Advantages of Self-Funding

Sharon McReynolds

As mentioned in a prior article, self-funding an employee benefit plan as a long-term strategy to save money works because it does afford an awesome opportunity for an employer to achieve savings plus cost control. Over history, the smaller employers, those traditionally under 250 or even 100 employees, have been hesitant to self-fund their health plan as in the past it was commonly believed that self-funding was only appropriate for “large groups.” Our previously owned third party administrator (TPA), Group Administrators, Inc., survived and flourished on companies with less than 250 employees and several with down to 25 employees. We were able to establish the right plan design, the correct specific deductible amount as well as placement of an aggregate coverage, often paired with a monthly accommodation feature, that allowed our clients to be confident in their determination that self-funding was in fact a formula for success.

The purpose of this article is to allow you to gain some insight into the key determining factors to consider for your company when deciding if self-funding is a viable option for you. The right health plan can and should be an integral part of the proper growth and success of your company, the wrong one can have very negative impacts. We believe you can offer the benefits much larger companies offer, taken down to a proper scale, to benefit you, the small employer.

A self-funded plan affords all groups, regardless of size, the opportunity for savings. You have the opportunity to pay your own claims, while a TPA administers the claims, processing them, issuing ID cards, handling the tasks that the insurance companies typically do. The difference: they hire a “stop-loss” carrier on your behalf to take on a large piece of the risk, leaving you with the risk under the stop-loss amount. Your company pays for the everyday claims, the stop-loss carrier is there to protect you from the run-away claims. If designed properly, you know exactly what your risk is from one year to the next, and oftentimes, from one month to the next. Again, if designed properly, your risk should line up with what you were paying in a fully insured environment.

Obviously there is now some incentive for the employer and employees to be involved in the delivery of health care: cost savings. Wellness programs, HSA’s, consumer-driven health plans with high deductibles paired with programs allowing employees to participate in their own comparison shopping on their respective providers or hospital charges before they are incurred — all are great ideas to incorporate to save money on the overall health plans that we design.

Self-funding also aids the employer in knowing what and where you are paying for delivery of care. Wouldn’t you like to be able to dig into the amount your company is paying toward emergency room visits, or specific drug costs? How about the overall cost for in- and out-of-network claims, or wellness visits? Self-funding will afford you the opportunity to see exactly where your health plan dollars are spent month-to-month, giving you the chance to make informed decisions moving forward at renewal regarding benefit changes or employee contributions. You can tailor the benefits to meet your specific group’s needs. Employers with self-funded health plans see exactly how the plan performs, thus removing the element of surprise at renewal as it relates to substantial increases or decreases in premium.

With over 30 years of experience in the self-funding arena, we welcome the opportunity to discuss the concept in further detail. Please visit our contact us page to schedule a more in-depth discussion.

Self-Funded Plans Under Health Care Reform

The Affordable Care Act (ACA) includes numerous reforms affecting the health coverage that employers provide to their employees. Many of these reforms apply to all group health plans, regardless of their method of funding. Plans that have grandfathered status under ACA, however, are not required to comply with select health care reform requirements. In addition, self-insured plans are exempt from certain ACA requirements. This MedCon Benefit Systems, Inc. Legislative Brief summarizes how the health care reform law applies to self-insured plans.
REFORMS THAT APPLY TO SELF-INSURED PLANS

As noted above, many of ACA’s reforms affect all group health plans, regardless of whether they are fully insured or self-insured. For example, among many other reforms, self-insured and fully insured plans must comply with the following ACA provisions:

  • Dependent coverage for adult children up to age 26;
  • Coverage of preventive health services without cost-sharing (grandfathered plans are exempt);
  • No rescissions of coverage, except in the case of fraud or intentional misrepresentation of material fact;
  • No lifetime limits on essential health benefits and annual limits are restricted until 2014 (in 2014, all annual limits are prohibited); and
  • Improved internal claims and appeals process and minimum requirements for external review (grandfathered plans are exempt).

In addition, both self-insured and fully insured plans are subject to ACA’s requirement to provide participants and beneficiaries with the uniform summary of benefits and coverage. Sponsors of self-insured and fully insured plans alike must also comply with ACA’s requirement to report the aggregate cost of employer-sponsored group health plan coverage on their employees’ Forms W-2.

REFORMS THAT DO NOT APPLY TO SELF-INSURED PLANS

Essential Health Benefits Package
Beginning in 2014, non-grandfathered insurance plans in the individual and small group markets must offer a comprehensive package of items and services, known as essential health benefits. This requirement applies to plans offered inside and outside of the state insurance exchanges (Exchanges). ACA identified in broad terms 10 benefit categories that must be included as essential health benefits. Within these broad categories, the individual states have flexibility to select their own benchmarks for defining essential health benefits.

Self-insured group health plans, health insurance coverage offered in the large group market and grandfathered plans are not required to cover essential health benefits.

