A Risk Taker? Consider Self-Funding

Self-funding an employee health benefit plan is a smart long-term health strategy to save money because it can provide an excellent opportunity for employers to achieve immediate savings plus sustainable cost control. However, smaller employers may be hesitant to self-fund their health plan because they commonly perceive it as appropriate only for large companies.

This white paper describes the financial and operational advantages of self-funding while addressing many of the major misperceptions. It also identifies the key differences between self-funded and fully insured health plans and includes a helpful checklist to assist you in recommending an effective self-funding solution to your clients.

Helping employers with fewer than 250 employees establish a self-funded health plan can become an integral part of your growing business. After reading this whitepaper, you will be more confident in understanding how a self-funded health plan can be a formula for success for your company.

Advantages of Self-Funding

Traditional self-funding is defined as when an employer pays for their own medical claims directly, while a third-party administrator administers the health plan by processing the claims, issuing ID cards, handling customer questions and performing other tasks. Companies with fewer than 250 employees can self-fund but will typically purchase stop-loss insurance. Stop-loss insurance limits the amount of claims expenses (or “stops the losses”) the employer’s self-funded health plan is responsible for per covered individual per plan year (more on that in the second section). If claims are lower than predicted, the employer can save money directly compared to paying the set monthly premium of a fully insured plan, while the stop-loss insurance policy puts a ceiling on the maximum amount the employer would pay in claims. Below is a quick summary of the major advantages of self-funding an employee health plan.

Smaller employers can be hesitant to self-fund a health plan because such plans are perceived as only appropriate for large employers. However, there exists new and innovative products and services specifically designed for employers with fewer than 250 employees that make a self-funded health plan a compelling option for employers with as few as 25 employees.

Advantage #1: Pay only for actual claims – at a discount

The ability to pay only for actual claims incurred by the employee is often the primary motivation for an employer to choose a self-funded health plan. If a smaller employer also invests in employee wellness programs and adopts consumer-driven health plans (like health plans compatible with health savings accounts), they have a greater opportunity to save more by helping to improve employee health and reducing overall claims.

In addition, securing large discounts from hospitals and health care professionals can help lower overall claim costs and result in additional savings with a self-funded health plan. Similar to the story about the different airline passengers – sitting on the same plane, going to the same location – one paid the full fare and the other paid a discount rate. You want to make sure you are getting the discount rate when possible.

Advantage #2: Know what and where you are paying

Want to know how much is being spent on emergency room visits? Want to know what percentage of overall claims expenses have been out-of-network? Client-specific claims reports are available to help you understand exactly where health care dollars are being spent and the impact of wellness programs. It allows for more informed decision-making when considering benefit changes and provides clear direction in what to include in employee messages about health, wellness and any upcoming health plan changes.

Advantage #3: Offer the same plan across state lines

Most self-funded health plans are not subject to state insurance coverage mandates. This allows an employer to offer the same coverage to employees in different states, allowing for consistency and easier administration. Also, self-funded health plans pay state taxes on stop-loss insurance premiums, compared to the full amount of premiums collected under a fully insured health plan; so premium taxes are lower.

Advantage #4: Tailor your plan design

Another advantage of a self-funded health plan is the greater opportunity for smaller employers to tailor the health plan for their specific employees. State-mandated benefits are not required and an employer can tailor a plan design beyond what most fully insured carriers have available “off the shelf.”

Advantage #5: Experience fewer surprises

With a fully insured health plan, it is typically 60 days prior to the effective date when the carrier delivers the renewal, before anything is known about current and future health care costs. And for smaller employers, data to explain or justify renewal increases is typically not available. A self-funded health plan allows the employer and the broker to see how the health plan performed throughout the year, so any renewal changes are not a surprise.

Frequently Asked Questions

How is an employer protected under a self-funded plan?

Employers limit their liability with Individual Stop-Loss Insurance With individual stop-loss insurance, when health claims reach a specific dollar limit in a plan year for a covered individual, the stop-loss insurance policy reimburses the employer’s health plan for claim amounts above the individual stop-loss insurance limit. For example, if an employer has individual stop-loss insurance of $25,000 and an individual has $85,000 worth of claims, the stop-loss insurance policy would reimburse the employer’s health plan $60,000. Additional claims for that individual for the plan year would also be reimbursed by the stop-loss insurance carrier. The cost of stop-loss insurance is a monthly premium, and there are a variety of stop-loss insurance dollar amounts from which to choose. For employers with fewer than 250 employees, we offer stop-loss insurance with individual dollar limits that range between $10,000 and $75,000.

