Capturing the Self-Funded Market Opportunity
Employer sponsored insurance is the leading source of health insurance in the U.S., providing coverage for over 150 million people. In this market, more than half the members are in self funded plans. Driven by cost advantages and benefit design flexibility, self funded plans have grown in prevalence over the past decade, with the share of all workers covered by self funded plans increasing from 49% in 2000 to 59% in 2010 (see Figure 1).
Despite its size and growth, self funded business is not universally profitable, as many payers rely on their fully insured business to generate the vast majority of their margins, and are satisfied with a break-even, or slightly profitable self funded business. Going forward, the self funded segment will need to be a stronger contributor to revenue and operating margin, as PPACA implementation is likely to erode the profitability of the fully insured group market and increase the relative share of self funded business within the group market (see Figure 2). Specifically, PPACA is likely to result in:
- Smaller and mid-sized groups shifting from fully insured to self funded arrangements
- Low wage groups dropping group coverage in favor of employees purchasing health coverage on state-run exchanges
- Fully insured profits being squeezed by Medical Loss Ratio (MLR) requirements, tighter rate reviews, and price-focused competition on exchanges
Based on our industry research and client work, we have identified several ways in which payers can grow self funded group revenue and improve segment profitability. Among those strategies are:
- Disaggregating product definition and pricing to improve competitive positioning and increase revenue
- Developing product offerings that meet the distinct needs of self funded groups who require a choice of services and solutions
- Framing pricing so that the offering is most attractive to the groups and brokers
- Identifying untapped sources of revenue which are of value to certain self funded groups
- Developing a near-term offering that targets groups migrating from fully insured to self funded arrangements
Depending on their starting point, we have found that payers can increase revenue over 25 percent, with much of this additional revenue contributing directly to operating profit.