# Self-Funding Explained: Stop-Loss, Captives and Claims. Spencer Smith of ParetoHealth. Source: https://ethosbenefits.com/podcast/self-funded-health-insurance-spencer-smith Type: Podcast episode Series: The Business of Benefits, Episode 66 Published: 2025-12-04 Duration: PT45M20S Hosts: Donovan Ryckis, Founder and CEO, Ethos Benefits Guests: Spencer Smith, SVP of Sales, ParetoHealth Video: https://www.youtube.com/watch?v=-N7vNO4lkUc Publisher: Ethos Benefits Cite as: "Self-Funding Explained: Stop-Loss, Captives and Claims. Spencer Smith of ParetoHealth.," The Business of Benefits, Episode 66, Ethos Benefits, https://ethosbenefits.com/podcast/self-funded-health-insurance-spencer-smith, 2025-12-04. **Summary:** Employers that move from fully insured to self-funded health insurance trade guaranteed cost for variable cost they can see and control. Donovan Ryckis of Ethos Benefits and Spencer Smith of ParetoHealth cover stop-loss, group captives, pharmacy as the first place to look, and three questions every plan sponsor should ask at renewal. ## Key takeaways - Spencer Smith compares a fully insured plan to car insurance that pays for gas and tire rotations, and describes self-funding as moving from guaranteed cost to variable cost the employer can see and control. - Smith describes a captive as a community of like-minded employers that band together for scale, and compares it to bumpers in a bowling lane that prevent a gutter ball in any single year. - Smith says cancer is almost always the top high-cost category in carrier reports, NICU babies carry the biggest price tags he sees, and most of an employer's focus belongs on the 60 or 70% of the plan that is actual claims. - Smith recommends starting with the pharmacy contract, where he says there is often 35 to 40% savings with little to no disruption, while Donovan Ryckis says full data access often has to come first. - Donovan Ryckis says reducing claims means fixing prices and the supply chain, not reducing care, and that a change only works for the plan if it works for employees first. - Smith's three renewal questions for a broker: why these recommendations, how and how often are you paid, and what is the long-term strategy beyond the next 12 months. ## Chapters - 00:56 Welcome and guest introduction (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=56s) - 02:21 Spencer Smith's path into self-funding and stop-loss (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=141s) - 04:11 Fully insured vs self-funded: the car insurance analogy (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=251s) - 12:33 Why short-form education works in benefits (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=753s) - 18:36 Broker vs consultant and five-year plan performance (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=1116s) - 21:23 What is a group captive: bumpers in a bowling lane (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=1283s) - 23:40 Cancer, NICU and the claims that drive stop-loss renewals (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=1420s) - 25:33 Where to start: pharmacy contracts and data access (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=1533s) - 29:41 What reducing claims really means (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=1781s) - 34:55 Biosimilars, international sourcing and rising contributions (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=2095s) - 40:27 Three questions to ask your broker at renewal (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=2427s) - 43:12 POSIWID: the purpose of a system is what it does (https://www.youtube.com/watch?v=-N7vNO4lkUc&t=2592s) ## Quotes > I think there's also a misconception, Donovan, that to lower cost you have to make the plan worse or you have to impede care or disrupt access. And that's absolutely the opposite of the truth. Spencer Smith, ParetoHealth > Fundamentally, if this is going to work for the plan at the end of the year, it's because it worked for the employees first. Donovan Ryckis, Ethos Benefits > Is it working? That's a simple question. If it's not working, then you're in the wrong system. Spencer Smith, ParetoHealth ## In this episode. Employers weighing self-funded health insurance often hear that it is risky, even though a self-funded plan still buys insurance for the large claims. In this episode of The Business of Benefits from Ethos Benefits, Donovan Ryckis and Spencer Smith of ParetoHealth explain self-funding in plain terms, from stop-loss and group captives to the pharmacy contract and the questions plan sponsors should ask their broker. Smith uses simple analogies throughout: car insurance that pays for gas, a savings account versus a 401(k), and bumpers in a bowling lane. The two also discuss why lowering cost does not have to mean cutting care, and why a long-term strategy matters more than a single 12-month renewal. Ethos Benefits helps employers with [stop-loss procurement and audit](https://ethosbenefits.com/services/stop-loss), and the [Hendry Marine Industries case study](https://ethosbenefits.com/results/hendry-marine) shows one employer's self-funded plan over five years. - **Fully insured vs self-funded.** Guaranteed cost versus variable cost, and what changes when you move to a [self-funded health plan](https://ethosbenefits.com/benefits-101/self-funded-health-insurance). See the side-by-side in [self-funded vs fully insured](https://ethosbenefits.com/benefits-101/self-funded-vs-fully-insured). - **Stop-loss and captives.** Why [stop-loss insurance](https://ethosbenefits.com/benefits-101/stop-loss-insurance) is the protection for worst-case claims, and how a [stop-loss captive](https://ethosbenefits.com/benefits-101/stop-loss-captive) pools employers for steadier renewals. - **Pharmacy first.** Why Smith starts with the pharmacy contract, and what to look for when [choosing a PBM](https://ethosbenefits.com/benefits-101/how-to-choose-a-pbm). - **Data before decisions.** Why Ryckis pushes for [health plan claims data access](https://ethosbenefits.com/insights/health-plan-claims-data-access) before a group changes funding. - **Questions for your broker.** How a [broker compensation disclosure](https://ethosbenefits.com/benefits-101/broker-compensation-disclosure) answers Smith's question about how and how often a broker is paid. ## About the guest. Spencer Smith is SVP of Sales at ParetoHealth, which he describes as the largest benefits captive in the space. He started as an analyst at BenefitMall, learned stop-loss at Sun Life, and has spent about the last decade in stop-loss insurance. He began making short stop-loss whiteboard videos in July 2020 and now hosts Self-Funded with Spencer, and at the time of recording he expected his self-funding and stop-loss videos to cross a million YouTube views that year. ## Guests - **Spencer Smith**, SVP of Sales, ParetoHealth. Spencer Smith started his career as an analyst at BenefitMall and has spent about the last decade in stop-loss insurance, a field he first learned at Sun Life. He is SVP of Sales at ParetoHealth, a benefits captive, and hosts Self-Funded with Spencer, which grew out of the stop-loss whiteboard videos he began posting in July 2020. ## Related guides - [How does self-funded health insurance