You walk into a doctor’s office and step up to the check-in window. The receptionist asks, “Do you have insurance?” Long ago, this question would have had a simple answer. Individuals whose employers provided health insurance could respond with a simple “Yes. I have health insurance.”
This seemingly normal exchange hides many complicated arrangements and moving parts that, until now, were ignored by most people. But as the price of health care and health insurance skyrockets, employers and employees alike are digging deeper and asking, “What is health insurance? Is it all the same? Can we do something to save money but maintain benefits?”
Health insurance generally comes in two flavors — self-funded and “traditional” fully funded insurance. Fully funded insurance is the type of coverage most people are accustomed to — from automobile to homeowners insurance. People are accustomed to having an agent assessing them and the risk they pose, then charging a premium to provide coverage.
Many employers who previously had purchased fully funded insurance are contemplating dropping their coverage, paying a penalty (per the Affordable Care Act) and allowing their employees to secure individual insurance on the exchanges. That cuts agents out of the mix, and they lose business. Therefore, agents who rely solely upon fully funded insurance risk losing many of their employer clients.
A self-funded health plan is established when an employer — the primary plan sponsor — sets aside some of its funds to pay for its employees’ medical expenses. Those workers contribute to the plan instead of paying premiums — although the similarity of the actions means it’s not uncommon to hear employees and employers refer to such contributions as “premiums.”
Here are some reasons why an employer would self-fund.
Self-funding begins with drafting a plan document or summary plan description. This is where the employer chooses what to cover and what to exclude.
Within parameters set by federal law, the employer customizes the plan to be generous where their particular workforce needs it, and stingy where benefits aren’t needed. For example, if someone owns a yoga studio where the workforce is in tip-top shape, they can go lean on benefits meant to help those who are suffering from morbid obesity.
In addition to customizing the benefits, the employer can customize the partnerships. Fully funded carriers have selected their provider networks, vendors and other programs that they package and force upon policyholders. A self-funding employer, however, can shop around and select partners to customize their team.
Interest and Cash Flow
When an employer purchases fully funded insurance, they pay premiums when they are told to pay. That money is gone. It sits in the carrier’s account until it’s needed to pay claims. While it sits, it’s working for the carrier.
With self-funding, the funds are in the employer’s hands until they’re needed, meaning interest on those assets belongs to the employer. Likewise, the money is in hand and usable where needed, when needed.
Federal Preemption and Lower Taxes
In the United States, we are governed by both federal laws and state laws. However, when you can’t comply with a state law without violating a federal law, the state law is moot and federal law preempts the state. The Employee Retirement Income Security Act of 1974 states that a private, self-funded health plan is administered in accordance with its terms and federal rules. As such, these plans are not subject to conflicting state health insurance regulations or benefit mandates. Likewise, such self-funded plans are also not subject to state health insurance premium taxes.
These days, everyone talks about “big data” and leveraging data to predict future needs and expenses. A fully funded insurance carrier owns the claims data they receive and produce. Employers with self-funded plans, however, can examine the claims data, study trends, allocate resources and form partnerships to address their actual needs.
A fully funded insurance carrier not only sets premiums based on what they anticipate you will cost them, but also adds a buffer to cover other employers’ employees, to soften the pain of underestimating how much one of those other policyholders will cost.
In other words, all policyholders are contributing toward their own expenses and the expenses of others. As such, the steps an employer takes to make their own population healthy don’t much affect the bottom line unless all other policyholder employers do the same thing.
With self-funding, the employer pays only the claims of their own population — so steps taken to reduce the cost directly impact the employer’s bottom line. Employees of self-funded companies generally have lower single and family premiums than those with fully funded insurance.
Many people — even experts within the self-insurance industry — believe a “minimum” number of lives are required to self-fund a health plan. They certainly are justified in thinking so. Indeed, one of the pillars upon which insurance rests is the idea that a bigger risk pool (more people enrolled in a plan or with an insurance carrier) means there is more money (premiums or contributions) being “dumped into the bucket” and made available to pay the occasional high-dollar “catastrophic” claim.
With self-insurance, however, plan sponsors and participants have more direct control over their costs. Indeed, the bigger the plan, the tougher it is to control its health and wellness. If I am self-funding a smaller group of enthusiastic participants, I can more easily implement wellness programs, analyze the claims data and take active steps to contain costs. Would you rather self-fund a plan for five healthy yoga instructors or 500 daredevils? Risk and the health of the population play a role as well. You can’t prevent some unforeseen losses from occurring (such as cancer, premature birth, etc.), but size is only one factor when assessing self-insurability.
