Medical Self Insurance & Self Funded Plans

Nurse taking blood pressure for patient of self funded plan

Medical Equipment Covered by Self Insurance

Am I a candidate for a Self-Funded plan? By Jeff Schreiber, ARM

As a mid-size or large-group employer, you have been down this road too many times:

The renewal letter has arrived delivering with it notice of a double-digit rate increase in spite of the fact that the members of your group have been in relatively good health and claims experience has been low.

Carrier’s retort is all too familiar – poor industry experience, increased taxes and other expenses have left them no choice but to raise across the board

Immediate response is “I should just self-fund”. However, when the anger and frustration subside, the employer is left with more questions than answers as to the viability of self-funding medical insurance. Hence, it remains as “I should have…”

The fact is that most brokers have repeatedly steered employers away from self-funding options. Some have done this to avoid placing their clients at risk from adverse claim experience. Others have avoided it due to lack of clear understanding of the mechanics of a self-funded plan. With health insurance premiums constantly on the rise and with the implementation of Healthcare Reform projected to drive rates even higher, self-funding may be coming closer to reality than possibility. Now more than ever, employers need to be educated and understand how self-funding works and whether they can stand to benefit from it.

This article offers a brief overview on self-funding medical benefits. For additional information or to setup a meeting, please contact us at 516-576-0007.

Self-Funded vs. Fully Insured

A traditional health plan is a pure risk transfer plan. The group pays fixed premium monthly to the insurance carrier and the insurance carrier is then responsible for all claim payments – with exception of any cost sharing obligations levied to the insured – and all administrative services. The insurance carrier is also the risk taker on the policy and any unused premium dollars is retained by the insurer as profits.

In a self-funded health plan, the employer plays the role of the insurer. Employer is now responsible for putting together a plan design and processing enrollments and claims. This gives the employer added control over the day to day administration of the health plan. It also places the employer in the risk taker position with the upside of seeing a reduction in overall cost based on claim experience.

The Role of the TPA

Most employers are not in the business of medical administration. Rather than trying to develop expertise in these areas, they partner with a qualified Third Party Administrator (“TPA”). The TPA is paid a monthly fee per employee and the TPA works closely with the employer to handle the following services that enable the self-funded plan to run efficiently:

Plan Designs – A self-funded plan allows the employer to limit many costly benefits that are not deemed necessary and provide increased coverage for those heavily utilized benefits.

Network Access – A successful health insurance plan hinges on employee satisfaction. Aside from out of pocket costs, employees are most concerned about the availability of in-network providers. The TPA assists in this regard by offering access to broad provider networks. Network access in turn allows the employer to benefit from in-network discounted reimbursements which in turn lowers the claim costs.

Enrollment Services – TPA should assist with all aspects of enrolling employees including eligibility verification. Most TPAs will offer online enrollment and provide visibility to the employer as to the enrollment status. For terminating employees, TPAs can assist with COBRA, HIPAA services.

Claims Management – In processing claims, the TPA strives to reduce claim payouts by the insured. Implementation of programs for large case management and disease management are essential to help control large claim payouts.

Stop-Loss Coverage – Stop-Loss coverage is purchased to provide cover for large claim payouts. Stop-Loss coverage can protect the insured in one of two ways:

Specific: This provides coverage when the total claim amount for a claimant exceeds the specific (“spec”) deductible. This scenario is similar to traditional insurance policies where the carrier pays claims in excess of the deductible. However, unlike other lines of insurance, this deductible is per claimant and not per claim. Therefore, multiple claims on a member combine to reach the attachment point after which stop-loss coverage will apply.

Aggregate: Aggregate (“agg.”) coverage pays all claims for the group once the total claims for the group exceed the aggregate attachment point. The aggregate attachment point is calculated by the insurer to be approximately 125% of expected annual claims for the entire group. While Specific coverage is purchased to protect against catastrophic claim experience from an individual, aggregate coverage is purchased to protect against catastrophic experience at the group level.

Terms of Coverage: Stop-Loss insurance policies run for a period of 12 months and contain the terms for which period of time the claims must be incurred and paid. There are numerous options for these periods. The most common options are known as 12/12 and 12/15.

12/12: Under the 12/12 terms, coverage is provided for claims incurred over the 12 month policy period and paid in those 12 months.

12/15: The 12/15 term covers claims incurred over 12 months and paid in 15 months thereby providing a 3 month run-out period for paying claims. Naturally, this will add to the cost of the premium (15% - 20% on average) since there is increased likelihood for a claim due to the extra run-out.

5 Advantages of Self-Funding

There are a number of advantages that a self-funding plan offers:

Improved Cash Flow – Rather than pay fixed costs on a monthly basis to the carrier, the employer is now paying a much smaller amount of monthly fixed costs (stop-loss plus administration fee is usually around 25% of regular monthly premium). The claim portion is paid on an “as billed” basis which allows the employer to benefit from the cash flow.

Customized Plan Designs – No more need to be restricted to boiler plate benefits offered by insurance carriers

More Control on claims administration – Avoid the unnecessary claim payouts

Less Impact from Healthcare Reform – Self-funded plans are impacted less by Healthcare Reform than fully insured plans. For example, self-funded plans are not subject to state mandates. In addition, some of the fees such as the 3% Insurer tax do not apply to self-funded plans. While there is a projected increase in cost to self-funded plans as a result of Healthcare Reform, that percentage increase is far less than the large 30% increase projected for fully-insured plans.

Ability to Save $$$ - Historically, most self-funded plans have been able to reduce cost of health insurance an average of 15% to 20% annually.

Candidates for Self-Funding

To obtain the answer to that question, you should be able to identify the status of the issues below:

How many employees enroll in the insurance? – Self-funded is usually not viable for groups less than 125-150 (enrolled). In reality, self-funding can be implemented with a group that is larger than 50, but the risk is greater as large claims can negate any savings opportunity.

General health status of employees: Employers should have an idea if the general insured population has ongoing medical issues and if they have heavy utilization on the current health plan. These are often the identifiers of what to expect on the new health plan.

Current cost of health insurance: Before deciding the next step, the employer needs to compare the current and renewal cost against projected cost of a self-funded plan.