Self-Funded Health Insurance

Self-funding is an approach to financing an employer’s health benefit offering that provides greater flexibility and control, plus the opportunity for significant cost savings. Though it isn’t ideal for all employers, many can benefit from a self-funded (or level-funded) plan as instead of the traditional fully insured model.

What is Self-Funding?

A self-funded health insurance plan is an employer-provided coverage plan that is not purchased from an insurance carrier (i.e., the employer pays the claims themselves). The employer assumes a greater risk, but also has greater potential for savings than with fully-insured plans. 

• Risk—Self-funded insurance plans have a higher risk than fully-insured plans since the employer takes responsibility for paying claims, though stop-loss insurance protects against catastrophic claims.
• Regulations—Self-funded plans fall under the Employee Retirement Income Security Act (ERISA), meaning they are subject to regulations related to participant rights and access to plan information. Self-funded plans are also regulated differently than traditional plans under the Affordable Care Act (ACA).
• Costs—Self-funded plans include the following costs:
• Fixed costs—Administrative fees, stop-loss premiums, other TPA or carrier fees
• Variable costs—Payment of claims 
• Savings—There is no need to pay state health coverage mandates, insurance company risk charges, or certain ACA-related fees. There is also more flexibility in plan design that can help manage costs.
• Logistics—The employer works with a broker and TPA to create a plan and choose a network, then uses the TPA to handle claims. They may use stop-loss insurance to protect themselves from catastrophic claims.

Benefits of Self-Funding

• Fewer taxes and fees—With self-funding, no profit margin is added by the insurance company. Plans are exempt from most state oversight and certain ACA regulations. While self-funded plans are still subject to certain aspects of ACA, such as minimum essential coverage (MEC), they are not subject to state-mandated coverage levels for certain benefits, such as chiropractic services. These aspects of self-funded plans lead to an average savings of 10% to 20% over fully-insured plans. With fully-insured plans, taxes and mandated fees increase proportionately with rising healthcare claims costs. While 2019 was considered a “relief year” from insurer fees, these fees in 2020 are expected to be even higher than the 3.9% they were in 2018, on top of the 2% premium tax. These savings alone average between 5% and 10% (Milliman).
• Increased benefits of employee education—Employees can be educated to become smarter healthcare consumers - and the employer (not the insurance company) reaps the benefits. When employees know where to go for their healthcare needs, and are healthier overall due to wellness initiatives, the employer saves money with self-funded plans.
• Flexibility in plan design—More creative plan design options help employers to manage costs and benefit from additional savings. Employers can shop around for better claims administration and stop-loss premiums, and have much more flexibility in plan design, allowing the creation of a plan that better fits an employer group’s needs.
• Access to data—Self-funding provides more access to claims and utilization data than fully-insured plans, where carriers control the data that they report on and provide to employers. With self-funding, employers are able to determine which information they want to access and when. This data can be tailored to tell the employer if their plan is achieving their goals. For example, the employer can run reports to see whether claims have gone down since implementing a new wellness program, allowing the employer to see how their efforts are impacting their bottom line.

Potential Downsides to Self-Funding

Self-funding can be confusing at first and can lead to employers setting up plans in a way that doesn’t help them, but actually hurts their bottom line. Here are some of the common pitfalls to self-funding—all of which can be avoided with proper planning:

• Hands-on approach—Some employers want to take a “set it and forget it” mentality with their employee benefits plan, but self-funding requires the employer to be more engaged than with a fully-insured plan. When taking on self-funding, the employer must commit to paying closer attention to claims and analyzing both their plan and their results regularly in order to achieve the best impact on their bottom line.
• Higher-level focus—Employers might try to control the wrong costs. Self-funding requires employers to look at the big picture, focus on total spend and trend, and understand that sometimes growth in one spend bucket is good. For example, increased pharmacy costs due to wellness programs encouraging employees to take medications for chronic conditions are positive in the long-term. Instead of worrying, employers should direct their efforts toward larger, controllable costs, like where care is delivered (e.g. incentivizing the use of walk-in clinics or office visits versus emergency rooms.). Rather than worry that employees are taking medications for chronic conditions when they weren’t previously, employers should encourage the use of generics when possible.
• Stop-loss coverage—Employers may buy the wrong stop-loss coverage. It is critical to understand whether the stop-loss is on a paid or incurred basis, and how long providers have to file the claim; bigger claims often take longer to file and pay. Gaps between what is offered in the medical plan and what is covered by stop-loss can also lead to additional large, unexpected expenses for employers. Making sure that the stop-loss plans take into account all of the benefits offered to employees and other covered individuals in the language of the plan itself can significantly reduce costs.
  
• Results take time—Losing patience with self-funding is not uncommon. The savings with self-funding don’t happen overnight. While self-funding can positively impact the employer’s bottom line, it may take a few years to create a plan that works best for the organization and provides the savings desired. With self-funding, there will be bad years—that’s part of the deal—but in the long run, the good years make up for it. The worst time to stop self-funding is after a bad year.
• Communication with vendors—Vendors working in silos can be dangerous. Getting reports from various vendors (TPAs, PBMs, etc.) and being unable to integrate or compile the data in a way that helps improve the plan is counterproductive and can lead to the plan costing more in the long run.
• Untreated conditions are more expensive long-term—With plan design flexibility comes the potential possibility of designing a plan that creates barriers to necessary care or incentivizes the wrong behavior. Discouraging care for chronic conditions with extremely high deductibles and out-of-pocket costs can actually lead to excessive claims. Employees and other covered individuals who have chronic conditions they aren’t managing due to cost are more likely to incur catastrophic claims down the road.
  
  

When employers are considering self-funding, they need to take special care to ensure their plan includes some specific elements that they may not have considered with previous plan types.

