Weighing the Options: Self-Insured vs. Fully Insured

With full implementation of the Patient Protection and Affordable Care Act (PPACA) less than one year away, employers are getting serious about complying with the mandates of the federal health care reform law. Many are finding that private health exchanges offer a viable alternative to traditional employer-sponsored health benefits. However, the debate is ongoing over which is better: a self-insured or fully insured model.

A Private Health Exchange can drive down prices by offering choice and encouraging competition. We’ve witnessed this first-hand with virtual marketplaces like Amazon, Travelocity, Zappos and Orbitz, where sellers compete for business by offering attractive prices and better service. In order to have real competition, however, there must be accountability for price. Imagine buying a flat-screen TV, only to have the manufacturer come to you a year later claiming you owe them an additional $300 because they underestimated what it cost to make the TV. That would never fly in the retail marketplace. A self-insured model won’t work in an exchange environment for similar reasons—any carrier can set its price artificially low to grab market share and then leave the employer to foot the bill for high claims.

The insured model has the greatest potential to drive down health care costs. In addition to achieving accountability for price, it aligns the insurer’s behavior to control costs. Pay-for-performance and innovative contracting strategies are encouraged and will eventually be required. Care management programs that do not lower premiums will either get better or disappear, while insurers that are successful in managing chronic illness will be rewarded with underwriting gains, rather than administrative fees.

Proponents of the self-insured model argue the insured model carries embedded costs, preventing it from ever being the more cost-effective option. While it’s true that insured funding arrangements must comply with certain state-mandated benefits, pay premium taxes and include certain health reform fees in premiums rather than passing them through to plan sponsors, there are ways to structure a fully-insured model to deliver a comparable or lower cost. In 2012, Aon Hewitt submitted data on 19 large employers representing 350,000 employees and over $2.8 billion of health care spending to the carrier market. Rates for the insured exchange were then compared with equivalent self-insured costs for comparable plans. The result? The insured exchange premiums, in aggregate, were 1.2% lower than self-insured costs. Results for the 2013 competitive bid process promise to be even better—proof that the competitive model works in health care just like it does in every other retail marketplace.

What’s more, the self-insured model is nothing new. Through their current benefits administration platform (internal or external), employers can replicate what others are pitching as a self-insured private exchange. Best-in-market networks, targeted care management, standardized “metallic” plan options, fixed dollar subsidies—employers have been using these strategies in a self-insured environment for years. While they might expand the choices they offer to employees, these are still not exchanges. The core element of an exchange—competition across multiple suppliers—does not exist in a self-insured model. And where there is no competition, there should be no expectation that anything will change from the historical 7%-10% cost trend of the last decade.

As the only multi-carrier, fully insured solution, Aon Hewitt’s Corporate Health Exchange is a better way to offer health benefits in the new health care marketplace. A true exchange wherein multiple insurance carriers give employees the ability to choose coverage that best meets their needs; it provides accountability for price and incentives to reduce cost. And with risk transfer eliminating volatility and increasing predictability to the employer, the Corporate Health Exchange delivers value to all constituents.

Interested in learning more? To talk to our sales team about whether the Corporate Exchange is the right fit for your company, please contact us at health@aonhewitt.com.

Ken Sperling is Aon Hewitt’s national health exchange strategy leader.

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