Business of Healthcare Blog
Dr Gregory Rubin is an MBA student at The Kellogg School of Management at Northwestern University.
How Employers Save Money: Fully Insured vs. Self-Insured Models — and the Role of MSK Bundles
In the setting of rising healthcare costs employers are looking for ways to save money. One proposed cost saving technique is to enroll in musculoskeletal bundles. This brief review compares a fully insured model vs. a musculoskeletal bundle.
Fully Insured Model: Predictable but Expensive
Let’s consider a company with 1,000 employees:
Average premium: $600 per month, per employee
Annual premium cost: $7.2 million
Actual claims generated: $5 million
Insurer overhead, reserves, and profit: ~$2.2 million
In this setup, the employer pays a fixed premium. The insurance company takes on the claims risk, pays providers directly, and keeps the difference if claims are lower than expected. If claims rise, premiums are adjusted upward the following year.
Employers gain predictability but often pay significantly more overall due to insurer margins and lack of cost transparency.
Self-Insured Model: More Control, More Savings
Now, let’s look at the same company under a self-insured model:
Employer directly funds claims: $5 million
Third-party administrator (TPA) fee: $500,000
Stop-loss insurance (to protect against catastrophic claims): $500,000
Total annual cost = $6 million
Compared with the fully insured plan, the employer saves $1.2 million per year.
Employers assume more responsibility for claims, but they also gain data transparency, customization options, and flexibility in contracting with providers.
MSK Bundles: A Game-Changer for Employers
One of the most expensive and predictable categories of care is musculoskeletal (MSK) procedures, such as knee and hip replacements. These are ideal for bundled payments.
Traditional fee-for-service:
Knee replacement: $50,000+ (variable, depending on complications and readmissions)
Bundled payment:
Knee replacement: $28,000 flat fee
Covers surgery, anesthesia, hospital stay, post-op care, and 90-day follow-up
If the company has 30 knee replacements annually:
Traditional model = ~$1.5 million
Bundled model = ~$840,000
Savings = ~$660,000 per year
Research supports these savings. A major JAMA study showed that bundled payments for lower extremity joint replacement episodes reduced Medicare spending without compromising quality outcomes.¹
Why This Matters for Employers
Cost predictability: Bundles cap exposure to runaway bills.
Quality assurance: Bundles are usually tied to “centers of excellence” with lower complication rates.
Employee satisfaction: Lower or waived out-of-pocket costs improve benefits and retention.
Direct contracting power: Self-insured employers can bypass insurer markups and negotiate directly with providers.
Conclusion
A company paying $7.2 million in premiums under a fully insured model could save over $1 million annually by self-insuring — and an additional $600,000 or more by adopting MSK bundles. For employers, this is not just an accounting exercise. It’s a chance to lower healthcare costs, improve outcomes, and strengthen the employee experience.
Reference
Dummit LA, Kahvecioglu D, Marrufo G, et al. Association Between Hospital Participation in a Medicare Bundled Payment Initiative and Payments and Quality Outcomes for Lower Extremity Joint Replacement Episodes. JAMA. 2016;316(12):1267–1278. doi:10.1001/jama.2016.12717