Health care costs rank among the top concerns of U.S. Employers. How to design and finance the plans are questions that inordinately occupy benefits professionals and corporate executives. Self-funding, partial self-funding and hybrid self-funding are three creative approaches to financially underwrite your benefits portfolio. According to the Kaiser Family Foundation 2012 Annual Employer Health Benefits Survey Report, 60% of workers’ who receive coverage in the private health care marketplace are covered by self‐insured group health plans. A breakdown of self‐insured employers by size is as follows:
- 3‐199 employees: 15%
- 200‐999 employees: 52%
- 1,000 – 4,999 employees: 78%
- 5,000 + employees: 93%
Why is Self-Funding Increasing?
Over the past decade, the percentage of private sector employees in self-insured plans has increased by nearly 20%. In 2011, self-funded plans covered 58.5 percent of private sector employees. Recently, self-funding has become more attractive due to Affordable Care Act (ACA) regulations, which have the potential to drive up the cost of fully-insured plans due to increased fees and additional assessments.
What is a Self-Funded Plan?
A self-funded plan is one in which the employer group assumes the financial risk for providing health care benefits to its employees. The group, not the carrier, is responsible for the claims. With a self-funded plan, the employer pays for claims as they are presented. The plan is administered by a Third Party Administrator (TPA) or by an insurance carrier functioning in an Administrative Services Only (ASO) capacity.
Generally applies to very large organizations who have the financial where with all and sophistication to appropriately manage the risk. Also practiced by smaller employers for dental, vision, HRA’s etc.
Partial Self-Funding (PSF)
Provides a funding mechanism for the employer to manage some risk but not all. Catastrophic and high utilization risk is transfered to a stop loss carrier. reporting and active plan management are critical to a successful PSF offering
Hybrid self-funding offers many of the same benefits as self-funding and partial self-funding but protects you from adverse risks, cash flow volatility and worst case scenarios. In effect hybrid self-funding is self-funding with training wheels and can be a first step in transitioning to a self-funding or partial self-funding arrangement. Terminology can be confusing but generally the terms all mean the same thing: self funding, partial self funding, stop loss and excess risk
Factors to Consider
Below are a number of factors to consider when looking at self-funding as a possible alternate approach to a more traditional fully-insured arrangement.
- Assessing your risk tolerance is the first step in evaluating your approach to funding.
- Control of Plan Design/ERISA Federally mandated benefits apply, State mandated benefits do not apply as a result of legislation enacted in 1974 (ERISA). This allows employers to offer uniform, targeted benefits to all employees, regardless of the state in which the employer is located.
- Improved Cash Flow Plans can maximize cash flow. Groups can manage the cash flow in a self- funded plan and the related interest income because claims are funded as they are paid. Fully-insured premiums constitute a form of pre- payment.
- Most State Premium Taxes are eliminated amounting to a 1.5%-3% immediate savings from a fully insured arrangement.
- Carrier Profit Margins and Risk Charges are Eliminated This amounts to a plan savings of 3%-5% annually.
How Does Health Care Reform Impact Health Plan Costs?
Four new fees will be assessed beginning in 2014. A Patient Centered Outcomes Research Institute (PCORI) fee, reinsurance fee, health insurance tax and exchange fee will impact individuals on-exchange, fully-insured groups and self-funded groups. The health insurance tax (HIT) does not apply to self funded plans
Making the Decision to Self-Fund
Self-funding is an arrangement in which an employer funds medical expenses and contracts with a third party administrator (TPA) or an insurance company for administrative services only (ASO) to provide administrative services and process claims for the group’s medical and dental benefit plan. Self-funded plans have many advantages over plans that are fully insured:
Risk Management – Charges, Commissions and Retention
A self-funded health plan can allocate more of each dollar toward the payment of medical claims, eliminating insurance commissions, risk charges, insurer profit and other costs involved in obtaining coverage from an insurer. Costs also decrease thanks to the sponsor’s ability to exert greater control over administrative expenses and claims costs.
Improved Cash Flow
Self-funding allows claims to be funded as they are paid. Fully insured premiums constitute a form of pre-payment.
Innovative Plan Document Design and Control
Since the employer is the plan fiduciary, decisions surrounding plan design belong to the employer and not an insurance company. Flexibility in plan design derives from a self-funded plan’s freedom from state mandated benefit laws. The employer can design its plan without the restrictions, delays and costs involved in obtaining the approval of an insurer or regulatory agency.
ERISA Preemption of State Regulation
In 1974, the Employee Retirement Income Security Act (ERISA) was enacted which pre-empted state law. ERISA offers self-funded plans the advantage of not being controlled by state laws that relate to insurance. ERISA provides regulatory stability to employers that operate in several states, so those companies do not have to adopt a patchwork of design variations to comply with state requirements. Thus, self-funded plans are not subject to state insurance benefit mandates.
Relief from State Premium Taxes
Most states impose taxes on premiums received by insurers. Insurers shift the burden of state premium taxes onto employers. A self-funded plan enjoys savings, as they are not subject to state premium taxes.
Plan Sponsor’s Experience
The plan sponsor has the ability to limit its liability to the claims experience of its own employees or members.
For an employer that is averse to risk, partial insurance is an important factor in self-funding. Stop-loss coverage can limit the employer’s risk while allowing it to retain control over claims and benefits.
Value-Based Benefits and Wellness Programs
As medical costs have skyrocketed, sponsors have been taking steps to reduce medical costs by emphasizing prevention and maintenance care for chronic diagnoses with tools such as health risk assessments, prevention and wellness programs, case and disease management
Improved Claims Data History and analytics
Analysis of claims using software and investigative techniques can help find areas where plan spending may be curtailed. By self-funding, employers will identify the categories consuming the majority of health care spending, and are then better equipped to make future decisions.
The ability to have effective cost containment options will help ease rising health care costs as money recovered goes back into the plan’s general fund and is once again available to pay future medical claims. Additionally, employers can monitor the conduct of its own employees to reduce costs attributable to unnecessary or fraudulent health care claims.
Health Care Reforms That Do Not Apply to Self-Insured Plans
- Essential Health Benefits Package
- Medical Loss Ratio Rules
- Small Employer Tax Credit
- Review of Premium Increase
- Participation in Risk Corridor and Risk Adjustment Programs
- Health Insurance Tax (HIT)