By John Harris
The credit union community is filled with great thought leaders, unafraid of challenging the status quo. They are also known to be one of the most collaborative industry groups, sharing knowledge and joining forces with their peers to create strength and economies of scale. In this particular economic cycle, it is more important than ever to evaluate and reduce the top expenses within the credit union. If expenses go unchecked, earnings and ROA will be hit hard in the coming months.
One of the largest expenses in every credit union is employee benefits, specifically the group health plan. To address this problem, a group of credit union CEOs and CFOs decided they would replace the broken healthcare system with a model that allows them to purchase benefits at a discount, like Costco or Walmart. Most employers have been purchasing benefits the same way for decades.
Those old strategies don’t work in a healthcare system that has changed dramatically. The cost of healthcare has grossly outpaced wages and inflation. The average annual premium for family medical coverage has increased a staggering 191% over the past 20 years. Something has to change.
The Blueprint for Cost Reduction
This group of bright executives began outlining something that would change the status quo and create a paradigm shift for credit unions. A secret that few will discover.
Step 1 – Determine the largest components of the healthcare spend
Step 2 – Work on reducing the top 3 healthcare cost drivers
Step 3 – Share the knowledge with other credit unions
Determining the Largest Components
The components of group healthcare cost can be divided into two buckets; Fixed costs and Variable costs. Fixed costs (15-20% of total cost) cover plan administration, claims administration, stop-loss insurance, broker fees, and insurance carrier profits. Variable cost (80-85% of total cost) cover medical claims. After dissecting every piece of the group healthcare puzzle, the executives determined the following top three factors dictate the price they pay for healthcare for their organizations:
- Severity and frequency of claims paid per employee per year (variable cost)
- Provider selection (variable cost)
- Stop-loss insurance (fixed cost)
Reducing Cost Drivers
Since claims make up the majority of the group health spend, it seems to be the logical place to begin. Just following good math principles, work on reducing the largest number first. An interesting fact these credit union executives found was that all three of the top healthcare cost drivers worked together and affected the outcome of the others.
For example, if an employee selected one provider over another, the claims cost was different. If one provider offered alternative treatment, the claims cost was different. If the individual stop-loss limit was increased, the cost went down and the group had an incentive to steer employees to higher quality and better value providers.
The first thing the executives decided to do was find the best medical management resource team that would come alongside their employees and guide them through both the health care delivery and health plan (aka “insurance”) systems. They knew that a high-touch concierge model of service would create a better employee healthcare experience. They wanted to make sure that employees were getting the right care, in the right time, at the right place, and for the right price. This was critical to reducing the severity and frequency of claims.
The second thing was to address the largest fixed cost component, stop-loss insurance. Stop-loss insurance is a policy designed to limit claim losses to a specific amount. This type of coverage is to ensure that catastrophic claims (specific stop-loss) or numerous claims (aggregate stop-loss), do not upset the financial reserves of a health plan.
Stop-loss insurance exists in both fully-insured plans and self-funded plans. However, an employer has no control over the stop-loss provided in a fully-insured plan because it is only the insurance carrier that is affected by the structure and results of the policy. In a self-funded plan, the employer can purchase stop-loss insurance in a manner consistent with its goals rather than an insurance company’s goals.
The credit union executives figured out that the cost and risk, associated with their stop-loss coverage, shrank as the number of covered employees in their plan increased. This follows the law of large numbers principle. So, they devised a way to bring multiple credit union employers together for the purpose of aggregating risk and purchasing insurance. They called it the Credit Union Healthcare Coalition. The basic premise of the program is to allow each credit union to pool their employees together and purchase a single stop-loss insurance policy for the entire group. Rather than paying the higher price as a small employer, they were able to get bulk pricing as a very large employer. And, they were able to minimize risk to each individual credit union. The more credit unions that join the coalition, the lower the net cost to each.
Sounds Good, But Does it Work?
Unfortunately, many employers have accepted the status quo and believe if their renewal comes in below healthcare trend, they are getting a good deal. They are budgeting for 6%-10% increases annually. But, for those who have taken the time and effort, like this group of credit union executives, the results have been amazing. For example, one of the credit union’s results after implementing the strategies outlined above were a cost reduction of more than $1.2 million and a 24% increase in ROA, in the first year.
Employee benefit programs are complex and continue to be one of the largest expenses to employers. Commit to learning and utilizing the strategies that have already been tested. And, most of all, stop doing things the same way if your results are not improving.
John Harris is the CEO and co-founder of CU Benefits Alliance, a national employee benefits CUSO. John has 29 years of experience in the insurance and financial services industry.