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Rising health care costs have touched every aspect of business during the past five years.
Thats why an increasing number of insurance brokers, benefits consultants and human-resources executives are turningor returningto self-funded benefits programs.
With a self-funded benefits program, an employer becomes the primary risk-bearer and assumes what would typically be an insurance companys role. Instead of paying for an insurance policy, the employer establishes cash reserves to cover the health care claims of its employees.
Because self-funding is often a response to increased premium rates, the stability and predictability of health care costs are critical. It is the unforeseen, catastrophic claim that poses the most risk to a self-funded program.
While a company may save money up-front by not having to pay premiums to an insurance company, one catastrophic claim, such as an organ transplant or a baby in an intensive care unit, can have a devastating financial impact.
Traditionally, self-funded employers have purchased specific stop-loss insurance to protect themselves from catastrophic claims and aggregate stop loss to protect against higher-than-expected total claims.
Rising stop-loss rates, due to shrinking employer reinsurance markets, have led a number of employers back to insured products.
However, another way for an employer to ensure financial predictability is now emerging as a viable alternative or complement to stop-loss insurance: carve-out insurance programs.
A carve-out insurance program enables an employer to transfer financial obligations for a specific health care condition to a third party. Typically, these conditions are either high cost or unpredictable, or both. With a carve-out insurance program, risk is typically transferred on a “first-dollar,” or very low (i.e. $10,000), deductible basis as soon as a covered employee is identified as needing a specific service.
A carve-out may not be right for every employer. Some large employers may feel they can manage the risk better themselves. Some may prefer to buy stop-loss coverage or use other strategies for limiting risk.
But, for acute care services, a carve-out also offers the benefit of covering the full “episode of care.” Thus, in contrast to an employer stop-loss policy, which restricts reimbursements based on incurred and paid dates, a carve-out will cover a premature infant from birth through discharge from the hospital.
Many companies today are taking advantage of carve-outs because of the rapidly evolving health care system. New technologies and medications are introduced almost on a daily basis, and direct-to-consumer advertising and the Internet have changed the way people use their health care benefits. Consumers today are far better informed about their health care choices and often research their conditions and treatment options before visiting a doctor.
The advance of medical technology means that last years claims data is not sufficient to predict how much a company should reserve for next years health care costs.
Carve-outs provide predictability for a particular condition and can allow a company to trade unknown, highly variable claims expenses for known, predictable costs. In addition, carve-outs provide management of regional variations. Certain populations have higher incidences of diabetes or low birth-weight babies. Carve-outs enable an employer to manage these issues more effectively and strategically.