Alternative Funding Is Changing the Way Employers Think About Healthcare

For years, most employers have treated health insurance as an annual renewal exercise. The carrier delivers the renewal, the broker negotiates, deductibles and employee contributions get adjusted, and everyone moves on for another year. That approach is becoming harder to justify as healthcare costs continue to rise, specialty pharmacy creates new financial pressure, and high-cost claimants have a greater impact on overall plan performance.

More employers are starting to ask a different question: instead of simply trying to negotiate a better renewal, is there a better way to fund the plan?

Alternative funding is not one specific strategy. It is a range of options that allow employers to take on different levels of risk in exchange for greater transparency, flexibility and control. Traditional fully insured coverage sits at one end of that spectrum, while traditional self-funding sits at the other. In between are level-funded plans, group captives and other shared-risk arrangements.

Fully insured plans still make sense for many employers, especially organizations that value simplicity and predictable monthly costs. The tradeoff is that the employer gives up a significant amount of control. Claims data can be limited, pharmacy economics are often difficult to understand, and employers typically do not participate in the upside when the plan performs well. If claims are better than expected, the carrier generally keeps the margin. If claims are worse, the employer often sees it reflected in the next renewal.

Level funding has become a popular middle ground. It allows an employer to make a predictable monthly payment that generally includes expected claims, administrative fees and stop-loss protection. If claims perform well, the employer may receive some portion of the unused claims funding back. For employers that want to move toward self-funding but are not ready for the potential cash-flow volatility, it can be a very good first step. The key is understanding the contract, including surplus provisions, claims runout, terminal liability, renewal underwriting and stop-loss terms.

Traditional self-funding provides much greater visibility and flexibility. Instead of paying an insurance company to assume the entire risk, the employer pays claims directly and purchases stop-loss coverage to protect against catastrophic claims. That structure gives the employer more control over the TPA, PBM, network, stop-loss carrier, advocacy partner and other vendors involved in the plan.

More importantly, the employer has the opportunity to benefit financially when the plan performs well.

That additional control comes with additional responsibility. Self-funding only works well when the employer actively manages the plan. High-cost claimants, pharmacy utilization, site of care, chronic conditions, stop-loss performance and vendor accountability all need to be monitored throughout the year. Simply changing the funding mechanism without changing the way the plan is managed rarely produces the best outcome.

Captive health plans have also become an increasingly attractive option for small and middle-market employers. In a captive, participating employers generally retain their own predictable claims while sharing a portion of larger claims with other members. Stop-loss coverage then protects the group above the captive layer.

The potential advantages include greater purchasing power, improved stop-loss stability, access to better data and the opportunity to participate financially when the captive performs well. But not all captives are structured the same way. Employers need to understand underwriting, collateral requirements, governance, risk sharing, stop-loss structure, vendor requirements and exit provisions before making a decision.

Alternative funding also creates opportunities that go beyond the financing structure itself. Employers can begin looking more closely at how healthcare is actually purchased. Reference-based pricing, direct provider contracting, centers of excellence, narrow networks and site-of-care strategies can all address the underlying cost of medical services instead of simply shifting more expense to employees.

The same is true with primary care. Direct primary care and virtual primary care can give employees easier access to physicians while helping employers improve early intervention, chronic condition management and navigation to more appropriate care. For a self-funded plan, influencing where an employee enters the healthcare system can have a much larger financial impact than simply negotiating another small discount at renewal.

Pharmacy may represent an even greater opportunity. Prescription drug spending continues to be one of the fastest-growing areas of employer healthcare costs, and traditional PBM contracts can be difficult to understand. Rebates, spread pricing, specialty pharmacy markups and other revenue streams can make it hard for employers to determine what they are actually paying.

More employers are evaluating transparent PBMs, pass-through pricing, specialty pharmacy strategies and stronger utilization management. The goal should not be to chase the largest rebate guarantee. It should be to understand the total net cost of the pharmacy program and make sure the contract is aligned with the employer's interests.