As we head into the Spring, plan sponsors will begin to consider their benefits offerings for 2023. Attracting and retaining talent has never been more challenging, and a robust benefits offering is increasingly important to individuals as they contemplate their job situations. That makes the pharmacy benefit, which now represents 20-30% of most plan sponsors’ healthcare costs and is the most broadly utilized employee health benefit, more important than ever.
Employers have many choices to make related to their pharmacy benefits plans, and one of the most important is whether to fully insure or self-insure the benefit. Let’s explore the benefits and challenges of each approach.
The Fully Insured Pharmacy Benefit Plan
The fully insured pharmacy plan operates in a similar manner as other types of insurance. By pooling the lives of multiple employers, the insurer can spread its risk over a large number of employees and members. The insurer typically bundles together medical and pharmacy benefits to further reduce its risk, and its actuaries weigh an array of factors when calculating the per-employee-per-month premium cost of coverage, including the age and health of the employer’s workforce and prior claims experience.
For most employers who choose the fully funded option, the key reason they cite is cost certainty. The employer knows it will pay a fixed, predictable monthly premium for health insurance, with the only variable being the number of covered members each month. If actual claims costs exceed what was expected, the health insurance company is responsible for covering these additional costs. Along these lines, companies in fully insured agreements are able to build out budgets with a high degree of predictability.
Finally, fully insured plans are generally easy to manage, as the health insurer selects the medical and pharmacy providers and also determines most/all elements of the plan design. These elements include the networks, cost share, clinical programs, and more. It should be noted that the fully funded option is often preferred by smaller employers, who are concerned about the risks associated with health benefits, which can be unpredictable.
While there are certainly some advantages to the fully insured option, particularly in terms of cost certainty and budget predictability, there are several key disadvantages that plan sponsors need to consider. First and foremost, plan sponsors in fully insured arrangements can pay substantially more than the actual cost of the claims they incur. The Affordable Care Act requires health insurers to spend a minimum of 80-85% of each premium dollar on actual claims costs. This leaves the potential for them to allocate the remaining 15-20% for administrative costs and profits – which is to say, plan sponsors could wind up paying the health insurer as much as 15-20% above the actual cost of their claims.
Second, plan sponsors typically have little opportunity to customize the plan to meet their particular needs. They don’t have a chance to select their vendors or clinical programs, as that is a choice made by the insurer. Fully insured plan sponsors do not generally have access to transparent, regular performance reporting to understand what is driving plan costs. As a result, they lack the ability to make changes to the plan to address rising costs. Finally, if your plan’s costs exceed the health plan’s underwriting models for the year, large rate hikes are inevitable, making renewal negotiations challenging and expensive.
The Self-Insured Pharmacy Plan
Now let’s explore the pros and cons of self-funding the benefit. There are several big reasons why self-insuring makes sense for many plan sponsors.
In a self-insured arrangement, the plan sponsor is responsible for the actual cost of the claims incurred by its members. Assuming the plan has been modeled effectively and costs estimated properly, self-insured plans cost plan sponsors less than fully insured plans, often substantially less.
While the plan sponsor assumes the risk, they have opportunities to mitigate this risk through the purchase of stop-loss insurance. Most self-insured plan sponsors set aside a monthly amount of money to cover plan members’ anticipated medical and pharmacy costs, administrative fees, and stop-loss insurance premiums. As the plan sponsor’s members consume healthcare by visiting the doctor and filling prescriptions at the pharmacy, the claims are paid directly from the funds that have been set aside. And stop-loss provides the backstop to mitigate the risk of very high-cost, unexpected claims, typically related to chronic, complex, or rare diseases and the specialty pharmacy drugs used to treat them.
A second, significant advantage of self-insuring is that these plans are far more flexible than fully insured plans. Because self-funded plans provide full access to the plan sponsor’s claims information, it is easy to see where the healthcare dollars are being spent. With this transparent access to data, the plan sponsor can make well-educated decisions on how to address any adjustments to the plan that may be required to better manage plan spend.
Finally, once the plan sponsor has made the decision to self-insure, they can also consider carving out the pharmacy benefit from the medical plan. This means they can choose to manage the pharmacy benefit separately, which offers the flexibility to select a different vendor to manage the pharmacy plan, set all aspects of the plan, obtain regular performance reporting, and potentially provide members with a superior service experience.
In fact, most plan sponsors who choose to self-fund health benefits also make the decision to carve out the pharmacy plan. Much has been written about the benefits of carving out the pharmacy benefit, and we will not go into great detail here. However, benefit advisors, brokers, and TPAs are excellent sources of information, and plenty of information on carving out is available online.
Plan sponsors that choose to self-fund agree to pay for all member claims – this is certainly riskier than simply paying a monthly fee to the health insurer. For plan sponsors who are not experienced at managing health benefits, self-funding does require the organization to make a number of important decisions about the medical and pharmacy plans, which can be overwhelming to the novice. Of course, benefit advisors, brokers, TPAs, and the medical and pharmacy vendors can help coach the plan sponsor to make the right choices for their plans.
Our next blog in this series, offers guidance on making the decision to either fully fund or self-insure.