct principles of benefits strategy.  Hopefully these pillar principles can be a starting place for plans looking to regain control of their costs and systems.

Which PBM is Best?

This is one of the most common questions that empowered[1] self-funded plan sponsors ask when laying out their benefits strategy.  As with other financial vendor questions (e.g.  “Which credit card is best?”), the answer depends a little what you need and how you use it.  However, I can give you some fantastic advice about how to compare them.  What follows is a rough sketch of some benefits of three important PBMs and how they might be able to help your self-funded plan operate better and save money.  This is not meant to be comprehensive, and is meant to be mostly unbiased (disclosures at bottom).[2]

CVS Caremark: Caremark is currently the second largest PBM in the country.  Its main differentiator is that it owns the CVS drugstores, and this is a huge differentiator.  Here’s why: for all plans, chronic illnesses are the top source of cost, and the best answer to this cost is getting your members (1) on mail order drugs and (2) ensuring they take these drugs.  CVS’ abundant drugstores allow your members to get mail order pricing in person to pick up their drugs at any CVS location, which provides choice about how to obtain the meds while maintaining the lower cost to your plan.  Lots of people like to pick up medicine in person, and it’s faster.

Furthermore, every year more of these locations add Minute Clinic operations, which can save your plan a ton by allowing your members to get prescriptions and see physicians at the same location.  CVS is also working to get these physicians and pharmacists tapped in to your members and their pharmaceutical needs to drive up consulting, education, and adherence.

Bottom Line: Caremark could be a great bet for your plan and members if you are in an area with many CVS drugstores and clinics, especially if you have a lot of members with mail order prescriptions.

Express Scripts: When Express Scripts (ESI) bought MedCo, it became the largest PBM in the country.  The combined company is very good at research and outcomes and offers a lot of services that could benefit your plan.  I’ll discuss the ones most interesting to me.  First, they have research centers where pharmacists specialize in a few of the most high-impact positions.  These specialty research centers audit all the claims that are coming through and find gaps and opportunities, and will reach out to your members to correct them, improving adherence and removing waste.

Another area is catching fraud, waste and abuse, specifically with drug abuse.  Claims data files through databases that check the drugs prescribed against what should be expected, looking especially at high street value and addictive drugs, and then puts the information in the plan’s hands and cuts off the members’ ability to abuse the system.

ESI has also negotiated a preferred network of pharmacies that, if used by the members, will deliver focused plan savings, and is a wider network than just using one brand.

Bottom Line: ESI is a thorough PBM option that is exceptionally clinically strong, which helps address adherence issues, treatment gaps, and drug abuse.  They have great discounts, as well.

Navitus: The Navitus name is almost synonymous with the innovation of transparent PBM pricing, which is a solid trend that has increased steadily in recent years.  The Navitus transparency model operates by allowing plans to pay a flat fee per month in exchange for (1) full rebates, (2) no spread or margin paid to the PBM on pharmacy claims, and (3) fee transparency paid to external parties.

It is challenging to directly compare the Navitus cost against the traditional PBM cost, but results suggest the cost savings could be significant because groups recapture money from so many areas.  It is virtually certain that the discounts negotiated by Navitus with the pharmacies are lower than are negotiated by the other PBMs.  Nevertheless, because Navitus does not mark up the discounted price with a spread, it is likely that the group will pay less per scrip than they would with a larger PBM in many, if not the majority, of cases.  Furthermore, a plan will be able to see exactly what the cost structure looks like and will be able to more easily track all its expenditures with the transparent model.

Bottom Line: Navitus may or may not be the lowest overall cost of the PBM options, but you know exactly what you are paying them and where your dollars are going, which is empowering for good decision making.

In summary, this is a very quick and rough assessment of three multibillion-dollar companies, and represents this author’s opinion of the respective strengths of each when you hire them for your members and your plan.  Any time you are bidding, ensure you (1) know your plan’s greatest weakness on the pharmacy side, and (2) interview each of them (and others) with these needs specifically in mind to see who offers the most for your plan.

