ACA Leads to Innovation in Employer-Sponsored Healthcare Options
Thursday, October 8, 2015
Danielle Ledford, Community Liaison, Nonstop Wellness
Editor's Note: Nonstop Wellness will be hosting a VIP networking reception at the Fall Primary Care Conference for C-level executives on Monday, October 19, and will be sponsoring the Fiscal Track. Learn more at the conference
In this age of healthcare reform, we often overlook the vast opportunities for positive change in our rush to manage all of the challenges. But the reality is that the ACA has opened the doors to transformation in the healthcare industry, and while it may take some time to get there, innovation is on its way. Perhaps faster than we realize.
The Dilemma of Nonprofit Healthcare Options
It’s no secret that organizations of all sizes – but especially those with 50+ employees – are struggling to find the balance between rising healthcare costs, ACA compliance, and a competitive job market. Combined, these three issues can lead to almost unmanageable strain.
This is especially true for nonprofit organizations that, in pre-ACA years, already struggled with maintaining the bottom line while trying to provide competitive benefits to retain talented staff. In fact, research shows that healthcare coverage is rated as the most important benefit to employees. As such, providing high-quality and customized insurance options is more important than ever in creating a healthy work environment and sustainable programming.
When it comes to group health coverage, in the past nonprofits have typically opted for the low financial risk and reduced administrative responsibilities of fully-funded insurance, despite expensive and non-customizable plans. But the traditional model of fully insuring health coverage just isn’t cost-effective for nonprofits anymore, nor does it benefit employees in the long run. Rising healthcare premiums, narrowing coverage, and subpar benefits result in plans that are under-used and poorly regarded by employees.
On the flip side, self-funded insurance plans solve many of these challenges by allowing more control over employee healthcare spending and increased flexibility and customization with the level of coverage and types of benefits offered. In fact, according to research by Arthur J. Gallagher & Co., 35 percent of 3000+ surveyed organizations are considering switching to a self-funding model in the coming years due to the advantages. However, the high financial risks and unpredictable cash flow/output associated with self-funded coverage make it a non-starter for many nonprofit organizations that need to have predictable, stable and manageable budgets.
As such, a new – and better – solution must be found that strikes a balance between fully funded and self-funded health coverage. Fortunately the advent of healthcare reform has inspired innovation on the part of nontraditional healthcare entrepreneurs who want to shake up the current system for the better. New companies are re-inventing healthcare to better serve communities – such as nonprofits – with increased savings, improved benefits, and creative approaches to insurance offerings. Partially self-funding health coverage is one such approach.
Innovation happens when a decision is made to abandon the old system in lieu of something that initially may sound risky – but in actuality pays off in droves. With partial self-insurance that benefit comes in the form of scrapping the current model of health insurance (e.g. traditional PPOs or HMOs which bill at 100% despite actual usage rates being 30-40% less) and moving more toward a “pay-for-use” approach, which increases the value and quality of healthcare. “Pay-for-use” is a particularly cost-effective approach because employees typically use only 50-75% percent of traditional fully-funded plans.
With partial self-insurance, organizations purchase less expensive, high-deductible healthcare plans (HDHPs) for employees, and then provide supplementary funds for all enrolled employees. These supplementary funds help pay for out-of-pocket expenses related to having a HDHP. Typically a significant portion of the allocated supplementary funds won’t be spent (except in the case of unusually high claims due to catastrophic events or emergencies) and can be reinvested back into the organization.
The primary organizational advantages of partially self-funding (e.g. pay-for-use model) are two-fold: financial savings and improved benefits. Regarding the financial savings, the combination of a HDHP and a reserve fund allows for significant cost reductions and unspent dollars to be reinvested back into the organization at the end of the year. In addition, partially self-insured plans allow organizations to determine how much out-of-pocket expenses employees will be required to pay – from a specified percentage to almost nothing.