work?](https://ethosbenefits.com/benefits-101/self-funded-health-insurance) - [Self funded vs. fully insured](https://ethosbenefits.com/benefits-101/self-funded-vs-fully-insured) - [How does stop-loss insurance work?](https://ethosbenefits.com/benefits-101/stop-loss-insurance) - [Stop-loss captives explained](https://ethosbenefits.com/benefits-101/stop-loss-captive) - [How to choose a PBM](https://ethosbenefits.com/benefits-101/how-to-choose-a-pbm) - [Broker compensation disclosure](https://ethosbenefits.com/benefits-101/broker-compensation-disclosure) - [Health plan claims data access](https://ethosbenefits.com/insights/health-plan-claims-data-access) ## Frequently asked questions ### What is the difference between fully insured and self-funded health insurance? A fully insured employer pays a fixed premium no matter what its claims are, while a self-funded employer picks the level of insurance it buys and pays most claims from its own cash. Spencer Smith calls this guaranteed cost versus variable cost, and says self-funding becomes far more efficient if done correctly. Donovan Ryckis adds that a self-funded employer always still has insurance. ### What is a group captive in health insurance? Spencer Smith describes a captive as a community of like-minded employers that band together to get scale they may not have on their own. He says that scale gives more predictable renewals year after year, and compares it to bumpers in a bowling lane: it does not guarantee a strike, but it prevents a gutter ball in any single year. ### What kinds of claims drive stop-loss renewals? Spencer Smith says carrier reports almost always show cancer as the top category by frequency of high-cost claims, and that NICU babies are the biggest price tags he sees, sometimes multimillion dollar claims. He says gene therapy is still too infrequent to be a big category so far. ### Where should an employer start to lower health plan costs? Spencer Smith starts with the pharmacy contract, where he says there is often 35 to 40% savings from day one with little to no disruption to employees. Donovan Ryckis agrees that pharmacy is the easiest place to start, but says data acquisition often has to come first for groups that only receive limited claims data from a fully insured carrier. ### Does lowering health plan costs mean cutting benefits? No, according to both speakers. Spencer Smith calls it a misconception that lowering cost means making the plan worse or disrupting access, and says it is about paying fairly for services. Donovan Ryckis gives examples such as no-cost drugs through international sourcing and free advanced imaging through a direct contract. ### How can a biosimilar lower pharmacy costs for a self-funded plan? Spencer Smith gives the example of Stelara, which he says might cost $120,000 a year, while a biosimilar could be $6,000 a year if the employee chooses it and the physician approves. He says one member switching can save the plan six figures a year, yet the employee may never have been offered the option. ### What should an employer ask its broker at renewal? Spencer Smith suggests three questions: why are you bringing me these particular recommendations, how and how often are you paid, and what is the long-term strategy beyond this 12-month cycle. Donovan Ryckis adds that broker compensation for each carrier should appear on the renewal spreadsheet while the decision is being made. ## Full transcript [00:00] Would you ever use your car insurance to pay for gas or to pay for tire rotations? And they laugh and go, "Hey, that's kind of a dumb question." Of course, the answer is no. [00:00] Found there was an appetite for that information more so than I even... [00:00] The answers are so dense that they almost make the understanding of it harder to obtain. [00:00] Incredulous about who's actually advising and why. There's also a misconception, Donovan, that to lower cost, you have to make the plan worse or you have to impede care or disrupt access. And that's absolutely the opposite of the truth. [00:28] Welcome. Welcome to The Business of Benefits. The Business of Benefits is your no-BS, no-sales guide to real solutions. No gimmicks, just the truth about how to take control, transform your benefits, and care for your most valuable asset, your people. If you're tired of the same old sales pitch and you're ready to rethink your benefits, this podcast is for you. The truth is out there. Are you ready to hear it? [00:56] Donovan Ryckis: All right, everybody. Welcome back to The Business of Benefits. I'm Donovan Ryckis, CEO of Ethos Benefits. Today, we had on Spencer Smith, who is the SVP of sales at ParetoHealth, a captive, but he's also the host of Self-Funded with Spencer. So, if you've been in the industry or been curious about healthcare strategy for a while, I'm sure you've probably heard from him. We covered a wide range of topics. I really enjoyed this conversation. I hope you guys do as well. Let's get into it. [01:24] Donovan Ryckis: All right. Today, we have Spencer Smith. I've known Spencer for a little while. I've been listening to him online even longer. Of course, the host of the Spencer Smith podcast. But before that, you were kind of doing YouTube videos. Well, anyway, for the industry. [01:24] Spencer Smith: Yeah, that's five years ago now. I made my first piece of content for LinkedIn on whiteboarding stop-loss, of all things. That's where I got the start, got the idea, and found there was an appetite, Donovan, for that information more so than I even suspected when I started. And it's led me down this path now of all the stuff I'm doing as a result. [01:53] Donovan Ryckis: Cool. Well, tell us a little bit about your background in the industry. I know you've held a couple different roles. You obviously do a lot of education and stuff. You do a lot of the conferences. So, you're keeping up with all the innovations and changes in the industry. So, tell me about your kind of starting point, your path. [02:21] Spencer Smith: Yeah. Well, it's funny. I'll start right now because I think it's interesting. 17, 18 years almost into this career, I feel like I know less about the industry now than I ever did because I get exposed to more. And you realize, man, once you start turning over stones, you just realize how many stones are out there. But I started as an analyst at a company called BenefitMall, and I was there for six years, I think. And I've always been somewhat analytical in nature. And it wasn't until I moved to the broker side as an analyst that I realized, hey, there's this thing out there called self-funding that's kind of interesting, and most big employers do it. And that's when Pandora's box opened up for me. But over the last decade or so, I've been in the world of what we call stop-loss insurance, which is the type of insurance that, you know, but if the audience doesn't know, it's what a self-funded employer purchases on the backside to insure big, big risk, large unexpected risk that hits the plan, so they have protection from that. And then my current job is SVP of sales for ParetoHealth. And we'll explain what a benefits captive is, I'm sure, at some point, but we are the largest benefits captive in the space. [03:17] Donovan Ryckis: So as a good conversation or knowledge base, I always find different