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Carve-Outs Slice Risk From Self-Funded Health Plans

By Chuck Newton

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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.

Moreover, carve-out programs are available to help companies manage more than just catastrophic claims. While not all programs are available on a risk-transfer basis, the use of a disease-management vendor means care is handled by professionals with the data and resources to ensure the best outcome.

For example, one less emergency room visit per year for an asthma sufferer can quickly add up to significant savings to an employers plan, especially when carried out over the variety of carve-out programs currently available.

Programs available today cover a wide range of chronic and acute conditions, including asthma, cancer, cardiovascular disease, hepatitis and mental health.

One new area that could have an especially positive impact on employers is a pharmacy carve-out. New drugs and direct-to-consumer advertising are causing pharmacy costs to skyrocket.

According to the Center for Studying Health Care Change, Washington, pharmacy cost increases led to nearly half of all health care cost increases over the last several years. High use is also a factor contributing to increases. In any given population, it is estimated that 25% of the members will generate a medical claim, but 70% will generate a pharmacy claim. Many underwriters of stop-loss insurance are currently using trend factors of more than 20% for self-funded plans that cover prescription drugs.

When purchasing a carve-out program, most companies hire an experienced health care consultant or broker to set up and select the best portions of a self-funded program.

A broker works for the company, not the carve-out provider, and can assess levels of risk, recommend program alternatives and secure competitive proposals. Working with a specialized broker can also reduce the time and expense of evaluating multiple vendors. The broker will ensure the company contracts with a vendor that is well capitalized and has the experience, database and case histories to cost effectively provide specialized care management. A broker can also provide a realistic view of the risks, costs and estimated savings associated with a particular program.

When evaluating an employer group, a broker will analyze historical claims data to learn where a companys claim dollars have gone, then identify which services can be carved out without disrupting the entire process for employees.

The broker might point out, for example, that a carve-out mandating that insureds change physicians and hospitals is unrealistic, especially for individuals with a long-standing condition.

Finally, the broker will provide recommendations for administrative issues, including member identification, claims handling and program introduction to employees.

Employers that purchase carve-out programs often find that an additional benefit of some carve-out programs is the transfer of medical liability.

In many cases, the employers financial risk and medical-management liability are transferred to the carve-out provider.

In these situations, questions such as who qualifies for procedures and who gets paid are the responsibility of the carve-out vendor, not the employer.

is vice president of Evergreen Re Inc.,Coral Gables, Fla., a health care consulting company that works with self-funded health plans and their benefits advisors..

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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