Healthcare Reform Will Accelerate the Move to Self-Insured Products

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1 A Decision Resources, Inc. Company e x e c u t i v e b r i e f i n g Healthcare Reform Will Accelerate the Move to Self-Insured Products By Jane DuBose Employers eager to stem rising healthcare benefit costs and avoid the mandates of healthcare reform are increasingly turning to self-insurance. HealthLeaders- InterStudy has been closely tracking this trend across the country. While the recession has prompted overall declines in the health insurance market, the self-insured segment of the commercial base has experienced smaller declines. Furthermore, enrollment in self-insured plan designs has grown as a percentage of the total market. According to HealthLeaders- InterStudy, that portion is now more than 54 percent, versus 48.5 percent just two years ago. The total commercial market in the United States declined by 3.8 percent from January 2009 to January 2011, largely because of the economic recession. The total number of commercial covered lives dropped from million to million. Although the self-insured commercial market also declined, going from 92.8 million to 90.3 million lives in that period, self-insured enrollment reported by managed care organizations (as opposed to MCO and third-partyadministrator enrollment combined) actually grew by 4 percent. In fact, the number of managed self-insured lives rose from 78.9 million to 82.1 million. Table 1-1: With a couple of exceptions, self-insured dominates more in smaller states State Self-insured % of Commercial Market Self-Insured Enrollment Kansas 76.50% 1,355,025 Alaska 74.40% 238,052 Wyoming 74.10% 298,293 Indiana 71.10% 2,693,869 Arizona 70.10% 2,354,700 Georgia 69.90% 3,685,108 North Carolina 68.40% 3,450,099 Nebraska 68.00% 755,494 Kentucky 67.60% 1,488,395 South Carolina 67.50% 1,680,331 Texas 67.40% 8,117,050 Data as of July 2010

2 Uptake of self-insured plans tends to be higher in smaller states, such as Kansas, Alaska and others listed in the graphic on page 1. The highest state rate of self-insured-to-fully insured covered lives was 76.5 percent in Kansas. Higher self-insured rates tend to occur in states with large employers. The table below depicts the states with the smallest penetration of selfinsured covered lives. Some of these states tend to have a higher percentage of unionized employees in the workforce, and a more robust HMO market. As a result, the self-insured proportions are not as high. Table 1-2: Self-insured commercial coverage is less dominant in HMO/union-centric states State Self-insured % Self-Insured Enrollment District of Columbia 9.70% 25,944 Hawaii 15.20% 115,082 California 25.00% 4,619,063 New York 27.00% 2,707,596 North Dakota 38.90% 158,000 Oregon 41.70% 893,691 Louisiana 42.60% 781,543 Michigan 43.70% 2,399,433 Pennsylvania 44.40% 3,098,319 Rhode Island 45.40% 271,964 Data as of July 2010 The map on page 3 shows the self-insured geographic diversity for all the states, illustrating that the majority of states have self-insured rates of 50 percent to 70 percent, while there are outliers that can be explained by local market dynamics. So why is this activity occurring now? One big reason is that the recession has forced healthcare purchasers into trimming benefit costs. That movement has been led by state and local governments, which have increasingly turned to self-insurance to cut costs (Stanford University is an example). At the same time, more sophisticated technology has allowed more transparency around healthcare claims and medical records, the kind of tools needed by employers who self-insure. In addition, some employers consider drug benefit filing regulations for fully insured benefits onerous. Healthcare reform is also pushing self-funding to the forefront. Under reform, MCOs must pay a premium tax for fully insured plans, on top of state premium Executive Briefing 2