Stop-Loss Coverage

There are two basic kinds of stop-loss coverage:

• Specific stop-loss coverage protects against catastrophic claim costs on any one individual. 
• Aggregate stop-loss coverage protects against total claims that are higher than expected.

Stop-loss coverage reduces the overall risk of self-funding for the employer. It basically ensures that when claims are extremely high, for an individual or total, the employer will not be responsible for all of the costs.

There are limits to what stop-loss insurance covers. For example, for stop-loss reinsurance (specific stop-loss), the maximum per-claim amount is often $1,000,000. Employers should be aware of what their stop-loss limit is when they design their plan to ensure they aren’t surprised by additional costs if they exceed their stop-loss limit.

Additionally, employers should be aware that when stop-loss kicks in to pay for excessive claims, the plan premium may increase in future plan years. This could mean that if one employee experiences a catastrophic claim in a specific plan year, employee costs may go up for all employees in future plan years to account for a higher premium cost for that one employee.

Third-Party Administrator (TPA)

In order to successfully switch to self-funding, it’s pertinent to find an administrator who is familiar with the structure. TPAs handle a lot of the behind-the-scenes details of self-funded plans, including:

• Claims payment and administration
• Offering assistance with compliance and regulatory support
• Providing a summary plan description (SPD)
• Support and provision of broker, employer and enrollee portals to access plan information

There are many details to self-funding your benefits plan that should not be overlooked, so finding an experienced TPA is key.

Pharmacy Benefits Manager (PBM)

A PBM provides services and education to aid covered employees and their families with the appropriate prescription of drugs for maximum effectiveness. These services may include:

• Formulary and pharmacy network management
• Processing and paying claims for prescription drugs covered under the plan
• Specialty drug management, such as prior authorization and supply limits on oral and self-administered prescription drugs, as well as recommending the optimal providers of these drugs

Additional Services

With self-funding, employers have the flexibility to build plans that work for their organizations and employees. They are able to include services such as:

• Disease management
• Case management
• Wellness
• Concierge services to help beneficiaries choose high-value services
• Transplant and specialty networks for special care

Choosing the Right Network

A network is a group of providers that have agreed to provide a discount to covered individuals when utilizing their services. Employers must decide if they want to offer a broad or narrow network.

Some employers may choose to use similar networks to the ones they utilized prior to switching to self-funding, and others may not. Network flexibility is a benefit of self-funding, but the network should be chosen carefully, with historical claims data in mind, to ensure the proper balance of employee satisfaction and employer cost savings.

To understand self-funding better, it helps to know how this plan type differs from other plan types you may be familiar with.

Self-funded

• Not purchased from a carrier (i.e. employer pays claims themselves)
• Highest risk
• Potential for greater savings than with other plan types
• Stop-loss insurance protects against catastrophic claims
• Subject to ERISA and ACA regulations 
• More flexibility in plan design

Level-funded

• A type of self-funded plan (not purchased from a carrier; the employer pays claims themselves)
• Monthly payment is fixed (determined by TPA based on risk), making it more predictable than self-funding
• Medium level of risk
• Potential for additional savings due to flexibility and lack of state regulation
• Stop-loss insurance protects against catastrophic claims
• Subject to ERISA and ACA regulations 
• More flexibility in plan design

Fully-insured

• Employer pays a fixed annual premium to a carrier based on the number of employees enrolled
• Carrier is responsible for claims payment (with the exception of deductibles and/or coinsurance paid by enrollees)
• Lowest level of risk
• Fewer opportunities for savings
• Subject to ACA, state health insurance regulations/benefit mandates, state health insurance premium taxes and ERISA
• Predictable costs
  
  

DIGGING DEEPER ON LEVEL FUNDED PLAN

Level-funded health insurance plans are actually a type of self-funded plan. But how does that work?

Instead of the employer simply paying claims as they go, a TPA determines a customized monthly payment amount for the employer. That payment amount doesn’t change throughout the year. It includes the following:

• TPA fees
• Stop-loss premiums
• A claims allowance

What happens is that when claims come in, the claims are paid out of the claims allowance. The TPA handles this. Since the employer is paying a specific monthly amount, costs are more predictable than with standard self-funded plans.

If, at the end of the plan year, the claims paid out are less than the amount allotted for, the employer may receive money back. It is important to understand that with level-funded plans, TPA fees and stop-loss premiums may be weighted higher than the claims allowance, so with the predictability of the plan, there may not be a claims excess at the end of the plan year, even if claims are lower than expected.

With a level-funded health insurance plan, there may be slightly higher fees than with a self-funded plan (although still lower than with fully-insured); however, the employer is never caught off-guard with unexpected expenses throughout the plan year.

Level-funding can be a good first step toward self-funding.

As an employer, you know how powerful an excellent benefits package can be. You’re probably also struggling with relentlessly rising healthcare costs. Cutting benefits or passing off more costs to employees might seem like the right strategy to manage your bottom line, but that choice can be detrimental to your business. 

There are many advantages for employers who choose to offer a competitive benefits package, such as:

• Attracting and retaining top talent—A robust benefits plan is extremely compelling to attract potential talent and can help retain your best employees. 80% of employees would choose a job with benefits over an identical one with 30% more pay and no benefits.

• Employee engagement and productivity—Solid health benefits can equate to lower stress, higher productivity and increased job satisfaction for employees. Employees who are very satisfied with their benefits are about 4x more likely to be satisfied with their jobs.
• Keep up with the competition—If you’re still unsure about the right benefits strategy, it may help to know what the competition is doing. A small percentage of companies are cutting benefits for financial reasons, but far more are choosing to expand their offerings to attract and retain top employees.