More than two decades ago, New Fairfield did something bold and creative that has saved taxpayers more than a million dollars. What was it? Our town made the gutsy decision to self-insure employee medical expenses.
Back then, New Fairfield purchased traditional insurance to cover health costs for most town employees, including teachers. Since that time, the cost of medical insurance has skyrocketed. Some increased costs have been driven by things that directly benefit people, like advanced treatments, drugs and medical technology. But other steep increases have been driven by exploding insurance-company overhead, like higher salaries for top management. In 2017, the 64 top healthcare CEOs earned 1.7 billion dollars. By self-insuring, New Fairfield has been able to avoid underwriting most of the cost of executive salary inflation, saving taxpayers a lot of money without compromising the quality of health care we provide.
How does self-insurance work in New Fairfield? In many ways, our plan seems no different from a traditional medical plan. Employees contribute to the costs and the town covers the rest. The town helps finance participant HSA accounts and there is a deductible that has to be met for most medical costs. The plan is overseen by the Board of Finance and pays, dollar for dollar, all covered medical costs incurred (after the deductible is met) by those who participate. If a plan member who has met her deductible has an MRI, for example, and the cost is $1,000, New Fairfield pays that $1,000 to the provider.
But the design of our self-insurance plan is a little more complicated than a simple reimbursement program. Administering a health plan that spends millions of dollars and covers hundreds of people is no small task. And, aside from administrative tasks, health insurance companies serve another important purpose: They negotiate lower rates for their participants. For those reasons, while New Fairfield pays our own health costs, we pay a fee to Anthem to administer our plan. This enables us to benefit from Anthem’s negotiated rates on services, procedures and pharmaceuticals. That MRI that cost us $1,000 might carry a retail price of $1,200 or more.
In addition to outsourcing health care administration, we retain a medical insurance advisory firm that helps us negotiate administrative details and insurance fees so we can provide the best care at the best price. New Fairfield reviews regularly the terms of our agreement with Anthem and checks out competitor’s pricing and service quality.
In order to finance health care services, New Fairfield maintains a multi-million dollar fund from which we pay for the services our plan members use. Every year, part of the town budget is a contribution to this fund. The rate of increase in these contributions has been far lower than equivalent increases in the cost of actual health insurance across Connecticut and the country, saving taxpayers a lot of money.
You might be wondering if there are concerns that some kind of extreme situation could create catastrophically high expenses that deplete the medical fund. For example, what happens to our fund if we are struck by a serious influenza requiring mass hospitalization? Or, what if a participant requires a very expensive treatment costing six or even seven figures? The Board of Finance has addressed these concerns by purchasing a special kind of insurance called “Stop Loss Insurance.” There are two kinds of stop loss policies, “individual” and “aggregate.” Individual stop loss coverage kicks in when one person’s annual medical costs exceed more than a specified amount of money. Aggregate stop loss coverage kicks in when the group, as a whole, spends more than a specified amount of money.
These stop loss policies are costly, but they protect the town against unanticipated expenses. Every year, the Board of Finance carefully considers just how much to spend for stop loss coverage. It’s always a bit of a gamble because no matter how careful we are in assessing our expected future costs, you just never know exactly what kinds of health events will arise. A lot of time is spent in carefully calibrating the competing desires to protect our medical fund while limiting insurance premium costs. In this respect, our insurance advisors do a lot of tough negotiating on our behalf.
And if you are wondering if all this is expensive for New Fairfield, it is. Fortunately, it is far less expensive than the cost of providing equivalent health care services through an insurance policy. And that is why New Fairfield’s groundbreaking approach has caught on with many, many other Connecticut towns.