INTRODUCTION TO SELF-FUNDING
Partially Self-funding is simply a corporation placing employer and employee contributions into a claim fund to pay benefit claims and overhead instead of paying premiums to an insurance company. Pro-Claim Plus, Inc., instead of an insurance company, provides all claims and administrative services.
The negative perceptions that deterred self-funding for many years have fallen aside as the product has been refined to provide maximum protection with optimum flexibility.
An employer who elects to partially self-fund an employee benefit program assumes risk only for as much as his firm can tolerate financially without excessive strain. The balance of risk is placed under a stop-loss reinsurance policy to insure against the unknown catastrophes. By limiting liability through the use of stop-loss, the corporation always knows its maximum exposure.
To fully appreciate the potential of self-funding, it’s important to understand how the pricing of a self-funded program compares with that of a conventionally insured program.
Conventional Medical Insurance: All insured medical plans, small and large alike, have the same internal mechanics, although the renewal process will differ depending on the size of the account. Required premium, or rates, is determined based on the age/sex composition of the group and the benefit design chosen. Basically, the carrier knows they must have enough dollars flowing in to a) cover their cost of doing business (overhead, commissions, premium taxes, etc), b) pay all claims submitted, and c) put aside enough money to pay claims which will legally be their obligation, but which they may not see until some time in the future, perhaps after the client has gone on the another carrier. In rough figures, these costs might break down like this:
Retention – 25%
Claims – 55%
Reserves – 20%
You should also realize that in an insured contract, first year claims are lower than subsequent years, so there’s more margins for the insurance company.
In a self-funded program, these same obligations are satisfied through a slightly different configuration, a mixture of “fixed costs”, and “variable costs”. Each element produces a Savings over its conventionally funded counterpart.
Fixed Costs - include the cost of administration, the stop-loss premium, and possible optional program charges for utilization review, etc.
Variable costs - are the predictable claims expenses for which the employer is liable. One immediate saving is that premium taxes (typically 2-3%) are not payable on the actual claims expenses.
Another cash flow saving is generated since claims usually don’t flow for the first 2-3 months of a new program. Instead of paying a carrier perhaps $10,000 a month for 3 months, the employer can set aside that money in his own corporate account (earning interest for him) and pay his fixed costs of perhaps $5,000 a month.
To highlight the differences between the two forms of funding, consider:
Retention – For the carriers, reflects very high overhead (towering home office buildings, high paid executives, extensive field force),
Administration – Provided by the carrier as a “necessary evil” of doing business. With a TPA, the administration is our business. We’re better at it because it is our primary function, and, the source of our revenue.
Claims – Although claims obligations are the same under both types of funding, the employer choosing self-funding is obviously interested in changing his program to maximize his cash flow and savings. This employer is more apt to aggressively seek plan improvements, such as utilization review, to help bring his claims under control. And improved claims are an immediate cash flow saving to the employer!
Specific Stop-Loss Insurance protects against a catastrophic loss occurring to any one individual covered by the plan. The employer sets his funding deductible at a level appropriate for the size and financial strength of his company. For small employers, this may be as low as $5,000-$10,000. For a very large employer it could be several hundred thousand dollars. The employer is liable for the claim payments of an individual up to the chosen deductible, and amounts in excess of that are borne by the stop-loss carrier. The employer will pay a fixed premium each month for this coverage. Defining exactly which claims are eligible for reimbursement is discussed shortly, under “Types of Contracts”.
Some specific Stop-Loss contracts will not require the employer to fund the claim and await reimbursement. The administrator pays the claim directly from the carrier’s account.
