The self-funding route to lower costs

For more than two years, West Wendover, Nev., has been self-funding the health coverage of city employees – paying the 35 eligible employees’ medical claims directly, instead of paying premiums to an insurance company to cover claims.

“We had a lot questions about going to this type of insurance plan when the idea first came up,” says assistant administrator Judy Mays.

“We don’t like to experiment with things too much around here, but the cost of our previous plan was just making it too hard on our employees.”

Before switching to the self-funded plan, a typical employee paid about $280 a month for family coverage. Now, that employee pays about $130. Each employee must pay a $250 deductible for themselves and for each dependent, with a maximum of $750.

West Wendover, a town of around 2,900 residents, is also saving money with the self funded plan. Previously, the city was facing 10 percent to 30 percent increases in health insurance costs per year. In 1995, with the plan in place, these costs increased about 2 percent.

Each month, the city pays into a bank account that serves as a “claims pool.” According to Mays, the city currently pays $171 for single employees with no dependents; $340 for married employees with one child; and $454 for married employees with more than one child.

A private insurance company designed the city’s self-funded plan and acts as a third-party administrator. The company withdraws money for its services each month from the claims pool, and the city uses the remaining funds to pay employee claims.

May says that previous coverage, provided through the Nevada League of Cities, was more expensive partially because the league’s plan had to cover many different types of employees in different areas.

“This gives you a little bit of room to work with your employees,” May says. “It gets them more involved.

“Self-funding allows us to focus our plan on the coverage that’s best for our workers in our area. We can look at our coverage trends to see what benefits our employees need the most. The more control we have, the more it opens the doors so we can see what types of benefits are out there.”

The residents’ average age of 35 and the city’s remote location, 120 miles from the nearest hospital, are some of the characteristics that West Wendover was able to factor into its plan.

The city has added a variety of benefits to the health care package offered to employees, including an increase in life insurance from $10,000 to $15,000; coverage for oral contraceptives; and an accident provision that pays the first $300 of medical expenses for an off-the-job injury.

In 1993, three of 27 eligible employees obtained family coverage through the city’s fully insured plan. Currently, 18 of the 35 eligible employees have family coverage.

A situation in which several employees have serious health problems and large claims is a potential nightmare for employers who self-fund their employees’ health benefits.

Therefore, West Wendover, like the vast majority of private companies with self-funded plans, purchased stop-loss coverage to pay for any portion of a claim above a certain point. The city has used the stop-loss coverage twice in its two years of self-funding.

“We decided we could afford to risk up to $7,500 per employee per year, so we set our attachment point at that level,” May says. “If any employee has claims that exceed $7,500, our stop-loss coverage pays the rest, and that allows us to keep our risk at an acceptable level.”