According to data from the Kaiser Family Foundation, self-funding is on the rise. In fact, the percentage of covered workers in a totally or partially self-funded health plan has grown from 49% in 2000 to 54% in 2005 to an estimated 60% today.
So, just what is self-insurance?
When a company is self-insured, it assumes more risk by actually paying the claims filed by employees and health care providers. To mitigate this risk, the employer purchases stop loss insurance to protect against large claims - for example, to cover costs over $50,000 per person or an aggregate amount that applies once TOTAL claims reach a certain amount for the plan year.
The bottom line is that self-insuring your group medical plan might be a way to avoid additional costs and constraints of PPACA. And, "small" group (under 100) options are coming ... if you have a relatively young and healthy population, as well as the financial ability to pay fluctuating monthly costs, self-insuring may be viable.
So, what are the biggest considerations before going down this path?
1. Risk tolerance
You can spend less money with a self-funded health plan. Or, you can spend more, in comparison with a fully insured plan. And while many of the potential fees and charges (beyond claims) may save money in the long run, they are still expense often requiring upfront funding. Stop loss insurance (also known as reinsurance), disease management, wellness programs and other utilization review options are good examples.
2. Cash flow
There is more than just “paying claims.” Significant cash flow is required to meet the plan's obligations to members, claims administrators, health providers and other vendors. Weekly claims funding can tax corporate reserves when low receivables cross paths with heavy claims. Stop loss doesn't always solve these cash flow burdens.
3. Federal compliance
While you avoid state mandates, ERISA brings forth its own set of document and reporting requirements (including 5500 filings). New requirements can complicate plan administration and place restrictions on plan design (e.g., Mental Health Parity). With a self-funded plan, these responsibilities fall to the employer (now known as the plan sponsor and/or plan fiduciary), not the claims administrator.
4. Plan management
A self-funded plan requires near daily management. Weekly claims funding requests, data file transmissions, usage reports and vendor supervision necessitates immediate attention. Plus, annually there are several responsibilities including (but not limited to) 5500 filings and distribution of the Summary Annual Report. Do you have the time to oversee these tasks? Will they require additional staff? Can you pay a broker or benefits consultant to help?
5. Separation of the plan from the company
A self-funded plan offers direct information about not only the health of employees, but their medical condions and claims costs. The employer reviews this on a regular basis o ensure the efficient administration of the plan. Creating a wall between management and the benefits department — beyond standard HIPAA protocols — is critcal and can be achieved by redacting identifiers, aggregating data and limiting discussion about members to the minimum necessary information.
Appeals requests come both from the claims administrator (or TPA) and employees directly. New treatments, unexpected situations and "grey areas" in the plan documents can force the company to make decisions. A denial can lead to resentment or a large expense for the employee. An override of the plan document can show bias and add additional expense to the plan.
7. Internal plan competition
A self-funded PPO with minimal out-of-pocket costs and low premiums could be detrimental to a fully insured HMO option. Some companies offer multiple plans to employees. Carrier agreements and stop loss contracts usually contain minimum participation requirements with the penalty often being re-rating. Additionally, consider supplemental plans — a vision plan may lose all its members if the new self-funded PPO covers optometrist visits and glasses.
Like with any benefit change, participants need to know what is covered, where to obtain services and how much they are going to pay. Internal benefits/HR staff will also need training. Employees will come with questions that can no longer be passed off to the insurance company. Also, senior management will expect answers on how the plan is running and anticipated costs and changes for the upcoming year.
9. Plan creation/development/amendment
A self-funded plan requires regular plan review. Legal and administrative changes often require amendments to the plan document. Stop loss carriers will also send out amendments to contracts for a range of issues, from minor clarifications of duties to government mandates to changes of sub-vendors. While not usually overly burdensome, be prepared to review your benefits plan at least a few times per year.
10. The participants
Take a good look at the participants. While participant well-being is not the only reason for a benefit plan to exist, remember that benefit packages are designed to be part of the entire compensation package. An adverse benefit plan may direct high-performing talent to other companies. A well-designed benefit and compensation plan will ensure that you attract and retain the best workerforce.
It is critical to consider both the positives - and the negatives - of self-funding a health plan. This analysis should include financial, administrative and even, cultural issues. It likely is one of the biggest employee-benefit decisions an employer will face.