First, a little background: a self-funded (aka self insured) group plan can be an attractive way for an employer to save money. Simplified, there are four parties to such an arrangement: the employer, the employee(s), an administrator and an insurance company. If an employee has a $100 claim, the administrator collects $100 from the employer, then pays the claim. On a $1 million dollar claim, the administrator collects $1 million from the insurance carrier, and then pays the claim.
But what happens if there's no insurance company involved?
Recently, one of my groups was approached by a new "carrier" that promised to save them big bucks on their coverage. This outfit, called PHA, is actually owned by one of our area's larger hospital networks, and has targeted physicians' offices as their market. Many of these offices are small, with just a handful of covered employees, and PHA has leveraged its relationship as a subsidiary of this hospital network as an incentive to come onboard.
By banding together, the pitch goes, all of these little offices will have the insurance buying power of a big company, and enjoy some major rate reductions, as well.
So far, so good.
The problem is that the numbers and the premise just don't add up.
After asking my client a lot of questions, I learned that the plan has no "stop loss" carrier (the insurance company's role). This means that claims are paid out of cash on hand.
Or not.
But certainly the folks running the plan have extensive experience with insurance and with self-funded arrangements, and a proven track record in this area, right?
Sadly, no: according to my client, the gentleman in charge has no such experience.
This does not bode well.
But it gets worse:
Currently, PHA has signed up a local physicians office group, comprised of some 25 offices. They're on board, and expecting coverage to begin on January 1. I asked my client if these offices were similar to hers; that is, a handful of employees, expecting to pay about $2500 a month in premiums. She agreed that this was so, and we did a little math:
The 25-office group, with 5 covered employees (plus some dependents) at $2500 (per office) is $62,500 a month.
And although unlikely, let's presume that he's successful in persuading another 25 such offices to sign up, contributing another $62,500.
This means that, assuming everyone pays on time (right!), PHA will have $125,000 on hand to pay whatever claims come in on January 2nd. And 3rd. And so on. Will that be enough?
Well, there's no way to tell, because the enrollment form (not an application) asks no health questions. Who knows how many diabetics, cancer and MS patients and pregnant women are signing up for this? There's just no way for them to know.
But surely, you may ask, there's some way for PHA to know ahead of time what they're getting into? How else would they know how to price the plans?
Nope:
The employer application does ask about any known claims and health conditions. But as my client pointed out, as a physicians' office, she's precluded by HIPAA from disclosing these (especially since PHA specifically asks for names attached to those conditions). Presuming that the other physicians' offices also comply with HIPAA, PHA will have zero underwriting information going in.
I'm sure they'll be well-informed by, say, January 2nd.
In Part 2, we discuss some of the other major problems with this new program.
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