How Self-Funded Employers Can Have It All:

Pharmacy Cost-Savings and Minimal Member Disruption


Employers are under significant pressure as they evaluate their health benefits plans for the year ahead. Recent projections by the Policy and Medicine publication show prescription drug spend growing by over $110 billion by 2024 with faster price increases and rises in specialty drug utilization being primary factors at play. In addition, we can expect to see increased healthcare costs and higher insurance premiums for the next several decades according to a recent report by Insurance Journal. At the same time, employers are facing an incredibly competitive talent war that requires an innovative approach to acquiring and retaining their workforce, including providing a top benefits plan.

The most significant advantage of self-funding is the cost-savings potential. In this arrangement, payments and costs are reconciled at the end of the year. If claims are lower than expected, the employer receives a refund of any unused funds.

These factors have put HR leaders between a rock and a hard place. With drug spending and health insurance premiums rising rapidly, many HR leaders are seeking to control costs without negatively impacting employee health or causing any disruption to their staff. One such option being explored is whether to self-fund health benefits.

As you help your clients evaluate whether their company should choose to remain fully insured or move to a self-insured model, it’s important to understand the difference between the two approaches and the questions employers should ask themselves as part of the decision-making process.

Self-Funded vs. Fully Insured – What’s the difference?
Investing in health insurance is about hedging financial risks. Many employers, especially those of a smaller size, are in a traditional fully insured benefits program. In this model, they pool employees’ experiences, diseases and care needs with those of many other employers. They then contract with a medical carrier that bundles together all their medical and pharmacy benefits vendors and services, and pay a health plan to assume that risk, in the form of a premium. Regardless of what transpires, the employer’s costs for that year are fixed. This approach may feel comfortable, familiar and safe for the employer, but the status quo has inherent risks.

For one, the cost of premiums for fully insured plans and their members is very high and climbing annually. And if the employee population is healthy or doesn’t utilize much healthcare or medication during the plan year, the organization will have spent a significant sum of money on premiums it can never recoup. Conversely, if the plan’s costs exceed what the health plan predicted for the year, rate hikes are inevitable for the following year, making renewal negotiations tedious and exasperating both the employer and their members.

In addition to high fixed costs, fully insured arrangements provide few, if any, options to tailor plan design, coverage, and provider networks for the employer’s members. They also limit the ability to adapt to meet new healthcare challenges as they arise, such as the rising costs of specialty medications or the impact of the COVID-19 pandemic. With this model, employers are part of a one-size-fits-all approach to managing health benefits.

An increasing number of employers are now considering taking on that financial risk themselves in a self-insured, or self-funded, benefits model. There comes a tipping point when it makes sense for employers to stop paying a premium to have the health plan manage everything and instead design a benefit plan that is focused on what really matters to their employees — and that tipping point is lower than you might think. Evidence shows, and most brokers agree, that it makes sense to explore self-funded benefits when the employer reaches as few as 25 employees.

In a self-funded arrangement, the employer sets aside a monthly amount
of money to cover administrative fees
and employees’ anticipated health and pharmacy costs. As employees seek
care from physicians and hospitals and  fill prescriptions at the pharmacy, the claims are paid directly from these funds. In addition, self-funded employers can purchase stop-loss insurance, which provides protection against catastrophic or unpredictable claims.

The most significant advantage of self-funding is the cost-savings potential. In this arrangement, payments and costs are reconciled at the end of the year. If claims are lower than expected, the employer receives a refund of any unused funds.
If that trend continues, there may be a reduction in the necessary contributions made by both employers and workers. On the other hand, if the plan incurs above-average costs or catastrophic claims, the employer’s stop-loss coverage insulates it from financial overages.

Additionally, self-funded plans are significantly more flexible and enable employers to tailor their benefits. In a self-funded arrangement, employers have full access to all claims information, giving them insight into who uses the plan and where healthcare dollars are spent. With these insights, you can help your client make educated decisions on their plan design and benefits coverage, proactively steering spending where it makes the most sense for them and their members.

For example, the employer can choose to work with an insurance company’s network so the plan and its members can benefit from its doctors, hospitals and pharmacies with contracts that outline predetermined prices — or they can allow employees to choose which doctors or specialists they prefer.

Finally, with a self-funded arrangement, employers can optimize their pharmacy benefits by carving out, or unbundling their pharmacy from their medical benefits.

