by JUDY GREENWALD

More employers are moving to self-insure their health maintenance organization coverage.

While many large employers have incorporated at least some elements of self-insurance into their health plans for many years, this generally has included preferred provider organizations rather than HMOs. Now, employers of all sizes are moving toward self-insurance, spurred by hardening rates, the opportunity to save on premium taxes and the appeal of exemption from state regulation under the Employee Retirement Income Security Act.

According to William M. Mercer Inc.'s annual Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans, the percentage of employers that self-insure their HMO coverage more than doubled in 2001, to 13% from 6% the previous year. Those that self-insure their point-of-service plans increased last year as well, to 15% from 7%.

In a continuing trend that began last year, "the HMOs have finally reached a point where they have to drive their rates up to reflect their current cost of claims and administration, and the PPOs have the same problem," said Arnold M. Katz, the president of third-party administrator Brokerage Concepts Inc. in King of Prussia, Pa.

At the same time, insurers that offer stop-loss coverage, which self-insured employers often obtain to cap their losses, are "making profits again, and, as such, becoming a little bit more accommodating," said Mr. Katz. That development further enhances self-insurance's appeal, he said, predicting that, over the next 12 to 24 months, "you'll see a real swing back to self-insurance."

In the mid- to late 1990s, "it was a bit more of a buyer's marketplace," with the HMOs, in particular, trying to increase their insured population and offering competitive rates, said Rich Stover, a principal with Buck Consultants Inc. in Secaucus, N.J. Consequently, he said, it made sense, in certain situations, for employers to insure their health coverage.

But over the past few years, "with both the increase in costs and the increased pressure on HMOs and commercial carriers to make profits, that's pushed more margin and more risk charges onto their insurance rates," said Mr. Stover. "So there aren't as many deals out there for employers to take advantage of in the insured marketplace."

Over the past year, in particular, insurers have been introducing normal margin and risk charges, plus building in additional margin "on top of that," said Mr. Stover. As a result, he said, "even the larger employers we're dealing with have moved more and more decisively toward their HMO offerings."

Employers are saying, "If insurers don't want to take on the risk, we might as well take on the risk ourselves and save on the margins," said John Povinelli, vp and benefits consultant for The Segal Co. in Phoenix.

"Costs in general are going up like crazy," said John Ungvary, human resources director for the Roman Catholic Diocese of Phoenix, which anticipates it would save several hundred thousand dollars by becoming self-insured.

The diocese now has fully insured HMO and PPO plans with Blue Cross & Blue Shield of Arizona for its 3,200 employees and dependents. If it becomes self-insured, it would lease the Blue Cross network and do the administrative work itself, said Mr. Ungvary. A decision will be made next month, he said.

Nicole Cox, compensation and benefits manager for Amarillo, Texas-based Hastings Entertainment, a self-insured media entertainment retailer, also cited the ERISA exemption as a factor that enhances the appeal of self-insurance. Self-insurance relieves Hastings of the burden of complying with the various laws in the 24 states in which it operates, said Ms. Cox. "Otherwise, it's difficult to keep a handle on all the different laws," she said.

Blaine Bos, a principal in Mercer's Chicago office, said he expects that, by the end of this year, close to 20% of large employers will self-fund their HMOs. Mr. Bos said the impetus to self-insure comes from both the employers and the HMOs. In addition to rate hikes serving as a driving factor, large employers' employee pools, in particular, have fairly stable overall claims costs, he said.

As a result, Mr. Bos said, by self-insuring, "they're cutting out the margin costs and the insurance premium tax costs in a lot of states. So I would expect that self-insurance of HMOs for that particular group would increase."

Furthermore, Mr. Bos said, "a lot of HMOs have abandoned capitation as the preferred method of reimbursing physicians and hospitals. The HMOs have been taking on more and more of the risk."

As a result, he said, "many of them have started going to smaller and midsized clients and tried to convince them to go to self-insurance because they don't like being in the business of taking a substantial amount of risk, particularly unintended risks" as they move to other forms of reimbursement besides capitation, he said.

Mr. Bos noted that there has been a parallel increase in the percentage of employers that self-insure the coverage of their POS plans. That's because HMOs typically serve as the basic platform for the coverage, with employees paying more if they use health care providers that are outside the HMO network, he said.

Meanwhile, in response to the hard market, a growing number of midsize employers that have never self-funded at all previously are beginning to do so.

Rich Ostuw, senior consultant in the Stamford, Conn., office of Towers Perrin, said, "As a general rule, I'd say that as health care costs have increased, the crossover point declines in how large a group for which self-insurance is justified." As a result, he said, "the issue is more and more what midsized companies would find it attractive."

Brokerage Concepts' Mr. Katz said he expects to see growth among employers with 100 to 650 employees and those with 50 to 100 employees, but not among companies with fewer than 50 employees. In the smaller companies, he said, "it doesn't generally pay."

Roger Edgren, managing director and national practice leader of employee benefits for Marsh USA Inc. in Grand Rapids, Mich., noted that smaller employers are "more likely to go back and forth than larger employers" between fully insured and self-insured plans because of greater volatility in the pricing of their fully insured programs or in their claims experience.

But even some large employers will begin to drift back to fully insured arrangements for their HMO coverage in another three to five years, predicted Jim Winkler, a Norwalk, Conn.-based senior consultant with Hewitt Associates L.L.C. Mr. Winkler explained that many small local HMOs may not make enough profit on administrative fees and consequently fail.

When that happens, the surviving national and regional HMOs will get a larger pool of people in their books of business, which will make them more comfortable with large employers' claims costs. That "makes (HMOs) price more conservatively and allows them to go back to employers and transfer the risk back to the health plan in a fully insured manner," said Mr. Winkler.

Note: The article above is excerpted with permission from the Business Insurance issue of January 28, 2002, copyright 2002, Crain Communications Inc., all rights reserved.

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