More Firms Carrying Health Costs

Faced with health insurance cost increases of as much as 20% this year, many companies are dumping their traditional HMOs and switching to self-insurance to better manage costs while providing medical care for their employees.

But self-insurance, in which the employer assumes the brunt of the financial risks, comes with its own potential problems. That was illustrated last month in California when the self-insured Sunkist Growers & Packers Benefit Plan Trust went bankrupt after it was clear that medical claims would far exceed the trust’s ability to pay. That briefly left 23,000 farm workers scrambling to find new insurance.

Unlike traditional health coverage, in which employers pay an upfront premium to an insurer, companies that self-insure save that money and pay the health-care providers only when medical claims come in. The employer assumes the financial risk of providing benefits to employees in exchange for greater control and potential savings. It sets up a reserve or trust fund to pay those claims.

Self-funded insurance has long been used by large multi-state employers that can manage the risk of heavy medical claims better than smaller companies. About two-thirds of the nation’s largest employers employ some form of self-insurance, experts say. The big employers also avoid a bewildering array of state insurance regulations when they self-insure and avoid insurance premiums and taxes. But now many mid-size and smaller employers also are willing to take on the risks of self-funding. And with costs of health maintenance organizations rising as fast as or faster than traditionally more expensive health plans, the percentage of employers that are self-funding their HMO coverage also is on the rise, having climbed from 6% to 13% from 2000 to 2001, according to a survey by William M. Mercer Inc.

One company that recently switched to self-funding is Flat Rock Furniture in the rural Indiana town of Waldron, a company of about 75 workers. Owner Van McQueen said that less than two weeks before the close of enrollment, his company’s health insurer proposed a rate increase of 80%.

“When I heard that, I got busy,” said McQueen, who was unwilling to give up a company staple: 100% health coverage for each of his employees and their dependents. McQueen hired a third-party administrator to help him run a self-insurance program.

Now McQueen says his company is building up a cash reserve while saving about 20% in premiums and is protected from severe medical claims by so-called stop-loss or excess insurance.

“We’re just a little Podunk company, but we can fight back,” McQueen said.

Service Rock Products, a Victorville company that provides construction materials for highways and buildings, switched to self-insurance seven years ago. It has only 171 employees and lacks the deep pockets of a Fortune 500-size company that could withstand a surge in medical bills. Dan Scorza, the company’s vice president for administration, sees few alternatives for keeping his employees covered.

Even under self-funded insurance, Scorza’s company has seen more than a 51% increase in health-care costs for its single employees since it switched to self-funding in 1995 and a nearly 71% increase for families over the same period.

Without self-funding, Scorza said, the costs would be even higher and “we would lose flexibility and our employees would lose benefits. We just couldn’t afford it.”

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Insufficient Reserves Sank Sunkist Trust

But these smaller employers must keep a wary eye on their projections. Big corporations can weather unanticipated problems--such as a spate of premature babies--long enough for subsequent premium increases to absorb the financial blow. Smaller companies can’t afford such mistakes, which is why secondary stop-loss insurance, which kicks in when claims exceed a certain preset amount, can be essential to a careful strategy.

Although the reasons remain in hot dispute, it was the inability to track the amount of medical claims and the lack of a sufficient reserve that ultimately deep-sixed the Sunkist trust.

In a report released last week to the state Senate and Assembly insurance committees, it was confirmed that the trust’s problems were apparent as early as last June. By the time the Department of Insurance cobbled together a recovery plan involving higher premiums, benefits restructuring and other measures, it already was too late.

Sunkist’s situation may illustrate the perils of self-insurance, but it’s also partly a reflection on California’s system of “multiple employer welfare arrangements,” which is different from self-insurance plans in most of the rest of the nation.

According to officials in the state’s Insurance Department, MEWAs are rather loosely subject to state regulations and requirements, but those requirements aren’t nearly as tough as those set for insurance companies licensed to do business in California.

For example, insurance firms operating here are required to have $5 million in capital available in the event of unforeseen problems, said Norris Clark, the state’s deputy commissioner of financial surveillance. For MEWAs, the requirement is only $1 million.

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Large Employers Seek to Consolidate, Simplify

Only six states, including California, have MEWAs or some variation on them. Virtually every other form of self-funded insurance is federally regulated under the Employee Retirement Income Security Act. That’s one of the reasons large employers prefer self-funding, because it alleviates the need to follow various state regulations.

Many large employers, meanwhile, either are dropping HMOs to consolidate, simplify and/or reduce their benefit options or are streamlining how they work with HMOs. Because doctor and hospital groups have had such success recently in pushing through fee increases, HMOs have lost much of their ability to contain costs.

In response, Connecticut-based Xerox Corp. has overhauled its health coverage, according to Larry Becker, the company’s director of benefits. First, rather than deal separately with 220 HMOs around the nation, including dozens of Blue Cross, Aetna and Kaiser affiliates, Xerox decided to expand its self-insurance programs and to negotiate with only one affiliate of the big managed-care companies, with every other affiliate expected to go along for the ride. Also, Becker said, other HMOs, particularly those with the highest cost increases, were dropped outright.

Becker added that Xerox spends about $300 million a year on health care and will save on administration, paperwork and premium taxes because of the self-funding and the streamlining.

Albert Lowey-Ball, who runs a Sacramento management consulting firm specializing in the managed health-care sector, said, “I expect this trend toward more self-insurance to accelerate. This is something that will be good for employers but not to consumers, who in some cases will see their costs increase and their choices reduced and their benefits reduced as well.”

Becker sees an advantage in that, even if consumers continue to be dazed by sticker shock.

“We have to get people more involved in the day-to-day decisions about their health care,” Becker said. “Right now, they are too insulated. They are still in the buffet mentality of health care: You pay your $10 and it’s all you can eat. We have to get to a place where it’s more like gas prices. The noise from consumers will become deafening. When the real consumer is paying the real bill, they will have an impact on the price.”