How carving out can optimize pharmacy benefits

Once your client is self-funded, allowing the pharmacy benefit to remain bundled, or “carved-in,” with a medical carrier severely limits the employer’s options to manage rising prescription drug spending. By carving out, however, employers can optimize the value they derive from their pharmacy benefits.

To illustrate, in a self-funded administrative services only (ASO) arrangement, the employer pays for the prescription drug claims, but the medical carrier continues to process them. With this type of arrangement, the employer has more access and insight into their pharmacy claims, pricing and utilization data than they did under the fully funded benefit arrangement but will still experience many of the same frustrations they encountered. For example, the carrier remains in control of all the plan decisions, and employers can’t customize their plan design or tailor their formulary based on their membership’s medical needs or cost-savings goals. Ultimately, if your self-funded employer client is in a carved-in arrangement, they can’t create a truly custom pharmacy-benefits experience for them and their employees.

Alternatively, self-funded employers in a carved-out pharmacy program have full control over everything from selecting their preferred pharmacy benefits partner to their pharmacy network, stop-loss carrier and more. When your self-funded client is in a carved-out arrangement, you can guide them in selecting a pharmacy partner that advocates for their best interests. This includes recommending strategies that align with their economic and clinical goals, helping them negotiate a competitive and transparent contract, and providing excellent member services. These are all critical aspects to look for in a pharmacy provider that will deliver sustainable prescription drug savings as well as long-term value with minimal disruption to members.

Getting started with self-funding
When working with your client to make the switch to a self-funded, carved-out plan, it’s important to allow ample time to gather the pharmacy claims file from their carrier, evaluate the data, and determine a strategy to address any clinical or financial risk areas. Additionally, by unbundling the benefit products, the employer will need to find partners to contract with for each component — i.e., medical benefits, pharmacy benefits, and a stop-loss vendor for catastrophic claims protection. This process takes time, and each of those carriers will want to see information about what the plan is currently spending. Thus, a conservative timeline calls for at least four months before the desired start date for a proper implementation process.

Some medical carriers intentionally drag their feet when providing employers with their pharmacy claims data file. However, this should not deter you and your client from pressing forward and securing whatever information is needed from the carrier. This data is key to helping you understand your client’s member population and finding opportunities to reduce costs. By evaluating your client’s plan performance using their claims data, you can identify potential risk areas, recommend hyper-targeted strategies to address them, and forecast the cost savings and member impact of any changes. The result is a pharmacy benefits strategy that is tailored to your client’s actual clinical utilization and aligned with their plan savings and member access goals.

When developing this pharmacy analysis and action plan for your client, it’s important to utilize pharmacy expertise independent of the PBM or insurance carrier. Include the best opportunities
for plan design and clinical utilization management to help your client strike the right balance between providing a robust benefit, achieving cost savings, and minimizing member disruption. This will ensure they’re able to make the best, data-driven decisions for their prescription drug plan and their members.
Finally, once your client decides
to become self-insured, the way they communicate the change to their members is critical. Most employees feel the impact of rising healthcare and prescription drug costs each year, and will appreciate a thoughtful solution. Employers should explain to their employees how cost-control measures can positively impact their premiums, copays and deductibles. Also take the time to discuss ways that potential savings might be reinvested in other programs that benefit employees. Communicating transparently will make employees feel valued and respected and will go a long way toward making them comfortable and empowered to make the best healthcare decisions.

Making the decision to self-fund

Ultimately, your client will need to consider their organization’s tolerance for risk when determining whether a fully insured or self-insured model is the right option for them. If the company must know in advance exactly how much their employee health and pharmacy benefits will cost at the end of the year, it may be necessary to pay a predictable, monthly premium to a health plan as part of a fully insured benefits strategy, although the cost will be much more substantial than that of a self-insured plan.
Moving to a self-insured, carved-
out plan can provide employers with significantly more flexibility to develop a pharmacy benefits plan that aligns with their goals, is attractive to current and future employees, optimizes member wellbeing, and reduces overall prescription drug costs.

Making changes to the pharmacy benefits plan or provider will undoubtedly cause some disruption, but if in the long run it will result in improved health, a superior service experience, and less frustration for members, all while reducing overall costs, it’s worth examining. 

is Business Development Executive of RxBenefits, the nation’s first Pharmacy Benefits Optimizer. He supports brokers in the California and Hawaii regions, guiding them through the pharmacy benefit contracting process to help them evaluate their clients’ prescription drug plans for optimal savings, clinical management, and service.
Rick is also the current Board President for the Employee Benefit Planning Association of Southern California (EBPA). He can be reached at