consultants, different people in the industry kind of explain this differently, and I always say the term self-funded is created by the insurance companies to scare the crap out of you and just sound terrible. Fully insured seems like a warm blanket. Self-funded, you're out on the streets. And we know through experience it couldn't be more different. You always have insurance. You're choosing that level of insurance. Usually, if it's your first year, you're choosing more insurance than you had prior, fully funded. But how do you explain that when you're starting a conversation with an employer, the difference between fully funded, self-funded, and kind of mitigating those concerns and getting them to understand you can design around them? [04:11] Spencer Smith: Yeah. I think there's a couple ways you can explain it. I think the best way is an analogy, Donovan, and you probably use this analogy sometimes, but we'll ask employers who are fully insured today, would you ever use your car insurance to pay for gas or to pay for tire rotations? And they laugh and go, "Hey, that's kind of a dumb question." Of course, the answer is no. But I think the same idea holds true in health insurance. It doesn't seem most efficient, right, to use your health insurance to pay for labs or x-rays or things that you can pay for in cash very easily. And if your plan covers all these little small things and insures them, what do you think's going to happen to the premium as a result? What would happen to your car insurance premium if it covered tire rotations and gas and oil changes? It would probably triple or quadruple. And so when you get that basic understanding of, I'm kind of overinsuring that plan as an employer, maybe there's another way to do that. And the other way to do it is this thing we call self-insurance, which now lets them pick the level of insurance they want to purchase, and then they use their own P&L, their own cash, to pay for the things that they can afford to pay for. It just becomes a much more efficient equation as a result. And I like to think of it, and do you ever explain it, Donovan, as guaranteed cost versus variable cost, right? So if I am fully insured as an employer, it's all premium. No matter what the outcomes are, good or bad, in terms of consumption, I'm going to pay that premium no matter what. When I self-insure, now the majority of my plan is things that I can control and I can see, and I'm using cash to pay for most of those things as well. So, it just becomes infinitely more efficient if done correctly, which I think is the important caveat there. [05:59] Donovan Ryckis: Yeah. No, I love the car insurance example. I've heard it. I've not used that one. The way I think of it in my head, as a former securities adviser, is always in securities and retirement savings and that kind of stuff. With what you're trying to do with a healthcare plan, you're trying to create predictability, sustainability, affordability, right? So, I always think of it as trying to retire either on a savings account, which would kind of be your fully funded, versus a 401(k), right? So, if you put all your money in a savings account, you're going to get half a percent, a percent. It's going to be safe. There's nothing to worry about, there's no loss, there's no concern, but you're not going to be able to build a sustainable retirement. Whereas some people think the stock market is risky, maybe. But the 401(k) creates a structure for people to invest that in a diversified way that mitigates that risk, but also gives them a retirement. American workers are not going to be able to create a retirement off a savings account, right? And I very much view a fully funded plan, and the profitability, sustainability of a healthcare plan in a corporation, the same way. You're not going to be able to do that in a savings account. You're going to have to have a 401(k) structure that allows you to make those... [07:26] Spencer Smith: Yeah. And I think to extend that analogy, because I've heard it applied to captives, Donovan: the diversification of a portfolio for people that are actively investing and as knowledgeable as you are. I'm going to pick some sort of mutual fund, exchange traded funds. I'm going to blend a portfolio that on average over time is going to make me more money than if I were individually picking stocks. I think a captive allows you to do that because you diversify the portfolio of employers and their risk pool as well, and you should have more predictable outcomes as a result of that. [07:53] Donovan Ryckis: Yeah. Yeah. I love it. So let's talk about your videos and your online presence. So, you talked about those videos you started with five years ago, which is crazy because I remember watching those, and I want to say it seems like it was longer than five years ago just because... [07:53] Spencer Smith: It was 2020, July. [07:53] Donovan Ryckis: Yeah. Just the transition of our business and where we were back then and where we are now. It seems like it was a lifetime ago. But those videos and also your new ones, I actually play them for my team now, the new series that you're doing. At the end of a team meeting, we'll watch those videos. They're short. They're like five minutes. But what it does is it engages my team in conversation. This last week we did one on lasers, and we were talking about lasers on renewals we just did, and why did we do that? Why do we choose it? What were our options? How did that laser work? And it's been a great conversational tool to give everybody on the team that level of education, understanding with how we're making decisions on the top end. [08:48] Spencer Smith: Well, I did them originally, Donovan, because something like that didn't exist, at least that I could find. And me learning the world of stop-loss insurance on my own within an organization, Sun Life, where I really was taught stop-loss, I had to go ask questions. I heard the term darkened doorway. Sometimes you just pick other people's brains to pick up elements of it over time. And I realized there was a void, if you will, of really formal, I would say conceptual and chronological, education on the subject. And so I just thought, hey, let's produce these. Maybe people are interested, maybe they're not. I found out they certainly were. And to your point, the fact that you're showing some of these videos, whether it's the old ones or the new ones, to your team just proves to me the idea that nobody else is doing that. So if you just find your niche that you know well and you give freely the information or the expertise that you might have, the market will be receptive to that. And so that has led me down a path, man. I don't know how many videos we're up to now, but we'll probably cross a million views on YouTube this year. And it's all related to self-funding and stop-loss, as crazy as that sounds. And it just kind of reinforces why we continue to put effort and spend money and time to do it. [10:10] Donovan Ryckis: Yeah. No, I think it's great. I remember learning self-funding prior to those videos. Even in 2020, I was using that to show other members on my team, but I remember learning it on my own and going through the CSFS, Certified Self-Funding Specialist, and the explanations are in there, but the answers