Aggregate Stop-Loss Coverage: While Specific Stop-Loss protects the employer against a single catastrophic claim, Aggregate Stop-Loss protects him against excessively high claim experience throughout his entire plan. Through actuarial studies, we are able to estimate a firm’s smaller, predictable claims. These projections are based on large, industry wide samples, and are therefore subject to variations and fluctuations in small groups. To protect against such fluctuations, which could severely impact an employer’s cash flow, he purchases protection wherein the stop-loss carrier will pay the claims, which exceed their forecast by a particular amount. This coverage will usually include a monthly accommodation provision, which will cap the employer’s maximum monthly claim payments and further protect him against negative cash flow fluctuations. The eligible claims paid which fall under the specific deductible are accumulated and if the total exceeds the employer’s maximum exposure (referred to as the “attachment point”) the stop loss carrier must pay all further claims.
Types of Contracts: Claims paid by the administrator must fit certain criteria in order to be eligible for reimbursement under the stop-loss contracts. Most commonly, the claim must be “incurred” within a certain period, and “paid” within a certain period. What is commonly referred to as a “12/12” means that the claim in question must be incurred during the contract 12 month period, and paid by the administrator during that same 12 month period. A 12/15 contract allows an extension into the next contract year for payment and a 15/12 will permit claims incurred in the last three months of the prior year, but paid in our contract year, to be eligible for reimbursement. In the second and subsequent year, the typical contract is referred to as a “paid” contract, covering all claims incurred since the onset of the employer-stop-loss carrier relationship, and paid during the current 12 month policy year.
Q. What is a self-insured health plan?
A. A self-insured group health plan (or a 'self-funded' plan as it is also called) is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self-insured employers pay for each - out of pocket - as they are incurred instead of paying a fixed premium to an insurance carrier, which is known as a fully-insured plan. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.
Q. How many people receive coverage through self-insured health plans?
A. According to a 2000 report by the Employee Benefit Research Institute (EBRI), approximately 50 million workers and their dependents receive benefits through self-insured group health plans sponsored by their employers. This represents 33% of the 150 million total participants in private employment-based plans nationwide.
Q. Why do employers self fund their health plans?
A. There are several reasons why employers choose the self-insurance option. The following are the most common reasons:
1. The employer can customize the plan to meet the specific health care needs of its workforce, as opposed to purchasing a one-size-fits-all' insurance policy.
2. The employer maintains control over the health plan reserves, enabling maximization of interest income - income that would be otherwise generated by an insurance carrier through the investment of premium dollars.
3. The employer does not have to pre-pay for coverage, thereby providing for improved cash flow.
4. The employer is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).
5. The employer is not subject to state health insurance premium taxes, which are generally 2-3 percent of the premium's dollar value.
6. The employer is free to contract with the providers or provider network best suited to meet the health care needs of its employees.
Q. Is self-insurance the best option for every employer?
A. No. Since a self-insured employer assumes the risk for paying the health care claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. Therefore, small employers and other employers with poor cash flow my find that self-insurance is not a viable option. It should be noted, however, that there are companies with as few as 25 employees that do maintain viable self-insured health plans.
Q. Can self-insured employers protect themselves against unpredicted or catastrophic claims?
A. Yes. While the largest employers have sufficient financial reserves to cover virtually any amount of health care costs, most self-insured employers purchase what is known as stop-loss insurance to reimburse them for claims above a specified dollar level. This is an insurance contract between the stop-loss carrier and the employer and is not deemed to be a health insurance policy covering individual plan participants.
Q. Who administers claims for self-insured group health plans?
A. Self-insured employers can either administer the claims in-house, or subcontract this service to a third party administrator (TPA). TPAs can also help employers set up their self-insured group health plans and coordinate stop-loss insurance coverage, provider network contracts and utilization review services.
Q. What about payroll deductions?
A. Any payments made by employees for their coverage are still handled through the employer' s payroll department. However, instead of being sent to an insurance company for premiums, the contributions are held by the employer until such time as claims become due and payable; or, if being used as reserves, put in a tax-free trust that is controlled by the employer.
Q. With what laws must self-insured group health plans comply?
A. Self-insured group health plans come under all applicable federal laws, including the Employee Retirement Income Security Act (ERISA), Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA).