Case Study: How it works for the employer
A client with 45 employees has purchased two Bronze level medical plans and use an integrated HRA to fund the amount below the maximum out of pocket; leaving their employees with a total exposure of $0. In an average year, the plan utilization is low; the group’s total HRA exposure is $300,000, but they only end up spending around $30,000 of that.
What is a “self-funded” plan?
The answer can depend to some extent on the size of the employer, but the basic components are:
- Some risk is borne by the employer or plan sponsor (with potential gain as well)
- Claims are paid by an insurance company or Third Party Administrator
- Stop-loss insurance is generally readily available to limit the risk. Individual stop-loss coverage is essentially a very high deductible, typically in the range of $25,000 to $250,000 or higher. That would limit the risk for a given individual. Many plans also include aggregate stop-loss coverage, which limits the risk to the plan for the cumulative claims total.
- The plan can be broken up into component parts, each one analyzed separately so that if there is a problem with one component it can be changed without changing the rest
- Self-funded plans do not have profit margins built in, as one generally sees with fully insured plans (even non-profit health plans typically build in a margin)
- Self-funded plans usually come under the federal law ERISA which can make the plan exempt from many state mandates (exceptions include employers in Hawaii, church plans, and native American organizations)
- For smaller employers, a common option is a “Level Funded” plan which generally costs more and is less flexible but reduces some of the risk to the employer or plan sponsor.
- Potential for significant cost savings
- Reduction in state premium taxes (in most states) and carrier profit margin
- Greater flexibility in plan design and avoidance of most or all state mandates
- Greater potential for employee and employer engagement
- Ability to evaluate each component of the plan separately
- Vastly increased knowledge of the plan, its claims experience, and component costs (HIPAA protected).
- Ability to install wellness and biometrics to reduce claims costs on a direct basis
- A greater ability to save money through the use of telemedicine providers, which is becoming an important trend for the future
- Greater ability for HR to act in a strategic and consultative manner in helping to guide the company’s healthcare costs
- Greater ability to create special networks, Centers of Excellence, and medical tourism (perhaps even within the immediate area)
- Ability to look at enhanced Reference Based Pricing and Value Based Insurance Design.
- Cash flow swings and total cost could exceed fully insured plan if claims high and safeguards are not imposed
- More employer engagement required to optimize effectiveness
- Self-funded plans are more complicated because it is often designed with a combination of components
- Must create and hold reserves for year end run out or plan termination
- IRC §105(h) discrimination testing applies
- Wellness and biometrics (if instituted) might cause employee morale issues if not handled correctly
- More technical expertise required on the part of the adviser/consultant
- Alternative fully insured and stop-loss markets might not be available later if there is severely adverse claims experience
- Insurance carrier or health plan tools and resources for wellness, etc., might not be available if self-funded
- Somewhat increased reporting requirements (HPID, ACA tracking, state compliance on-going work, etc.)
- Stop-loss coverage can be more price sensitive to on-going claims than a fully insured plan.
When an employer establishes a partially self-funded plan, it takes over control of almost all aspects of the plan:
- Outside party administration to adjudicate claims and provide general plan functions such as ID cards, plan materials, etc.
- Purchase of “specific” and possibly “aggregate” stop loss coverage to protect against high claims
- Rental or creation of a “preferred provider” network to reduce base costs
- Set up of plan reserves to pay claims incurred but not reported prior to the end of the plan year
- Avoidance of some or all state mandated coverages as it sets its own plan design and requirements
- Claims Utilization Review, disease management, data analysis, nurse answer lines, discharge planning, telemedicine, etc.
- Risk is taken by the plan sponsor (usually employer) to a greater extent, and it has fiduciary responsibilities.
- Savings from wellness or related initiatives result directly in lower employer costs.
- Plan not tied to large fully insured pool with shared risk – the individual plan cost/claims experience is counted