are so dense that they almost make the understanding of it harder to obtain. And then when you get it, you're like, that's really a simple concept. Did you have to go about it in the most complicated way? It's that simple. I get it, right? But we're really bad in the insurance... [10:39] Spencer Smith: Mastery is true, mastery is being able to simplify it, right? So I've done the CSFS myself, man, and I agree with you. Incredibly dense, very ERISA-heavy, valuable information, but to your average person who's not as initiated as us in this space, man, it's going to seem overwhelming. And so I think it's incumbent upon folks like you and me that have spent our careers in the space to make it simple and synthesize that information for somebody that's never heard it before, so they walk away somewhat transformed to go, you know what, I need to understand this because this is valuable to my business, so I should. If we complicate it, man, we're just going to run them away, and then it's actually probably to their detriment that we complicated it too much. [11:35] Donovan Ryckis: Yeah, agreed. And I think a lot of that's, I see that on a couple different sides of the business as we're actually out there practicing and working with prospects. To some degree, I see brokers who just talk negatively about solutions because in truth, they don't really understand them. And the same when we're talking to prospects, because the broker negatively said something about a solution without a proper, thorough explanation. What do you see? What do you think's changed since 2020, let's say, as far as broker education and ultimately bringing this education downstream to plan sponsors and effectively communicating the choices that they have? [12:33] Spencer Smith: Our industry has finally caught up. People like to consume information in short form and video form. That's where most of the young generation, Generation Z and maybe the millennial generation, respond to. I'm a geriatric millennial, I think, technically. So, I'm still technically millennial. But that's how I consume information. I want it to be short, digestible. I want to leave with a little bit better understanding of a subject, but I don't necessarily want to read an essay or a white paper or open up a textbook that's 200 pages in order to find out that information. So, I think to answer your question directly, we as an industry have just started to adopt the way that other people consume information around real estate or financial services or whatever, and we're finally catching up. And I think it's good for the industry as a whole, which is making employers go, "Oh, wow. That was useful information. I should follow this guy and I should learn more." And then, could I do that for my plan? Ultimately, that's probably the question we want them to ask. And then what are they going to do, Donovan? If it's you producing the content, they go, "That guy, Donovan, or Chelsea, man, I really like what they're having to say. They're the one I associate with the expertise. Let me go hire them to help me do what they're talking about." [13:28] Donovan Ryckis: Yeah. I imagine that's served you well as you kind of change roles. [13:28] Spencer Smith: Well, has it served you? I have to assume it served you well as well. [13:28] Donovan Ryckis: Yeah. Yeah. Well, we're getting there. Honestly, from the beginning, seeing you do it, I'm like, I should do that. I still haven't done it really consistently. [laughter] There's so much going on. [13:58] Spencer Smith: Well, but think about, I mean, I get it, right? There's an effort component to it, and to be consistent over a long period of time is very difficult. If I hadn't hired a producer to help me operationalize it, I probably would have quit. But the reality is, seeing the fruition of doing it for a long enough period of time, now it's to such a point where I can't stop doing it, because I think it would be a disservice to my career, but I think it would be a disservice to the marketplace, who is desperate for this information. And if I'm the one that helps deliver it, cool. If it's somebody else like you or Chris Hamilton or you name a person, great. We all have our own lanes where we're slightly different in what we understand and what we know and the way that we communicate it. But I do think it's important that we continue to do it. Otherwise, somebody else will fill the void, right? And somebody else might get the benefit of doing that. [14:26] Donovan Ryckis: So on your end, I imagine the majority of the consumers of your content are on our side of the business, but of course they're opening their eyes up downstream to all the solutions. Because on your podcast, you've had just about everybody on that's doing something interesting that's changing the industry, new solutions, just amazing, amazing guests. [14:54] Spencer Smith: Well, you would think it. I don't get deep demographic detail, but I do believe obviously it's a lot of consultants. But it's funny. I'll show up to employer events where we're educating employers, and I'll have an HR person come up to me and say, "I've been watching your podcast for years." And it's really weird because I don't quite know how it ends up landing in their inbox or on their feed, but ultimately there's actually a lot of employers, and I'm sure you suspect this, which is why you're doing what you're doing. There's a lot of employers that really want to know this stuff, and they don't know where to get it. [15:21] Donovan Ryckis: Yeah. No, I agree. I think the content and the education need to be brought downstream, devoid of the acronyms and the complexities, and brought forth in a straight-up way, and also examples of case studies and application, pros and cons of everything. Because I just hear all too often, this doesn't work, that doesn't work. It's kind of ridiculous. [15:49] Spencer Smith: Well, how often have you heard, "Oh, we were self-funded 20 years ago and it didn't work. I'll never do it again"? Do you hear that quite a bit? [16:16] Donovan Ryckis: Yeah, I lost a case in February because of it. And I was like, we had a stop-loss renewal and then with a cap next year. I was like, not only is it cheaper this year, worst case scenario, if everything went terrible again the following year, it's still cheaper. And I could probably get a renewal to where the following year it would still be cheaper. Worst case scenario, all things gone wrong. So, at some point you have to look at it like the stock market. You can't be like your grandmother that says, that's risky, don't ever do that. We have to design a way around that and create some sustainability, some predictability in that, too. [16:45] Spencer Smith: Well, and I think it's for you, right? It's helping differentiate as a really true trusted advisor and a consultant versus what maybe the experience they had with what you might call a broker in the past. There is a spectrum of abilities on both sides of the equation here, and it's really important for an employer to find a trusted adviser that they believe, one, knows what they're doing, but two, that they're actually bringing solutions to the table that are going to benefit them, and not necessarily what's best for the consultant financially. Which is always, I