The Self-Insured Healthcare Market – What You Don’t Know Can Hurt You

The last 20 years has shown a steady rise in the number of people covered by Medicare and Medicaid, with concomitant decrease of those covered by commercial, employer-based health insurance. Much has been written about the aging of the boomer generation driving Medicare enrollment and the dramatic increases in Medicaid associated with the economic downturn in 2008, the passage of the Affordable Care Act with Medicaid expansion, and the more recent impact of the COVID-19 pandemic.  In the midst of those changes, some significant shifts in the commercial insurance landscape have received less attention.  

According to a 2009 CDC report, in the 1990s there were approximately 175 million Americans covered by commercial insurance with about 40 percent (70 million) in self-insured plans. Compare that to a 2019 report showing that commercial coverage was down to 154 million, but the number of people participating in self-insured plans had increased to 92 million, constituting 60 percent of the commercial total. To the uninitiated this may seem to be of little consequence, but as providers consider their participation in value-based contracting it becomes increasingly helpful to understand the implications of this shift.

Employers that choose to self-insure have a level of flexibility that goes significantly beyond what commercial health plans are allowed to do.  They may limit benefits and network design in ways that are inconsistent with the health plan’s standard approach.  They may also include additional utilization and/or care management programs that are non-standard.  Conversely, they sometimes exclude some of the health plan’s standard programs, exempting their employees from prior authorization or care management.  While some of these approaches are superficially attractive, since every employer chooses their own unique set of options, self-insurance can become a principal driver of administrative complexity for providers. Five patients with the same apparent insurance coverage can have five substantially different administrative requirements associated with the same care. This complexity creates obvious challenges for providers, and these same issues can cause even more substantive challenges in value-based contracts.  

That said, a look at the impact of the self-insured on a health plan’s business model offers hope of a silver lining for those positioned to pursue the opportunities. In fully-insured products, the health plan receives a monthly premium and, other than co-pays and deductibles, takes full financial risk for the cost of care. In that setting, health plans are motivated to look at trade-offs between their administrative and claims costs. Since they bear all of the risk, if they can save $3 in claims for every dollar of administrative cost (such as creating a prior authorization program), then the net savings of $2 goes to their bottom line.  

With the significant shift toward self-insurance noted previously, this business model has been turned on its head. Under self-insurance, the health plan gets reimbursed dollar-for-dollar by the employer for all claims costs. The employer is assuming the financial risk for the cost of care and paying the health plan a relatively small monthly fee to cover the plan’s administrative expenses. In that context, the health plan’s $1 investment in prior authorization would result in three dollars of savings for the employer, but a one dollar loss for the health plan.

This flip in the health plan’s business model creates significant opportunity for a well-positioned provider group. For self-insured business, if the health plan can take their current administrative costs for utilization and care management and convert them to claims costs by assigning these tasks to the provider group, then those costs are passed through to the employer. As a result, the health plan can bring those administrative savings to their bottom line. Using the previous example, the employer would end up with a net $2 savings, and the health plan would bear no incremental cost. In order to reduce their administrative costs, some health plans may be willing to transfer their clinical programs to providers that have robust population health and care management capabilities.  Additionally, because of the flexibility that self-insured employers enjoy, there may be large local employers that are interested in contracting directly with a capable provider for care management and bypass the health plan altogether.

While the actual details of how each health plan responds to these dynamics will vary, if providers understand the health plans’ strategic needs, they will be better positioned to maximize their own value proposition.