[1] Empowered plan sponsors are those who have the option in their self-funding arrangement of choosing a PBM.  If you are a plan sponsor who is being prevented from selecting a PBM of your choice, you may want to consider a new arrangement, working with an unbundled TPA instead of a fully bundled arrangement.

[2] I gained this information from Caremark at a free lunch meeting, from ESI at a free conference, and from Navitus on a conference call.  There was no payment for writing this article and no commission or fee paid to anyone who uses these services.  At the time of this writing, none of these companies sponsor Benefits Strategy, either.

Pharmacy Benefit Manager (PBM): Basics and Three Ways to Save Money on Pharma

Buying in a group allows for discounts, everyone knows this.  This is what has caused the creation of the large networks, such as Blue Cross, United Healthcare, and the others, allowing the negotiation of heavy discounts with providers in behalf of patients.  Nevertheless, buying drugs from the local drugstore operates along the same principles: if everyone on a plan buys as a group, employers can get superior discounts.  The same is true for prescription drugs, which led to the creation of networks for buying pharmaceuticals known as Pharmacy Benefit Managers (PBMs).

The PBM is more behind the scenes for most employees; they don’t have a logo on the cards or on most of the materials.  The large carriers use the PBM to handle the pharmacy benefit in their “back offices” behind the scenes as well.  Nevertheless, these companies are huge and drive a large part of your medical spend through the tools and discounts they employ in behalf of your plan whenever a member buys a prescription drug.  The remainder of this post will explain a little more about the basics of the PBM, how it works, and three ways you can use this information to save money.

The best way to illustrate how a PBM works is with the example of a person buying a drug from a retail drug store, such as Walgreens, that would be valued off the shelf at $100 to someone off the street.  Let us imagine that Walgreens bought the drug from the manufacturer for $50, to earn $50 profit if sold at full price.  Let us now imagine that a member of a large health plan that is self-funded through his/her employer goes to buy the drug.  The employer uses a health network for regular claims (such as Blue Cross), but works with a large pharmacy benefit manager (such as Caremark), behind the scenes to negotiate drug discounts on the members’ behalf.  The PBM has negotiated with the drug store to accept payment of $70 for the drug.  The PBM then bills the plan $80, creating for itself a spread of $10.

From here, it gets a little more complicated.  First, the PBM pays a negotiated fee to the administrator for administering the claim.  Second, the PBM pays a percentage of the spread to the administrator as well.  Third, the PBM pays a fee to the health broker off of the claim as well.  Additionally, the manufacturer of the drug, from whom the drug store bought the drug, offers a rebate on the drug.  This rebate is paid to the PBM directly, and then the PBM shares the rebate with the employer and potentially the other parties as well.

As you can see, this can be very confusing.  It’s not necessarily good or bad, but it is extremely difficult to tell where all the money goes and to whom.  This confusion creates opportunity for both PBMs and employers.  The PBM has big opportunity in the smoke and mirrors to engineer tremendous economics and compete against each other.  The employer has huge opportunity in three areas:

(1) Negotiate Harder: There are so many dollars passing around behind the scenes that you should be able to get more dollars returned in per-scrip fees or a larger percentage of the rebate.  Push hard on the PBM and make them compete heavily against each other.

(2) Audit the PBM: There are vendors who audit the PBM payments and the discounts that are being stated.  Using an auditor to keep the PBM diligent in delivering everything it has committed to can generally pay a strong ROI.

(3) Go Transparent: Some PBMs have the ability to do a “transparent model” that allows you to pay a flat fee to them each month, and then pay the wholesale rate, keep all rebates, avoid a spread, and avoid additional hidden fees.  Sometimes the discounts paid to the pharmacy are a little more than the PBM would have to pay if there were a spread, but the employer is able to see everything that is going on and keep all the additional fees, rebates and the like.  Furthermore, specialty drugs, which are growing in cost insanely quickly, have some of the greatest spreads, so a transparent model can potentially help the most with the cost of these types of drugs.

