Introduction: The Growing Crisis
For most employers, the cost of health insurance is their second largest expense behind only payroll. It is a line item defined by a relentless upward trend that consistently outpaces regular inflation. Medical Trend continues to outpace regular inflation: averaging 7.2% over the last 15 years (compounding at 7.2% means it will double every 10 years). This is compounded by an Rx trend that is growing at an alarming rate.
Faced with this reality, many employers and their brokers feel trapped in a reactive cycle: receive a double-digit rate increase, conduct a market analysis, and ultimately present the client with options that merely shift costs to employees through higher deductibles and contributions. Most employers are frustrated because there is little they can do to manage this growing expense—they are left to the mercy of their insurance providers.
This annual exercise creates the illusion of action, but the underlying strategy remains the same. The decision to remain in a fully-insured plan year after year is often seen as the safe choice. However, this paper will argue that this inaction carries its own significant and often hidden costs. The true cost of doing nothing is not just the 10-15% renewal increase; it is the forfeiture of control, transparency, data, and substantial financial savings.
The Fully-Insured "Black Box"
A fully-insured plan is, by design, a black box. An employer pays a fixed premium to a carrier, and in exchange, the carrier assumes the financial risk for all claims. While this appears straightforward, it obscures the true cost drivers of the plan. The premium paid is not a direct reflection of the group's health; it is a complex calculation designed to cover the carrier's costs and guarantee its profitability.
When a client pays a fully-insured premium, they are paying for several components that have little to do with their employees' healthcare:
• Carrier Profit Margins: A significant portion, typically 5-7%, is allocated to the insurance carrier's bottom line. This is a direct cost for which the employer receives no tangible benefit.
• State Premium Taxes: Unlike self-funded plans, fully-insured premiums are subject to state taxes. In a state like California, this adds 2.35% to the total cost.
• Administrative Costs & Risk Charges: Carriers build in charges for overhead, reserves, and various risk and retention fees. These are determined by the carrier's book of business, not the client's specific performance.
• Costs of State-Mandated Benefits: Fully-insured plans must comply with all state-mandated benefits, which can add 2% or more in optional savings that a self-funded plan could realize.
This model is best understood through the analogy of renting versus owning. In a fully-insured plan, the employer is a tenant. They pay their monthly rent (premium) and have a place to live, but they build no equity. At the end of the year, any money not spent on claims is retained by the landlord (the carrier) as profit. The decision to "do nothing" and renew is akin to signing another year's lease, knowing the rent will go up without any corresponding improvement in value.
The Hidden Opportunity Costs of Inaction
Staying with a fully-insured plan means more than just paying a higher bill. It means actively choosing to forego the powerful tools and financial advantages that alternative funding strategies provide. The cost of doing nothing is an opportunity cost.
1. The Cost of No Data
In a fully-insured arrangement, the carrier owns the data. Employers receive very limited reporting, making it impossible to understand the specific drivers of their healthcare spend. Without this information, an employer cannot implement targeted wellness initiatives, identify opportunities for disease management, or strategically adjust plan design to influence member behavior. Lacking data, the employer is forced to manage the plan with blunt instruments—namely, increasing deductibles and employee contributions—rather than with the surgical precision that detailed analytics allow.
2. The Cost of No Control
In a fully-insured plan, the benefit design is pre-determined by the carrier to minimize its own claims exposure. The employer has limited flexibility to customize the plan to meet the specific healthcare needs of their workforce. By contrast, a self-funded employer can "unbundle" the elements of its health plan, purchasing services and benefits more cost-effectively. This allows them to choose a Third-Party Administrator (TPA) that aligns with their service philosophy, select a Pharmacy Benefit Manager (PBM) that provides transparency and passes through rebates, and implement "best-in-class" cost containment vendors for services like telemedicine, bill auditing, and specialty care management.
3. The Cost of Forfeited Savings
The most tangible cost of inaction is financial. By remaining fully-insured, an employer actively forfeits multiple streams of potential savings that flow directly to a self-funded employer's bottom line. Based on a $1M annual fully-insured spend, these savings are substantial: Eliminate Carrier Profit ($50k - $70k), Lower Administrative Costs ($30k - $50k), Reduced State Premium Tax ($23.5k), Avoid State Mandates - ERISA ($20k), and Capture Rx Rebates ($20k - $90k representing 20-30% of Rx spend).
The Myth of Uncontrollable Risk
The primary reason employers choose to do nothing is the fear of risk. The idea of being responsible for a catastrophic, million-dollar claim is daunting. However, this fear is based on a misunderstanding of modern self-funding. A self-funded plan does not mean assuming 100% of the liability. It is a risk financing strategy, and the most critical component is stop-loss insurance, an insurance product that provides protection against catastrophic or unpredictable losses.
Stop-loss coverage comes in two forms: Specific Stop-Loss protects the plan against a catastrophic claim from a single individual (the employer sets a specific deductible and the stop-loss carrier reimburses all claims above that amount), and Aggregate Stop-Loss protects the plan against a high volume of claims from the entire group (establishing a maximum claims liability for the year, typically set at 125% of expected claims).
Conclusion: A Proactive Path Forward
The status quo is comfortable, but it is not free. The true cost of doing nothing is the quiet acceptance of a system where employers have little control, no data, and are forced to fund the profits and inefficiencies of insurance carriers. It is the missed opportunity to manage healthcare as a controllable expense and reinvest savings back into the company and its employees. Moving from a fully-insured to a self-funded arrangement is a significant strategic decision, but it is not one that has to be made in the dark. At XL Benefits, our exclusive focus is providing the expertise and analysis to guide brokers and their clients through this process.