Rocked by spiraling health-care costs and poor management, one of Southern California's larger self-insured health-care plans--created by citrus cooperative Sunkist Growers Inc.--has folded, forcing tens of thousands of workers to switch insurance and leaving nearly 5,000 medical providers with unpaid bills.
The collapse of Sunkist's SGP Benefit Plan Inc. exemplifies the stresses that rapidly rising health-care costs are creating for employers, many of which are opting for self-insurance to save money while running the risk of failure if they miscalculate the level of claims. About two-thirds of employers self-insure, which is raising concerns that many are underestimating health costs and could face financial problems as a result.
Sherman Oaks-based Sunkist blames the collapse of the plan on rising physician fees and drug costs coupled with faulty medical information management software, which it said caused it to underestimate the premiums needed to cover claims.
To shrink its growing shortfall, SGP instituted a series of rate hikes and plan changes beginning in 1999, but it wasn't enough. "The effect of the inflationary health-care spiral hit us at the wrong time. We got caught," said Lawrence Thompson of now-defunct Glacier Insurance Administrators, which managed the plan.
SGP Benefit Plan is expected to file for Chapter 7 bankruptcy in the coming days. Since the plan ceased operation in November and its administrator closed its doors in late December, many of SGP Benefit Plan's estimated 23,000 participants, who work for about 360 companies, have been transferred to another agriculture trade group's self-insured plan or have found coverage elsewhere.
But the months of unpaid bills forced interruptions in care for many, officials said, and brought the bills to collection agencies and some doctors into Small Claims Court. SGP still owes 4,800 medical providers an estimated $10 million in unpaid claims, Thompson said.
Because of double-digit increases in health-care costs, many employers have been investigating self-insured programs in an effort to save money. Self-funded insurance plans can be more affordable and more easily managed than private insurance and aren't regulated by the state. But because employers often don't keep enough money in reserve after a few years of relatively small claims, a wave of expensive medical problems can soon bring them down.
Self-funded insurance programs account for 60% to 65% of the private-sector health plans and a similar if not greater percentage of government agencies, said Jim Kinder, chief executive of the Santa Ana-based Self-Insurance Institute of America Inc.
They work well for large companies that operate in several states, he said, because they aren't subject to the varied rules and regulations of those states. They are instead regulated under federal law. And self-funded programs eliminate premium taxes that employers normally pay.
Kinder acknowledged that there also are some significant downsides to these types of plans. "You can't walk way from the risk," Kinder said. "With private insurance, you pay a third party, and they handle it. When you self-insure, you inherit the problems."
The Sunkist plan was a "multiple employer welfare arrangement," just one form of self-funded insurance plan. Kirby Bosley, a principal with health-care consulting firm William Mercer Co., said few such plans fail.
There have, however, been instances when even large plans have run afoul of unforeseen costs, such as the situation faced by the California Public Employees' Retirement System, whose self-funded insurance plan was headed for a dramatic run of red ink in 2000 and wound up implementing a series of rate increases.
Generally, said Bosley, small employers are not equipped for self-funded plans because they don't have the resources and because claims amounts can be unpredictable. They make sense for larger companies that are able to generate sufficient reserves and then hold on to them until claims are incurred.
But all health-care plans, self-insured or not, face the same issues of network instability and overall cost increases that cause problems for employers and consumers.
Kinder said, "When you really get down to the brass tacks of it, some employers really aren't good candidates for self-insurance because their balance sheets aren't strong enough and they incur greater medical expenses than they have revenues to cover them."
The SGP Benefit Plan should have been bailed out by Sunkist itself, said Sheldon Emmer, a Los Angeles-based attorney for the plan. It had signed an agreement with the state in 1996 guaranteeing it would cover any claims that exceeded the plan's reserves.
Sunkist did agree to put up $2.5 million to settle claims, but it couldn't come to an agreement on the wording of a proposed settlement and withdrew those funds.
Still, Sunkist could be on the hook for much of the plan's unpaid bills because of that agreement and because SGP has few assets. Sunkist officials acknowledge some potential liability but say their financial responsibility probably will be decided by a trustee or court.
"My sense is that most people understand that Sunkist was not running this thing," said Mike Wootton, Sunkist spokesman.
Sunkist's board created the nonprofit multiple employer welfare arrangement in the early 1990s as a lower-cost perk for its member growers and shippers but eventually expanded the program to take in other large agribusinesses.
Sunkist claims its board was first alerted of the plan's problem five months ago, but Thompson said it was a case of foot dragging. The board should have been aware of its problems as early as late 2000, when it was told the plan couldn't continue to pay the licensing fee for the Sunkist name, he said.
The state Department of Insurance also knew of the plan's problems, because SGP filed quarterly financial reports, but lacked the jurisdiction to intervene. It did not revoke the plan's certificate of compliance, shutting the plan down, but helped refer members to another plan.
"Revoking their certificate of compliance sooner could have left those members up short without coverage in the meantime," said Scott Edelen, a spokesman for the Department of Insurance. The Department of Labor has since taken the matter under consideration, Edelen said.