Look back to Benefits Strategy for on deconstructing pharmacy expenditures.  Pharmacy spend represents one of the greatest opportunities for savings for most employers, and is frequently one of the least understood areas.

Barriers to Self-Funding: Why Don’t More Employers Self Fund Their Health Insurance?

An alternative title to this article might also be “why certain employers should not self-fund their insurance plans.”  When companies of a larger size first explore self-funding their health insurance plans, it appears to be an easy financial decision; yet making the change requires overcoming a number of hurdles.  (For the reasons why an employer should self-fund its health plan, see an earlier post here Four Reasons to Self-Fund Your Benefits Now). This article will illustrate the obstacles, both systemic and external, that inhibit employers from self-funding their health insurance benefits, and illustrate thoughts about overcoming these obstacles.


First, it’s easy.  Fully insuring a population with health insurance is extremely simple, just buy a pre-packaged plan from a broker and it will cover the population.  Select a few coverage items from a list, such as the deductible, and it is finished until renewal.  Just remember that when large employers with relatively average-health populations (or better) are fully insured, they are probably overpaying (potentially significantly) for this ease.

Second, it’s predictable (in 12 month segments).  An employer buying a fully insured health plan knows exactly what it will cost each month of the year, no matter how many surprises come or operations occur.  This is a short term predictability, however, because the prices change every 12 months at renewal.

Third, fully insuring is an excellent choice for unhealthy populations.  Although the majority of benefits strategies hinge on employers being able to manage the risk of their own populations, sometimes the situation is beyond saving.  If the population of employees is aging, obese, and/or chronically ill, the claims utilization may be quite high.  This can be so extreme that if the employer were paying the claims it would be far worse than having the population be part of a large risk pool, where the insurance company takes the losses instead of the employer.

Fourth, it works best for large populations.  There is no rule that says a company must have “X” number of employees to make the leap to self-funding its employees.  The idea is, however, that the larger a population, the more it is able to balance risk across it.  Hence, if only 10 employees are on a plan, a single big accident could drive losses greater than a decade of premiums.  If the plan has 1,000 employees, the likelihood of a single incident driving huge losses declines dramatically.  Recent articles have indicated that more and more, companies with fewer than 50 employees are making the jump to self-funding their insurance plans because of anticipated cost increases due to ACA, especially for employers with healthy populations.


Fifth, it can be hard to get stop loss insurance.  When a company wants to self-fund its benefits plan, it needs to purchase stop-loss insurance to provide a backstop against catastrophic claims.  These stop-loss carriers need to have claims data and totals so they can price the stop loss insurance accordingly (e.g. a young, healthy population needs a low price, an old, chronically ill population should have a higher price).  The stop loss carrier is not gauging the elderly and sick, it just needs to price the insurance properly so it can stay in business.  Without any data (which will be very hard to get from the insurance company) the stop loss insurance will price the insurance higher in order to be cautious and make up for the business risk of taking a gamble.  There are many ways to get around this hurdle, from buying stop loss from a general agent who specializes in fully insured conversions to doing a semi-self-funded policy with the carrier.  See this post How to Get Stop Loss Insurance if You are Fully Insured for details.

Sixth, insurance companies make more money on fully insured plans.  By some estimates it requires 3-5 self-funded health insurance plans to earn the same money for an insurance company as a single fully insured plan.  Because of this, there is a strong financial disincentive for insurance companies to have your plan be self insured.

Seventh, insurance companies pay more commission to the broker on fully insured plans.  Not all brokers work on commission; some work for a flat, transparent fee or a monthly subscription, or hourly.  However, a large preponderance of health insurance brokers are paid by commissions from carriers.  These commissions are materially higher if the broker has an employer group on a fully insured plan than they are on a self-funded plan.  Most brokers will still do what is in the best interest of the client, but if the client doesn’t ask to be self-funded, it’s not a wonder that the broker may not push for it: more work, less pay.