think, the risk. The lack of trust comes around, well, I got burned because somebody brought me this recommendation, and then I found out they were incentivized financially to bring it to me. And so do they really have my best interest in mind, or are they doing what's best for their business? I think that's created a little bit of, what's the word, incredulous, about who's actually advising them and why. [17:40] Donovan Ryckis: So, broker versus consultant, what's your quick take or simple explanation when you're talking to a plan sponsor? Because it's a delicate balance. For one, they know, like and trust their current broker, right? And they should, right? I'm sure that person's not intentionally doing the wrong thing. But at the same time, I always try to communicate to them, they may be good, they may be nice, but you wouldn't hire an employee and incentivize them for the opposite behavior that you're looking to get out of them, and your current arrangement just doesn't allow for that. But what's your take or explanation when you're sitting down with a plan sponsor about that? [18:36] Spencer Smith: I mean, the easiest way to think about it is a broker shops insurance. A consultant collects information and brings solutions to the table. And that's really the easiest way to think about it. And there's nothing wrong with a broker. If you're a seven-life group, you hire a broker to shop Blue Cross or UnitedHealthcare. That's what you're going to get, and that's what you probably need. There's a point, though, where a consultant, somebody that's really digging into the data and bringing ideas, but also listening to you as an employer, your own needs, what your specific goals are, and doesn't just throw, "I know what to do for you. Here it is." You're going to have to obviously make sure they're listening to you. But I think the industry is demanding the transition from broker to consultant, because if you see what's happening in the fully insured market right now, I'm sure you see it in your local market as well, it's somewhat of a bloodbath. And I think we're at a point where most employers have reached their breaking point in terms of being able to continue to do what they're doing over and over again, where now they're going to need a consultant instead of a broker, at the state of healthcare today. [19:30] Donovan Ryckis: Yeah. I think one of the simple tests, and one of the things I always mention, and again, this is coming from being a financial advisor, but the one thing I've never ever seen sitting with a prospect is any broker materials that showed their historical performance on the plan, right? Have you ever seen that, where you sit down and the first page of the renewal is the past five years and the premium and the enrollment and the PY? I still have never seen it, and that's something we do every single time. And I think that's the number one thing. They're brokering a different risk transfer year by year by year by year without the consulting aspect of, hey, let's look at how this has been performing to figure out how fast you need to fix it. [20:29] Spencer Smith: Yeah, absolutely. I think five-year lookbacks are always important, and especially, let's say you got hired, you implemented whatever your strategy was on their behalf. You should be looking over a three to five year horizon to say, are we delivering the value that we suggested we'd be able to? So to me that's really the proof. And we are in the risk business, so there are certain things outside of everybody's control, which I have to accept, and I'm sure you do as well. But the averages, the overall performance, even if there's a blip one single year out of those five years, if you're still on a more sustainable trajectory, you flattened or lowered that curve, that is proof that the strategy is working. You're not going to be able to prove that necessarily in a single 12-month period all the time. [20:56] Donovan Ryckis: Yeah, for sure. So, let's talk about captives and start from the beginning. Captives are a funny thing, because they're all different and they all operate very differently. Some of them have proprietary stacks where you're essentially buying a healthcare plan and stop-loss and captive. Some of them are just captive. Some of them run separate corporations, different plan years, all kinds of different things. But let's start from the beginning. What is a captive for? [21:23] Spencer Smith: Well, so I'll give you the short answer, and then I'll give you an analogy, because again, we want to try to keep it simple. But the short answer: it's a community of like-minded employers that band together to get scale that they may not have on their own. And that scale gives more predictability year after year on the renewals, as well as the stacks that you described, the cost containment stacks. And they're all different by benefits captive or group captive. But I think of a captive like, if you've ever been bowling, which I'm sure you've been bowling before. I'm a pretty average bowler. So sometimes I get a few pins, sometimes a strike, sometimes it's a gutter ball. What a captive does is bring those bumpers on the side, where it still doesn't guarantee a strike, but it's going to prevent you from rolling a gutter ball in any single year. Think of a captive as your bumpers on the side of a bowling lane. [22:17] Donovan Ryckis: I like that. That makes sense. [22:17] Spencer Smith: You go write it down if you think it's good enough. I keep trying analogies, man. You never know. But I feel like the bowling one, everybody's been bowling, and it works because it's hard for us, man. And it's hard for you. I'm sure you're coming in with this thing that's complex. And if I were to whiteboard layers and all this stuff in front of you, it'd go in one ear and out the other, and you'd go, "That sounds too complicated. I can't do it." But if you really help them build the story and the framework of what it is for and why it benefits them to look at one, then they're going to lean in. They'll get into the technical stuff as needed. So, we really have to be better storytellers, ultimately, depending on where we sit, because the story is what's going to compel them to listen. [22:43] Donovan Ryckis: So, stop-loss renewals are 12 months at a time, and the way I always think of it is your captive is covering those in-betweens for the plan years, to make sure you're not blowing up on any particular renewal for a condition. So, let's talk about that. What kind of things might happen that cause issues, conditions, different things you've seen that can cause a stop-loss policy to renew substantially, I guess? [23:40] Spencer Smith: Yeah. And there's a number of things. If you follow Sun Life or HCC, there's a number of great reports out there on their blocks of business, and almost always cancer is the number one category in terms of frequency of high cost. You hear gene therapy a lot, but gene therapy, quite frankly, is so infrequent that I don't think it's materialized in such a big category to date. But the random ones, man, are really the most costly ones. NICU babies are by far the biggest price tags that I see year after year. Again, infrequent to a degree, but when they are on a plan, these can be multi, multimillion dollar