Kent asked a great question yesterday about the mechanics and money flows of large group health insurance:
Say you are a big Portland-area employer with thousands of employees and your employee-provided health plan is through Kaiser.
If you lay off 2,000 employees during the pandemic and those 2,000 employees drop off of the Kaiser health plan because they are unemployed, isn’t that a direct hit to Kaiser’s bottom line? And doesn’t COBRA prevent that from happening
There are two basic flavors of insurance products a large group employer can buyer. The choice of which insurance flavor changes the answer to Kent’s musings.
Fully Insured (FI) means that the insurer takes on all risks of medical claims in exchange for collecting a fixed premium from the employer. The insurer makes money when claims and administrative expenses are less than the premium. The insurer will lose money if there is a cluster of unanticipated high cost claims that exceed reinsurance. In this case, 2,000 employees getting laid off and losing their insurance will be a significant revenue hit for the insurer.
Fully Insured is how the Medicare Advantage, and the ACA small group and individual markets work. Fully Insured is unusual to see in large groups (100+ covered lives).
Self-Insured (SI) is the other flavor of large group employer insurance. Here, the employer pays the claims as they are incurred. The insurer merely performs Administrative Services Only (ASO) functions such as network construction, benefit design, and claims processing in the stead of the employer. The employer pays the insurer a per member per month fee to use these services. The insurer is fundamentally indifferent if there is a cluster of multi-million dollar claims or if there are not claims. The employer takes on all of the risk.
Most large employer group insurance plans are self-insured. Self-insured plans are regulated under ERISA which keeps state regulators far removed from the administration of these plans while state regulators are actively involved in fully insured plans. Self-insured plans are also systemically cheaper than fully insured as there is risk sorting and selection.
So when an employer that is self-insured lays off 2,000 people, the ASO insurer loses a small per member per month fee otherwise the insurer is almost indifferent. The change in claims being paid will be immediately interalized by the firm, not the insurer.
Adam Lang
Wow. Cutoff is ≈ 100? I have never worked for a company of less than 1000 that is self-insured. (And I am just assuming with my last two companies that they are, because they are ginormous.)
Kent
Thanks for the explanation. I thought I was relatively informed about this industry but I’m finding out how much I actually don’t know
And I suspect I’ve been on various plans like this over the years and never really knew how they worked.
Poe Larity
So falling in the larger category where I should be SI, what does it mean when the W-2 12c deduction for cost of employer-sponsored health coverage shows a value? That’s the actual fees and claims cost?
David Anderson
@Poe Larity: Great question — Box 12DD is a calculated premium equivalent when the employer is a self-insured entity.
David Anderson
@Kent: As a beneficiary, you would barely have any reason to ever notice the difference between a fully insured and a self-insured plan except in the weirdest of edge cases and business failures. Two individuals who work across the street from each other could be covered by the same insurer, with the same plan type, with the same network, and the same benefit structure where one is part of a self-insured group and the other is fully insured. The only difference will be a reference table deep in the claims system that activates a different finance work flow.