Considerable commentary seen lately regarding the demographics of the potential continued domestic employee population in Bermuda. I say, potential, because it is a statistical fact that unemployment among Bermudian residents is high and continuing to escalate upward. Job loss for anyone is real, financially painful, and emotionally devastating. In most cases, redundancy reality means complete loss of those taken-for-granted employee benefits: no future employer pension contributions, no group life insurance, and most concerning of all, no health insurance.Unemployment statistics released recently (only tabulating numbers that are many months behind the current unemployment picture) estimate that there are more than 3,500 Bermuda residents without jobs, and a further 6,500 who are underemployed. Redundant workers have no employer provided health insurance while underemployed workers may have reduced to no health insurance benefits as well. This means that the Bermuda commercial health insurance pools now have 10,000 less people to insure, along with unknown lower numbers derived from the departure of thousands of guest workers. What impact does this change have on healthcare provider’s revenue cost benefit and health premiums pricing? We shall see.Back to the story. In part I of this article, we began the narrative of a large trade organisation that when faced with increasing medical insurance costs, developed a brilliant strategy. The organisation decided to jettison its commercial health insurers and set up their own self-funded health insurance pool. They had the numbers of employees (estimated at more than 10,000), the right demographic groups (mostly, single, relatively healthy construction workers, in 22-40 age group), and the cash to fast track the entire scheme.“A year later, the organisation’s self-funded insurance company was in gear. All member owners dropped higher rate charging commercial insurers, and switched. Health premiums were low based on actuarial assumptions of no major employee health catastrophe (an outlier) early on, allowing them to price competitively under commercial health insurance premiums and still have carry forward cash surpluses.Healthcare premiums poured in steadily for a year and a half. Care costs were relatively small and stable. Prospective information looked amazingly good. The group proposed planning to review portfolio managers for investing the estimated cash surplus.”Suddenly, a catastrophic medical disaster, very large in scope for a small self-funded health insurance pool, struck. Several employees were affected by life-threatening debilitating illnesses, with more than one individual imposed into a persistent vegetative state. Medical costs on a long-term basis for these seriously ill patients ran rapidly, in a matter of months, into millions. The self-funded case reserves suddenly faced a cash flow emergency. The low health premiums assessed under the original actuarial projections had to be revised upward immediately for all members, possibly palatable in the short term, but two additional events destroyed all assumptions and positive projections.One. The economy was rapidly decelerating, and construction projects were drying up. Banks were tightening lending restrictions and calling lines of credit. Members started company cost preventions tactics across the board.Two. Hundreds of members then abandoned their organisation’s self-funded health insurance plan when they were wooed back to commercial health insurers by aggressively discounted health insurance premiums. All’s fair in love, war and business, they say. The commercial health insurer’s strategy shrewdly and deliberately targeted member firms with younger healthier employees, leaving behind older, possibly sicker, higher cost employees in the self-funded health insurance pool.You know the answer to this true story. Market forces prevailed. The self-funded health insurance plan for the organisation declared insolvency and wound up in a little over two years. The moral of business: random events are unpredictable and at a minimum, heavy deep experience, aggressive loss prevention, a large group of demographically diverse individuals, and large cash reserves are paramount for success in any health insurance endeavour. Experienced commercial health insurance providers face an uphill battle just to break even, given the constant inflation of medical care, spiralling hospital costs, and related events.Want to know why how health insurance premiums continue to rise? Public opinion and comments made recently stated that “we are in a recessionary environment where health insurers don’t seem to get it.” They get it, but we don’t. Controlling medical costs is a constant challenge in best of times. Now, there are less of us in the health pool than there used to be given the demographics above, and the proportion of older unhealthy workers has increased. Yet we, the public, still have high expectations regarding our right to affordable medical care, and do little in our own lives to maintain responsible personal health.Next: Part III. Where does that leave us — healthy, wealthy, and wiser? Health versus rates based on weights. Government contemplates a self-funded health plan. Who will ultimately pay?Martha Harris Myron CPA PFS CFP (USA) TEP is at Patterson Partners Ltd providing integrated cross-border tax, estate, investment advisory and related strategic planning services in Bermuda. For additional information, please contact mmyron@patterson-partners.com or call 296 3528 http://www.patterson-partners.com