In terms of improved benefits, it’s common knowledge that attracting and retaining top talent can be an ongoing challenge and an uphill battle for nonprofits. According to Nonprofit HR, 20 percent of nonprofits list turnover as their biggest employee challenge and 32 percent report compensation as the greatest retention challenge. As such, developing innovative approaches to keep skilled staff members satisfied becomes even more crucial to sustained programming.
With partial self-insurance, employers can both customize additional benefits (on top of the HDHP) based on employee needs/wants, and improve compensation packages by adding highly desired non-traditional benefits with little to no impact on budgets. As employee benefits improve and out-of-pocket expenses decrease, there is a greater likelihood of employee contentment with direct and indirect compensation.
The Realities of a Partial Self-Insured Plan
One example of a nonprofit health center that made the switch to partial self-insurance with positive results is Asian Health Services (AHS). AHS is a nonprofit health center with 350+ employees serving and advocating for the Asian and Pacific Islander community in Oakland, California. In January 2015, AHS made the switch from fully funded coverage to partially self-funded coverage and immediately began saving on premiums. Combine this savings with the Return of Reserves, and employee savings, and their 2015 healthcare costs have been cut by 19%.
For AHS, reduced monthly premium costs leads to more money for provider education, staff expansion, and community programs. For AHS employees, the combination of zero out-of-pocket costs and a reduction in premium expenses for dependents means more available dollars each month for other living expenses.
The Challenges of a Partial Self-Insured Plan for Nonprofits
Many for-profit organizations are beginning to see the pay-for-use approach to insurance as a viable option that allows for more financial control over healthcare spending. In fact, the percentage of U.S. workers covered by health plans that are at least partially self-funded by their employers has been rising gradually for many years, reaching 61% in 2014 compared with 44% in 1999 (Kaiser Family Foundation). In large for-profits, self-funded plans are the standard – with more than 75 percent of these organizations operating in this fashion.
And according to the Self-Insurance Educational Foundation (SIEF), due to the rise of self-insured coverage for the majority of US employees in both private and public sector organizations, “benefits brokers and consultants are becoming increasingly interested and involved in the self-insurance process.”
However, there is still a level of financial risk associated with partial self-insurance. In the event of a high claims year (e.g. due to unexpected or catastrophic events) an organization might be responsible for paying the complete deductible up to the ACA maximum ($6600 for individuals and $13,200 for families). For for-profit companies, who have a more fluid and stable cash flow, taking on this risk is feasible. But for nonprofits, any level of risk that could negatively impact funding and programming is just not an option.
In addition, secondary to the financial risk there is also the management aspect of partially self-funding that may appear daunting to a midsize nonprofit that is already stretching staff to their limits. While large claims such as hospital visits and outpatient surgery continue to be handled by the carriers with partial self-funding, the vast majority (typically well over 90%) of day-to-day healthcare occurs with small transactions (typically less than $500). And managing the billing, payments and reimbursements inherent in these ERISA-governed transactions becomes another potential landmine for a nonprofit employer.
Partial Self-Insurance as A Solution for Nonprofits
Nonprofit employers are often faced with having to balance public needs with employee needs, and to justify costs to funders who may prefer to see the results of their donations in programming versus overhead. Exploring partially self-funded plans and determining the level of risk is the first step toward achieving that delicate balance.
That said, the high levels of financial risk and administration management might still provide a significant deterrent to interested nonprofits. There is also a healthy level of skepticism in the industry that healthcare can actually be affordable, which might lead nonprofits to see the benefits of partial self-insurance as “too good to be true.” In addition, many nonprofits might have felt “burned” in the past by brokers who don’t understand the nonprofit business model, and therefore aren’t looking out for the most affordable, efficient, and beneficial healthcare approach for them.
As such, starting a dialogue with nontraditional organizations that have a commitment toward nonprofit growth and sustainability, and have business models designed to manage and mitigate the risks, can be a solid and timely first step in determining whether a partially self-funded model is the right fit for an organization.
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