claims. And so, I think an employer just has to think about stop-loss in a bucket. It's going to be a relatively small percentage, a minority share of their plan. What contractual protections are you buying in the event that something goes really, really wrong? And then the majority of your focus should be on the 60 or 70% of your plan that's actual claims. Because if you do a good job controlling those, not only are you going to lower your overall plan cost, but your stop-loss should follow suit. So buy protection for worst case scenarios, but then focus on the controllable items, which is your claims [inaudible] itself. [24:36] Donovan Ryckis: So I think one of the things I've seen with captives, maybe a better way to ask this is: plan sponsor, currently fully funded, maybe they've started to look back five years and realize, wow, I have double-digit average trend here, and it's not sustainable. Going five years forward is typically something we look at and try to have that conversation with them. But what do you think are the starting points, conceptually, and maybe cost containment solutions as a starting point? Because you seem to be of a similar mind: this isn't an annual reactive thing. This needs to be a three to five year business plan going forward. I think of it as an individual business unit within that business, usually being the second or third highest cost. What's the starting point for you, either conceptually or taking action? [25:33] Spencer Smith: Well, so conceptually, it's some of the things we described before, right? It's really being in the driver's seat and not being subject to a system that's designed to allow costs to go up over time and actually is incentivized to allow them. But then I would dig into pharmacy data, and I'd love your opinion here as well. But I think the pharmacy contracts, especially if they're fully funded, if they realize how much they're spending on pharmacy, how little to none of the rebates are coming back into their own pocket, how those claims are then being utilized as the pretense for your increases as well. If you start with your pharmacy contract, chances are there's 35, 40% savings on your pharmacy from day one with little to no disruption whatsoever to the employee. So that's where I would start. So I'd be curious to hear you comment on that. [26:28] Donovan Ryckis: No, I agree. Pharmacy is the easiest place to start. There is almost no disruption at all. And if there is, it's usually for a logical clinical reason that we don't understand, but we can certainly explain it with the PBM. I think the number one step that we usually have to transition people to, maybe even before we can fix that, depending on where they're at, is just data acquisition, right? Sometimes clients get put into a place where they're fully funded in a state that releases an MLR in one page of data. And when they're also pushing high renewals, to some degree, if we're looking for alternative stop-loss quotes, those stop-loss carriers have to take shadow underwriting into consideration, where they're almost taking the assumption that these carriers are doing, and then they're trying to do an AI or a PBM database checklist. So certainly I think if a plan sponsor gets put in that situation and they're not able to fix the PBM, at the very least that solution should have full data acquisition. And we've been able to work with the carriers on plans where they typically don't want to do it. We've been able to export raw data files to our own analytics. So then we're completely freed up to start the following year. [27:52] Spencer Smith: Yeah. I mean, you finally get a look under the hood, right? Until you take the step of being self-funded, you won't get the depth of data that you're looking for to actually make strategic decisions. And so, sometimes it does have to be a little bit of a leap of faith, where now you have a spectrum of possible outcomes because there's variability in being self-insured. And if the worst case scenario in self-insured is a palatable distance away from what you're guaranteed to get today being fully insured, but you know on the other side of that is a richness of data that's now going to inform better decisions over time, you have to be able to take somewhat of a leap. Shadow pricing happens. AI tools are out there. But there is no perfect way to move a group from fully insured to self-funded if they don't have any data at all. And this is where the employer really needs to understand the why behind what they're doing and be able to accept a little bit more risk as a result of that. [28:46] Donovan Ryckis: Yeah, I think that's really one of the first questions a plan sponsor should be asking when they're getting to this point where they're realizing, hey, this isn't working. I always call it, they're moving to another carrier to do the same thing somewhere else. Fundamentally, they didn't address any of the claim issues. Which, I don't know about you, but I didn't realize for a long time that I really had to explain what a claim is. Have you experienced [laughter] that at all? [29:14] Spencer Smith: I mean, not, maybe, that level of simplicity, but maybe it's an unfair presumption that I have that people understand what claims actually are. But maybe that's actually the reason why we're in this predicament, is a lot of employers don't even understand that component. So, do you see that? [29:41] Donovan Ryckis: Yeah. Yeah. Let me tell you what I mean. So, when you and I are talking claims, we understand that we're talking... [29:41] Spencer Smith: A dollar amount requested for a covered... [29:41] Donovan Ryckis: When you're talking to a company and you say reducing claims, what I found, or my perception of this a few times at least, has been they're thinking medical conditions. So, they're thinking of their population, and they're thinking we need to reduce medical conditions, which is obviously not the goal at all. We're talking about the supply chain, the request for dollars, fair reimbursement prices, all that kind of stuff. And sometimes what they're hearing is we're trying to change what their people are doing, where they're going, how much care they're getting, getting them healthy. That's not the name of the game. We're fixing the back end. [30:38] Spencer Smith: Yeah. Well, that makes sense, man. And what it really is, is paying fairly for the services provided. And you don't know whether you're doing that right now when you're fully funded. But I think there's also a misconception, Donovan, that to lower cost you have to make the plan worse or you have to impede care or disrupt access. And that's absolutely the opposite of the truth. [31:06] Donovan Ryckis: Yeah, that's a really great point. And I find that's something that we have to actually state, because they're coming off at least a 20-year history of, anytime they get a high renewal and they need to make the plan cheaper for the company, they have to take something away from the employees. They have to add more deductible. They have to put them in a tighter network. They have to increase their premiums. And that is a starting point where we always have to stop and explain it. Fundamentally, if this is going to work for the plan at the end of the year, it's because it worked for the employees first. It was a good result for them, and they wanted it, and they did it that way, and they got cheaper drugs, no-cost drugs from international sourcing. Maybe we did Green Imaging and they got free advanced imaging, right? All these solutions, they work for them, and then at the end of the year they work for the... [31:34] Spencer Smith: Well, yeah. I mean, we're at a state where the average, I think, family premium is somewhere in the neighborhood of 25 to $26,000 annually. And we've gotten to that point because I think we've made it difficult for employees to actually access care when they need it because of the financial constraints. And so therefore, what happens? They delay care. They don't get care at all, and then something terrible actually materializes. Then they're forced to go get care, then it's really expensive for the employer and the employee too, because now they're forced to pay maximum out-of-pockets and all those things. If they had just made it easier to go get the routine care or the early onset care they needed, because they're removing financial constraints and removing deductibles and copays and coinsurance, that's actually better for the plan, and obviously it's better for the member as well. So we have to retrain employers to stop thinking consumerism is cost shifting to the employees and giving them more skin in the game. The more skin in the game is actually much more expensive for... At least in my humble opinion. [32:30] Donovan Ryckis: Yeah. No, I agree. And I find so often there's so many conceptual things that you have to try to shift them away from, just because when you're in a fully funded model, there are no opportunities to make these kinds of decisions. So the only lever to pull is give employees more skin in the game. [33:00] Spencer Smith: Yeah, again, because it's all insurance, it's all premium. What we're really talking about, you mentioned Green Imaging, that's an excellent example: direct contracts for images, MRIs, things like that, where people actually are incentivized. And I'm sure in that situation the out-of-pocket is completely waived if they just go here instead of here. Or sometimes the facility is exactly the same one they would have gone to anyways. They just have a better contract in order to access it. Well, that is really simple. That employee now will go get that MRI there. It costs them nothing, and it's probably a third or a fourth of the cost it would have been had they used the insurance reimbursement model instead. But people don't necessarily understand you can disentangle or separate insurance from access. And they think Blue Cross logo, UnitedHealthcare logo, whatever it may be, equals access. And it's actually more of an impediment to access, again, in my opinion. [33:56] Donovan Ryckis: Yeah. No, I agree. The other thing is a lot of those programs come with so much assistance in healthcare delivery. That's a complicated and confusing process, to figure out where you're going to get advanced imaging. So having these types of programs is often such a huge assist to employees from an advocacy point of view, to say, well, here, there's a center three miles from your house. Here's a voucher. That's all you need. You're good. Right? Instead of making an appointment at the hospital and going into a hospital, which no one ever wants to do, just to empty out your checking account. [34:55] Spencer Smith: And go back to pharmacy for a second. You mentioned international sourcing as a way to procure drugs through, like, Canada for a fraction of the cost we might pay in the States. The other thing is there's things like biosimilars that exist, where Stelara might cost $120,000 a year. There's a biosimilar for the employee, if they choose to take it, and then obviously the physician will need to make sure that's approved. But that biosimilar could be $6,000 a year. So you have one person on one drug that could get a biosimilar and save the plan six figures a year as a result, but they may not have ever been offered that before. They may have no idea that actually exists. And so until you find a partner that knows that information, has the network or the framework set up to be able to make that transition, they're going to be stuck. The employee doesn't know that I'm taking a $100,000 a year drug. They know what their copay is, and that's all they know. And so they go, "Well, it costs 20 bucks a month," or whatever the case may be. "Why do I care?" Well, it's costing your employer $120,000 a year. And by the way, when the renewal comes in and your contributions go up, do you realize there's actually an association between those two things? And people will go, why are my contributions going up? Well, the reality is there's a handful of people that, probably through no fault of their own, are costing the plan a significant amount of money. And until you know that and can address it, it's going to continue to be a problem. [36:18] Donovan Ryckis: Yeah. I had a client on stage, and we did kind of a review of his plan after three years. Man, this talk can be great. One of the things he always told me, he's like, when we started doing this plan and you're explaining everything, you kind of made it like it operates just like the plan you're used to, right? And I think you have to, to some degree, because it's hard. He's like, that's not how it works always. He's like, it works way better. I'm like, I know, but nobody's gonna believe that. Hey, it works better, and it's cheaper for you, and it's cheaper for the employee. I was like, I have to start from somewhere, or you're going to blow me out the door thinking I'm crazy. So, I have to tell you, hey, all the functions, here's how your plan operates. There's these four parts. You're going to have all those same four parts. We're just going to measure them independently, and that way we can push each one for performance where we need it. And if we have problems, we can swap out one and not disrupt the employees. But I almost feel like you have to start from a point of, hey, this is the exact same thing. We're just going to make it make sense for you. [37:41] Spencer Smith: Exactly. Well, and I think you also have to accept that you have to meet employers where they are in this, quote unquote, journey, right? I'm sure there's some incredibly innovative things that you want to do with every single client that you end up picking up. The reality is most of them are probably not going to be ready in year one to do those things. So you say, "Okay, here's where we're trying to go. My job is to get you there if you're open to it. But today, maybe we keep it as least disruptive as possible to your employees." You get comfortable with the idea of being self-funded in the first place. Next year, maybe we talk about adding this thing or moving to a narrow network or a high-performance structure, whatever it may be, and we'll increment you over time. We get criticism, at least for us at Pareto, because we're pretty flexible in what we allow, meaning TPA, network design, PBMs. We have incentives for things that we think work exceedingly well, but we don't require them to do all of those things from day one, because we recognize that most employers are not ready to cut the cord completely and go