The Concept of

Partially Self-Funded Health Insurance Plans

(Typically called self-insured plans)

Prior to 1974, Self-funding of employee benefits was only practical for very large corporations.  The problem was that companies wishing to self-insure were forced to comply with the same regulations as commercial insurance carriers. When the Employee Retirement Income Security Act (ERISA) was passed into law in 1974, it changed the landscape in American employee benefits.  ERISA effectively reclassified self funded employers as a separate entity from an insurance carrier.  The self-funded employer no longer has to be licensed, pay premium tax, or maintain mandated reserves.  In fact, ERISA even went so far as to supersede any state regulations, which might otherwise impede a self-funded arrangement.

True self-funding, wherein the employer assumes all its insurable risk, is rare.  The more common variation - partial self-funding- uses an insurance carrier to limit the employers overall risk as well as limiting the risk on individual catastrophic claims.  Self-funding can reduce benefit costs while giving the employer complete control over all the aspects of providing employee benefits.  Such control and flexibility are unheard in the fully insured arena.

Freed from the burden of the state mandates and no longer subject to the traditional insurance carriers agenda, the employer is free to select the benefits that will be most valuable to the employees while eliminating those that are unlikely to be utilized but will drive up plan costs.  The choice of plan design is also at the employers discretion.  Everything from a traditional indemnity plan to a PPO to an HMO look-alike is available to the employer.

In addition, self funding allows the employer to benefit from cost savings that are not available in a fully insured plan.  When fully insured, the employer rarely reaps any of the savings from a year of lower than expected claims.  This is because there is no reconciliation of funds after the claims for the period are paid.  In self-funding, the employer only pays for the claims incurred.  In a fully insured health plan, it is difficult to know what percentage of the premium covers claims and what covers fixed costs.  This allows an insurer to conceal internal fees, which are either wasteful (excessive administration fees, mandatory pooling charges and a higher overhead) or excessive profit margin.  With a partially self-insured plan, costs for all aspects of the plan including claims administration, stop loss insurance premium, pre-certification, and network access fees are detailed separately.  In fact, a good third party administrator will shop every aspect of the plan annually to assure that the employer is getting the best plan components at the most reasonable price.  This puts the employer in command of the employee benefit process.

While the total cost of a fully insured plan is fixed, the bulk of the cost of a self insured plan varies as claims fluctuate from month to month.  This pay-as-you-go system allows the employer to retain benefit funds until expenses are incurred.  The employer retains funds in good claims years and is insulated from excessive risk in a bad year though the purchase of stop loss insurance.

There is little debate over the fact the ERISA made self-funding available to more employers.   But how does a cost conscious employer, concerned with cash flow, handle the potential catastrophic claim? Stop loss coverage is the answer.

Stop loss, also know as medical excess risk coverage, allows an employer to assign the risk it cannot handle to an insurance company called a stop loss carrier.  Stop loss has two components: specific stop loss and aggregate stop loss. Specific stop loss places a limit on the amount that each individual claim will cost a company.  Similar to a high deductible, a specific stop loss allow the employer to choose, within the carriers guidelines, the amount of claim that he is willing to retain.  The aggregate stop loss works in a similar fashion.  It limits the total claims exposure an employer is subject to during the plan year.

While it is possible for an insurance company to administer a self funded plan, we feel it is advantageous to look at the services offer by third party administrators, or TPAs.  A TPA is responsible for complete claims administration for the self-insured employer.  This relieves the employer from the cumbersome and time consuming day-to-day duties of administering the plan while providing the employer access to a wide range of expertise related to plan design, cost containment strategies, regulatory compliance, etc. The services of a TPA typically include: 

• Claims processing
• Member services including answering member and provider inquiries regarding benefits and eligibility
• Negotiation with the stop loss carriers
• Filing of all stop loss claims
• Assembly of all plan components including provider networks and pre-certification vendors
• Preparation of employee handbooks and ID cards
• Establishing the claim account
• Monthly reporting to the employer
• Customized report production upon request
• COBRA administration
• HIPAA administration

A TPA acts on the behalf of the employer.  As a third party, the TPA has no vested financial interest in whether a claim is paid or denied.  A TPA's only interest is in service to the employer.  Since TPA's are in the service business rather than the insurance business, we have found them to be excellent partners for the self-funded employer.  Plan design flexibility and cost containment measures cannot be duplicated by an insurance company.  In addition, TPA's have specialized units that recover claims dollar through subrogation and hospital bill audits.

 A self-funded plan can dramatically lower your costs, give you flexibility and control, and let you manage renewals.  Contact us, we understand the risks and rewards.