Medical Loss Ratio Rules

The medical loss ratio (MLR) rules became effective on Jan. 1, 2011. These rules require health insurance issuers to spend 80 to 85 percent of their premium dollars on medical care and health care quality improvement, rather than administrative costs. Issuers that do not meet these requirements must provide rebates to consumers beginning in 2012. The MLR rules do not apply to self-insured plans.

Small Employer Tax Credit

Beginning with 2010 tax years, ACA created a tax credit for eligible small employers that provide health care coverage to their employees. In order to be eligible for the health care tax credit, an employer must:

  • Have fewer than 25 full-time equivalent employees (FTEs);
  • Pay average annual wages of less than $50,000 per FTE; and
  • Pay at least half of employee health insurance premiums (based on single coverage).

For tax years 2010 through 2013, the maximum health care tax credit is 35 percent of premiums for small business employers and 25 percent of premiums for small tax-exempt employers. An enhanced version of the credit will be effective in 2014.

The tax credit is only available for the purchase of health insurance coverage, and so it does not apply to self-insured coverage.

Review of Premium Increases

ACA required the Department of Health and Human Services (HHS) to establish a process for the annual review of unreasonable increases in premiums for health insurance coverage. HHS’s process provides that effective Sept. 1, 2011, issuers seeking rate increases of 10 percent or more for nongrandfathered plans in the individual and small group markets must publicly disclose the proposed increases, along with justification for the increases. Starting Sept. 1, 2012, the 10 percent threshold will be replaced with a state specific threshold to reflect insurance and health care cost trends particular to that state. The increases will be reviewed by either state or federal experts to determine whether they are unreasonable. This review process for rate increases applies to issuers in the small group and individual markets. However, it does not apply to grandfathered health plan coverage or to excepted benefits (for example, liability insurance, workers’ compensation insurance, limited scope dental or vision benefits, long-term care or nursing home benefits and hospital indemnity insurance). It also does not apply to self-insured plans.

Annual Insurance Fee

ACA’s revenue raising provisions require certain health insurance providers to pay an annual fee beginning in 2014. Issuers with net premiums in a calendar year of $25 million or less are exempt from the fee. Employers that self insure their employees’ health coverage are also exempt from the fee.

Methods to Allocate Insurance Risk

ACA includes reforms related to the allocation of insurance risk through reinsurance, risk corridors and risk adjustment. The purpose of these reforms, which become effective in 2014, is to protect against risk selection and market uncertainty as insurance changes and the Exchanges are implemented.

Self-insured plans are not subject to some of these provisions, such as the risk adjustment charges that states may impose on non-grandfathered plans in the individual and small group market. However, under ACA, each state must establish a transitional reinsurance program to help stabilize premiums for coverage in the individual market during the first three years of Exchange operation (2014-2016). Administrators of self-insured plans will be required to contribute to this program.

Insurance Market Reforms

Effective for 2014, health insurance issuers must comply with a new set of market reforms. Market reforms that are inapplicable to self-insured arrangements include:

  • Guaranteed Issue and Renewability – Health insurance issuers offering coverage in the individual or group market in a state must accept every employer and individual in the state that applies for coverage and must renew or continue to enforce the coverage at the option of the plan sponsor or the individual.
  • Insurance Premium Restrictions – Health insurance issuers will not be permitted to charge higher rates due to heath status, gender or other factors. Premiums will be able to vary based only on age (no more than 3:1), geography, family size and tobacco use.

Should you have questions about self-funded plans, health care reform, or any employee benefits, please feel free to contact the professionals at MedCon.

Self Funding – Act II

Having been in the insurance industry for over 25 years, collectively our agency specializes in “self funding.”  It is with great pleasure that we welcome the resurgence of this funding instrument back to center stage.

Self funding gives the employers back the control — the control over both plan design and the financing of their health care benefit plan.  While the employer assumes the risk of expected claims, you will purchase insurance (stop loss coverage, both specific and aggregate) to protect your plan against unpredictable or catastrophic claims.

The financial control is gained by paying for only the claims that your employees incur, when they incur them.  In a fully insured environment you pay a monthly premium up front for what the insurance company believes your claims are going to be, advance premium payments.  This also translates to the insurance company holding/investing your money.

By funding your own claims, you are also avoiding the costs of claim reserves as well as premium taxes.  Included in these charges are the insurance company’s profit margins, risk charges, and their administrative fees.  There will be administrative fees associated with your  self funded plan but typically much lower than those of a fully insured plan.

The self-funded vehicle allows the employer to design the health benefit plan to meet their specific needs.  It offers the flexibility to manage costs and make changes to better manage utilization and take advantage of discounts offered through third party vendors.  All of which can help in the making of a much more cost effective plan.

We will be discussing the advantages  of self funding in more detail in future blog posts.  Should you have a questions please feel free to contact Sharon McReynolds at 214/739-5212 or email smcreynolds@medconbenefit.com.