Overall, these benefits result in net savings for the self-funded plan over a three-to-five-year span, compared with a comparable fully funded insurance policy. Yet there are risks. Among them: the threat of catastrophic claims, inability to fund claims and new fiduciary responsibilities to the members of the plan.
Ordinarily, a self-funded benefit plan will obtain an insurance policy meant to protect the plan. This form of reinsurance is called “stop-loss.” Like most insurance, stop-loss includes its own policy and a deductible.
A self-funded plan may be forced to pay a substantial amount of money to treat a participant’s costly illness or injury. Any amount that the plan pays in excess of the stop-loss deductible is — after having been paid by the self-funded plan to the medical services provider(s) — submitted to the stop-loss insurance carrier for reimbursement.
Imagine your self-funded plan has a stop-loss policy and a deductible of $100,000. One of your plan participants is diagnosed with a rare disease; it’s treatable, but the cure costs $250,000. Your plan pays the $250,000 to the doctor. That $250,000 exceeds the $100,000 deductible by $150,000, so you submit a claim for $150,000 reimbursement to the stop-loss carrier.
Finally, a self-funded employer is — or appoints — a plan administrator. That administrator is a fiduciary of the plan and its members. Applicable law dictates the fiduciary must act prudently, protect the plan and apply its terms judiciously.
Failure to comply with these terms, mismanaging plan assets or otherwise doing something not in the plan’s best interest could expose the plan sponsor to claims of fiduciary breach, resulting in steep penalties. Fortunately, there are third-party organizations that will step in, aid in decision-making and act as a fiduciary as it relates to those decisions. This indemnifies the self-funded plan administrator.
Personal Health Information
Self-funded health plans operate within the scope of federal law, and in some cases, state insurance laws as well. As such, there are many protections in place to secure patient information. For instance, the Health Insurance Portability and Accountability Act ensures that participants’ health information is kept secure.
Self-funded employers appoint a plan administrator to serve as a fiduciary
decision-maker for the plan, and most (if not all) sensitive information is limited to that entity. Additionally, most plans hire an insurance carrier to provide administrative services, or a third-party administrator to process the claims. In other words, the self-funded employer is hiring an objective third party to receive medical bills, process claims and pay the bills with the employer’s money — without sharing personal health information with the employer.
When deciding what to cover or where to focus their efforts, employers will generally look at data freed of personal information. In other words, as an employer, I may see that half my staff is pre-diabetic, and decide that a weight-loss benefit is called for. I don’t see any individual employee’s information; I view the plan as a whole.
Risks and Rewards
Self-funding has its risks, but also presents numerous rewards. As the price of health care continues to increase, many employers who previously had been too risk-averse are second-guessing their decision — and self-funding.
My company, for example, made the decision to self-fund our health plan nearly a decade ago. Although self-funding is an obvious choice for employers with more than 1,000 lives that can spread the risk among their employees, employers with 100 or fewer workers are at greater risk. If one catastrophic claim is submitted, and the company lacks the population or assets to absorb the hit, the results can be devastating. Yet my company — with fewer than 100 lives at the time — made the leap.
Over the time we have been self-funding, our contributions dropped drastically from the premiums we had been paying — by nearly 30 percent in two years. Since then, they haven’t increased by more than a few percentage points annually, and we have yet to submit a single stop-loss claim.
Our ability to customize and control our plan certainly has helped. We’ve drafted terms into plan documents empowering participants to notify the plan administrator anytime a costly procedure is being sought. We also reward participants for collaborating with the plan sponsor to identify the most effective yet cost-efficient options.
Our health plan already has saved thousands of dollars this year, and awarded employees thousands in incentives as well. A plan member recently sought to obtain surgery with an anticipated fee of $60,000 for the facility, and another $10,000 for the surgeon. After research, we determined the fee was on the high end of the spectrum.
We communicated with some area hospitals and found one facility that would take $20,000 cash upfront for everything involved — with the procedure being performed by the same surgeon. We saved more than 70 percent, and a portion of that savings was given to the participant as a reward.
Self-funding isn’t for everyone. But for employers willing to get hands-on about their health care, the savings could be monumental — enough, in fact, to save the employer-based health benefits industry.
Agents who educate themselves about self-funding and its benefits can steer their employer clients away from the scenario described above. Agents can use self-funding as a means to keep their employer clients as clients — purchasers of insurance.