3 Table 1-3: Most states have self-insured rates of 50 percent to 70 percent taxes that average 2 percent to 3 percent. The new medical loss ratio rules require fully insured health plans to spend 85 percent of the premium dollar for medical care for large groups, and 80 percent for small groups and individuals. Health plans that don t meet that threshold must pay rebates to members. Another factor is also sparking interest in self-insurance: Under healthcare reform, groups of fewer than 100 will have community rating, meaning healthier groups will pay more and less-healthy groups will pay less. According to Paul Ginsburg, president of the Center for Studying Health System Change, If you are a company with a young and healthy workforce, you might want to stay out of that pool, and becoming self insured is a way to do that. Self-insurance is more common among large employers. According to the U.S. Department of Labor, 26.8 percent of employers with participants were mixed-funded or self-funded in 2008, and 76.4 percent of employers with greater than 5,000 participants were mixed-funded or self-funded. Employers with locations in multiple states were more likely to self-insure than single-employer plans. Executive Briefing 3

4 Brokers and health plans alike say they are responding to inquiries from employers of all sizes who are interested in self-funding. As a result, health plans are fielding new products to accommodate smaller group sizes. Anthem Blue Cross Blue Shield of Colorado is developing self-insurance capabilities for groups as small as 30 covered lives. Aetna recently purchased the company Prodigy to help make inroads in self-insurance for small to mid-sized groups. Other health plans are reacting to the movement toward self-insurance with a variety of products: Capital District Physicians Health Plan in Albany, N.Y., is selling a hybrid product that features both a fully insured component and a self-insured portion. In order to help employers better manage the risk inherent in self-funding, CDPHP offers a wellness service with a clinical account manager (see graphic below). CIGNA s Level Funding product is making waves in certain markets; it is available on open-access PPO and HMO look-alike (EPO) networks. Kaiser Foundation Health Plans, the HMO stalwart, launched an administrative-services-only (ASO) product in early 2009 and has more than 100,000 members. UnitedHealth says it may gain more than 600,000 self-insured members in 2011, up from an earlier forecast of 150,000. Empire BlueCross and BlueShield in New York is selling self-insured products to groups with as few as 240 lives, down from previous threshold of 500 Table 1-4: Shared Health wellness product has self-funding feature Executive Briefing 4

5 As managed care companies increase their share of the self-insured market, the third-party administrators that have typically been at the center of this movement are fighting back. One of the ways they are doing that is by linking employer clients to wellness and care management products. They are also promoting telemedicine and eligibility audits to make their offerings attractive to clients. In trying to predict where conversions from fully to self-insured platforms could occur, HealthLeaders-InterStudy looked at premium rates for HMOs in key states. Because cost is a significant factor in funding decisions, we could begin to see shifts in these states with high premium costs such as California, New York and Massachusetts. Table 1-5: As economy recovers, how will the market shift? State HMO Commercial Premium PMPM* PMPM Premium Increase 2007-Sept California $ % New York $ % Massachusetts $ % New Jersey $ % Pennsylvania $ % Illinois $ % PMPM data as of September 2010 Sources: HealthLeaders-InterStudy, Council for Affordable HealthCare In taking predictions further, we looked at the largest U.S. markets with the lowest self-insured rates. Even a little movement in those markets could mean meaningful shifts into the self-insured buckets. Table 1-6: Self-insured could grow in these low-self-insured-penetration MSAs Metropolitan area Total commercial lives % Self Insured Sacramento, Calif. 1,154, % Oakland, Calif. 1,529, % Buffalo, N.Y. 604, % Honolulu, Hawaii 554, % San Francisco 1,071, % Los Angeles 4,387, % Suffolk/Nassau County, N.Y. 1,865, % Data as of July 2010 Sources: HealthLeaders-InterStudy So as the country moves closer to implementation of healthcare reform, employers will be making several crucial choices about health benefits. Among them will be whether to choose self-funding. That has implications for health plan products. Pharmacy companies will be challenged to consider how the changing dynamic affects formulary control and where the risk lies for the pharmacy spending. In addition, the movement toward better care coordination through accountable care organizations will favor MCO management of self-insured groups. Executive Briefing 5

6 About the Author Jane DuBose is product director for HealthLeaders-InterStudy. For more information, contact: HealthLeaders-InterStudy About HealthLeaders-InterStudy HealthLeaders-InterStudy, a Decision Resources, Inc. company, is the authoritative source for managed care data, analysis and news. For more information, please visit sales@hl-isy.com Executive Briefing 6