all in. That's a rare type of employer, actually. And so, you have to work them there over time and accept that not everybody's going to do exactly what you believe is optimal. And that's also okay, because at least they're doing 70% or 80% of what you might want them to do. [38:34] Donovan Ryckis: No, I agree. And I've certainly in the past, many years back, pushed a client to go all the way with all the responsible cost containment solutions, and they've worked financially, but they just weren't ready to hear the disruption from employees, and they weren't willing to be upfront with communications, all that kind of stuff. So, we've learned. Financially, I can know this is the best thing, and we just lay out those educational pieces now, and when they're ready for it, they take it. We start much slower than we used to. [39:02] Spencer Smith: Yeah. I mean, they have businesses to run, man. They're in the healthcare business whether they like it or not, but that's not their core business. And so, they have a business to run, employees to think about. And so, you can show them a way to save 40% on their healthcare spending in year one. That doesn't mean it's actually going to be received well by the population. And then, does it disrupt their actual business, their core business that they're doing? And if so, maybe that's not the right recommendation at this time. [39:29] Donovan Ryckis: Yeah, I agree. [39:29] Spencer Smith: You're smiling. I feel like you've been there a couple times. [39:29] Donovan Ryckis: Yeah. Yeah. I've been there. It was about five years ago. One or two of them. So, going back to plan sponsors, just to close us out from a conceptual point of view. Plan sponsors going up for renewal: three things that they should do different, or ask their broker to do different, or question during this renewal process as they come to their breaking point. [39:59] Spencer Smith: So, a fully insured plan sponsor, or... [39:59] Donovan Ryckis: Let's say either. Let's just say either, conceptually: how they're doing the process, what they're asking for, what's being measured, what steps to take. What are your three things that they should be taking into consideration? [40:27] Spencer Smith: Well, I think the first I'd ask is, why are you bringing me these particular solutions? I think that's the fundamental motivation behind what a broker is providing as recommendations. I'd like to understand the why. The second thing I'd ask, which I know some people are uncomfortable asking, is how are you getting paid in this structure? So, where are you getting paid, and how often are you getting paid? I think it's another maybe uncomfortable question to ask, but a very important question for plan sponsors to ask, because then that might suggest where the incentives actually lie. And that's perhaps going to strain the trust. But if you have nothing to hide, or you're very transparent as a broker, you should be fine answering that question. And I think the last one is, what is the long-term strategy? You brought me these ideas today. Why, what is it getting me to over time? Why are we doing this now? And what is it setting me up for in the future? Because this myopic thinking of 12-month purchasing of healthcare is a big reason why I think we're in this predicament. And if you don't have a long-term strategy, I think ultimately you're going to get suboptimal results. [41:23] Donovan Ryckis: I agree. I love those. I always say the funny thing is, your broker knows how much everybody in your organization gets paid, and you hired them, and often you don't know how, when or why they would get paid more or less. [41:50] Spencer Smith: Well, it's not to suggest they shouldn't. Your skill set, or people like you, your skill set is very valuable in the market, and you should be compensated fairly for that. But knowing how you get paid and what you get paid is, I think, an easy question to be able to answer if you're not trying to hide it. [41:50] Donovan Ryckis: Yeah. So, the CAA, this is part of the CAA, but I find that nobody's doing it correctly. If they're getting a compensation disclosure, it's after the fact. It still has fine print. It still has wide ranges of bonuses, right? So, I always say, hey, if you had a renewal spreadsheet, that should be the bottom line. What is the broker compensation on carrier A, carrier B, carrier C? Right there as you're making the decision. So it's upfront. It's clear. Everybody's on the same page. [42:44] Spencer Smith: And if there's a difference, just explain the difference. Why is it a little bit higher here? And I'm sure there's an easy justification for that as well. [42:44] Donovan Ryckis: Yeah. And sometimes it is. I know for us, depending on how big our scope of work is, more scope might mean more compensation, but that needs to be out there in a conversation for the employers to have. Closing thought on captives, exploration, understanding, or Pareto? [43:12] Spencer Smith: Well, I want to close on something you've probably heard before, but I don't know if the audience has heard before. I remember we talked about the acronym. We're trying to avoid acronyms, but POSIWID is one of my favorite acronyms. And what it stands for is: the purpose of the system is what it does. And what that means is, whatever outcomes you're getting, that's why the system exists. And so if you're in this world of fully funded, what are the outcomes you're getting? Rising costs and often worsening plan designs year after year after year. So you have to accept as an employer that's what that system does. And if you don't like those outcomes, then you have to decide, am I ready for a different system or a different model that will deliver the outcomes I'm looking for? And I think most employers are at that fork in the road right now, and they've just got to be willing to lean into something new. [43:39] Donovan Ryckis: Yeah. No, you told me that. I've used it so many times since. [43:39] Spencer Smith: Good. Good. [43:39] Donovan Ryckis: I recorded two podcasts this week on other people's shows, and I used it both times. So, it's part of my conversation flow now, because when you're going through it and they're starting to have questions, the rebuttal thought is, well, doesn't my insurance carrier want to keep the premium low to keep me as a client, right? Well, doesn't my commissioned broker want to keep it... Well, has it been working? [44:06] Spencer Smith: Yeah. Is it working? That's a simple question. If it's not working, then you're in the wrong system. [44:33] Donovan Ryckis: Yeah, either it's been failing for 10, 20 years and they're really bad at doing that, or it's just not the purpose of it at all. [44:33] Spencer Smith: That's not the purpose of it. Well, I'm glad. I'm flattered. I obviously didn't come up with POSIWID, but I feel like this application to the healthcare model, in this $4.5 trillion sector that we operate in, I think it couldn't be more true. And so, fire away, man. And I hope everybody that listens to this might actually find it valuable as well. [45:00] Donovan Ryckis: Awesome, man. Spencer, thanks for joining me today. I really appreciate it. Thanks for sharing all your knowledge with the audience. [45:00] Spencer Smith: Thanks for the invite, man. Appreciate it.