Self-funding an employee population is the right answer for over 90% of large employers, and 60% of all employees in the United States[1].  Nevertheless, there are still tens of thousands of businesses on fully insured plans who could reap major savings by making the switch.  Doing so is a long term commitment, and will require some work to get the benefits, but the effort in many cases is well worth it.

[1] Thomas, Katie. “Self Insured Complicate Health Deal.” New York Times. February 15, 2012

Four Reasons Employers Should Self-Fund Their Health Benefits Now

One of the first steps employers should consider when creating a robust benefits strategy is getting “hands on the steering wheel” through self-funding their health benefits plans.  Well over 90% of large employers self-fund their plans.  Most groups choose this route based on one or more of the following logic streams.

First, it can be lower cost.   By eliminating the insurance company, the plan is able to recapture some of the profit and overhead costs borne by the insurance company.  The profit and overhead of the insurance carriers are frequently 20% of the plan cost.  This means an employer spending $1 million per year on health insurance could reduce its baseline cost to $800,000 (plus stop loss premium and administration).

As a word of caution, self-funding a health insurance plan can also cause higher cost in the right conditions.  If your population is very sick, uses healthcare frequently, or has a number of chronic illnesses, there is a possibility that you could spend as much or more than you would on a fully insured, traditional health plan.  Also, if a few unpredictable and large claims occur in a given year it could cause the plan to spend more than anticipated.  Hence, the significant upside does carry with it some risk.

Second, flexibility.  Many employers want to be able to offer benefits not available in the “canned” fully insured plans (in vitro fertilizations, adoption expenses, transgender operations, experimental treatments, etc.) and the only way to have control over your plan in a highly customized way is by self-funding your benefits.  For companies fighting hard to attract and retain talent, having a rich health plan with creative and innovative benefits is a great way to set themselves apart from the competition.

The downside of flexibility is having to make a variety of decisions.  Companies that are fully insured have very few decisions to make, because the decisions are already made for them.  When an employer has full control over its plan, there are thousands of options from which to choose about how they reward, motivate, and subsidize different healthcare choices from their population.  For instance, companies in control of their plans must choose an administrator and a stop loss vendor, or stick with the administrative services of a carrier.  Likewise, they must decide whether to include disease management, wellness programs, health savings accounts, nontraditional treatments, and more.  An unsophisticated human resources department will need to rely on a sophisticated, self-funding experienced health insurance broker when making these decisions.

Third, strategy.  Once employers are paying the claims themselves, they can directly benefit from savings that result from better decision making and outcomes in their employee population.  This means they can experiment with plan incentives, educate their employees, and take advantage of innovations to reduce the utilization of healthcare and get better outcomes.  Any improvements directly reduce the amounts employers spend on their healthcare, and can thus reduce the amount employees must contribute to have healthcare.

As with all things, there are good and bad strategies, and if a company puts in place incorrect incentives they can inadvertently lead to bad decision making in the population or employee resentment.  Major changes should be approached with care, thoughtfulness, and guidance.

Fourth, avoiding regulation.  The E.R.I.S.A. act of 1974 makes it so self-funded employers are regulated differently than fully insured plans.  This allows self-funded plans to avoid some laws that would apply to fully insured plans and provide more flexibility.  Regarding healthcare reform, self-funded plans avoid some of the requirements of healthcare reform as well, that apply only to insurance companies.

Companies generally should begin seriously investigating self-funding their health insurance once they begin growing in size and if they feel comfortable with the potential negatives described above.  While it is most typical to become self-funded at a few hundred employees, with the onset of ACA, many companies in the 20-50 life range are exploring self-funding their health plans[1].

[1] Pear, Robert “Some Employers Could Opt Out of Insurance Market, Raising Others’ Costs.” New York Times, February 17, 2013.