Human Resources: Carve Outs: A Way to Make Self-Funded Plan Costs More Predictable

The pressure to hire and retain the best employees while keeping costs in check is a daily challenge. Medical inflation, now well back into the 16-20 percent range, has pushed health plan rate increases into double-digits, adding more pressure to human resource departments. Savvy human resources executives are turning (or returning) in increasing numbers to self-funded benefits programs.

In a self-funded scenario, the employer becomes the primary risk-bearer and assumes what would typically be the insurance company´s role. Instead of paying for an insurance policy, the employer establishes cash reserves to cover the claims of its employees. A company may save money by not paying premiums to the insurance company, but one catastrophic claim, such as a small-bowel transplant or a baby in an ICU, can dramatically impact the company´s financial situation.

Because self-funding is often a response to increased premium rates, stability and predictability of costs are critical. The unforeseen, catastrophic claim poses the most risk to a self-funded program. Traditionally, self-funded employers have purchased specific stop-loss insurance to protect themselves from the severity risk of catastrophic claims and aggregate stop loss to protect against higher than expected total claims. Rising stop-loss rates, due to a severely contracting market over the past several years, has lead a number of employers back to insured products. Another way to ensure financial predictability for an employer is now emerging as a viable alternative or complement to stop-loss insurance: carve-out insurance programs.

A carve-out insurance program is a way for an employer to transfer financial obligation for a specific healthcare condition to a third party. Typically, these are categories that are either high cost or unpredictable, such as transplants or premature babies. 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. 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 to their home.

Companies are taking advantage of carve outs because healthcare is evolving so rapidly. New technologies and medications are implemented almost on a daily basis, and direct-to-consumer advertising and the Internet have changed the way people use healthcare benefits. Consumers are far better informed about their healthcare choices and often research their condition and treatment options before visiting a doctor.

The advance of medical technology means that last year´s claims data is not sufficient to predict how much to reserve for next year´s healthcare costs. Carve outs provide predictability for a particular condition and can allow the company to trade unknown; highly variable claims expenses for known costs. In addition, carve outs provide management of regional variations. Certain populations have higher incidences of low birth weight babies. A neonatal intensive care carve out allows an employer with a self-funded plan to manage these catastrophic claim costs more effectively and strategically.

One area where carve outs have particular relevance is transplants. The number of transplant procedures has doubled in the last ten years and the number of people on waiting lists has tripled. Technological advances, such as tandem transplants, immuno-suppressant drugs and mismatch criteria, will continue the upward trend.

By carving out solid organ and bone marrow transplants with managed transplant insurance, employers can protect themselves from 100% of the costs of procedures conducted at in-network hospitals. In addition, most plans cover organ and tissue harvesting and travel benefits for the patient and companions. Most transplant carve-out programs assign a patient advisor to help select the most appropriate facility and guide the patient through the process.

For employers, a transplant carve out provides flat per-member per-month pricing that enables payers to budget for transplant claims evenly throughout the year. For a self-funded employer, carve outs also remove the risk from stop-loss coverage and may positively impact availability, deductibles, and stop-loss premium rates.

Transplants are expensive and typically take 18-24 months from initial diagnosis to completion of the therapy. For this example, assume that an employee is evaluated for a liver transplant in June and placed on a waiting list. A match becomes available in November, and the transplant procedure is performed November 30. Total transplant-related expenses for evaluation, organ procurement, hospital, physician, follow-up care and immuno-suppressant drugs for one year after the transplant amount to $250,000.

The following chart shows the potential impact to the employer´s claim costs with a transplant carve-out, self-funded plan with reinsurance and self-funded plan without reinsurance.

Health Plan Claim Impact	With Transplant Carve-out Policy	With Employer Stop Loss - $100,000 Deductible	With No Employer Stop Loss
Reinsurance year 1 Â Â Â (1/1-12/31) Â Claims Jun 1 - Dec. 31	$0	$125,000	$125,000
Less Specific Deductible	Not applicable	$100,000	$0
Stop Loss Reimbursement	Not applicable	$25,000	$0
Reinsurance year 2 (1/1 -12/31) Claims Jan 1 - Nov. 30	Covered under policy year 1	$125,000	$125,000
Less Specific Deductible	Not applicable	$100,000	$0
Stop Loss Reimbursement	Not applicable	$25,000	$0
Employer Claim Cost	$0	$200,000	$250,000

In addition, if the employer purchases specific reinsurance coverage, the claimant could impact the overall availability, rate and deductible level for the reinsurance policy for Reinsurance Year 2. Or, the employer could face the potential exclusion of (also known as "lasering"), or higher specific deductible for, the employee under the reinsurance policy.

With a transplant carve-out policy, the employer pays a predetermined amount of premium in return for predictable health plan costs and no claims liability.

Purchasing a Carve-Out Program
Most companies engage the services of a professional healthcare consultant or broker when contemplating carving out 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, has the credentials, database and case histories of providing specialized care management cost effectively and with excellent outcomes. A broker will also provide a realistic view of the risks, costs and estimated savings associated with a particular program.

An additional benefit of some carve out insurance programs is the transfer of medical liability. In many cases, the employer´s financial risk and medical-management liability is 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, rather than the employer.

Conclusion
Carve-outs should be an important consideration for human resources professional that manages self-funded programs. Strategic use of carve outs provide added predictability and transfer of liability to help meet the financial and human resource objectives while providing a continuum of care and benefits for employees.