How does an employer budget for a self-funded plan?

In addition to individual stop-loss insurance, smaller employers who want to self-fund their health plan should consider purchasing aggregate stop-loss insurance. Aggregate stop-loss insurance works similar to individual stop-loss insurance, but – as the name implies – the reimbursement under the insurance policy is provided when the total health claims for a plan year reach a certain dollar amount (the aggregate stop-loss dollar limit). When reviewing aggregate stop-loss options, it is important to make sure your policy includes monthly reconciliation – otherwise your client may be required to fund all claims during the plan year and would not get reimbursed for excess claims until the end of the plan year. Monthly reconciliation helps to protect your client’s cash flow by knowing the maximum claim liability each month in advance. Standard aggregate stop-loss levels are typically set at 20 or 25 percent higher than the employer’s expected claim amounts.

How does an employer select a third-party administrator to process claims?

Many self-funded solutions involve a benefits administrator that processes the employer’s health plan claims and a separate insurance company that issues the stop-loss insurance. This arrangement usually involves the administrator acting as the gatekeeper and allowing a choice of stop-loss insurance companies. A simpler option is an integrated solution where a single entity handles the claims administration and offers the stop-loss insurance.

An integrated solution also makes transactions faster, more efficient and more secure and avoids the separate fees that can surprise a client. Once a claim is submitted in an integrated solution, it can be processed, applied to appropriate stop-loss insurance, paid, categorized and reported quickly by the connected systems. If a claim needs to be “adjusted” for over-payment or incorrect submission, corrections and re-issuance are a more streamlined process. And since medical claims contain protected health information that must be safeguarded, with fewer instances where this information must pass between different entities, the less likely privacy can be breached. Finally, since information does not need to travel between separate organizations, your client does not face additional “set-up” or “processing” fees throughout the year.

Key Differences from Fully Insured Plans

Self-funding an employee health plan offers potential savings for many smaller employers. However, your clients should be aware of some of the key differences when considering transitioning from a fully insured product to a self-funded health plan.

Requirement #1: Claims risk

Employers enjoy immediate savings if their health plan claims total lower than expected, but can also experience increased expenses, up to the stop-loss insurance limits, if claims run higher than expected. This maximum claim liability is – on average – higher by a small percentage point than the fully insured premium and represents the worst-case scenario. This maximum claims liability should be considered by the employer when deciding whether to self-fund their health plan.

Requirement #2: Terminal or run-out liability

If an employer elects to end its agreement with a particular benefits administrator, it will need to budget for claims, stop-loss insurance premiums and administration services after the termination date – otherwise known as terminal liability. Claims that were incurred during the health plan year but received after the termination date of the contract still need to be paid by the employer.

Requirement #3: Claims Litigation Liability

For fully insured health plans, the health insurance company is responsible for the vast majority of claim appeals decisions and subject to any litigation related to claims payment decisions. The benefits administrator for a self-funded health plan would be responsible for handling day-to-day coverage decisions, but may or may not make decisions related to claims appeals, depending on whether this responsibility has been delegated to the administrator. But a key difference between a fully insured health plan and a self-funded health plan, is that the employer sponsoring the plan is solely responsible for defending any lawsuits based on claim payment decisions. If a claim denial is ultimately overturned under a court’s judgment, the employer is required to pay the amount of the disputed benefit, their own costs (including legal fees) and potentially the costs and legal fees of the plaintiff. Any claims that are required to be paid under the judgment still get applied to the stop-loss insurance limits as with any other covered claim. Although the vast majority of appeals are resolved in the multiple levels of appeal, which may include the option of an external review, it is important for companies to understand their claims litigation liability under a self-funded health plan.

Summary

Smaller employers have been reluctant to self-fund their health benefits due to the misperception that self-funding only works for large companies – though this is no longer true when considering the stop-loss insurance and innovative selffunding options that are available today. The many advantages of a self-funded health plan, while recognizing key differences from a fully insured health plan, can make this option a smart long-term strategy for clients looking to save money on their employee health plan.