Tailoring self-funding benefit strategies to the needs of the client
Liana Hemingway was devastated when she had to inform Eckerd College’s faculty and staff that yet another round of premium increases meant the school had no choice but to stop funding some of their benefits.
“We’re a small private liberal arts college that is tuition dependent and we just couldn’t afford it anymore,” recalls Hemingway, Eckerd's HR director. “It was the first time during my 15-year tenure where we were faced with having to cut benefits.”
So, the St. Petersburg, Fla., school started considering a more radical approach. Once a month, Hemmingway and the Eckerd College’s benefits committee began meeting regularly with Paula Beersdorf, the president of Sun Risk Management, a local health insurance agency. During those monthly sessions, Beersdorf presents the committee with the steps it can take to become self-insured, as it mulls which of several approaches to persue.
Beersdorf, who has advised clients on self-funding strategies for the past 30 years, finds her services in much demand these days, as a growing number of employers are confronted with unsustainable premium increases. Not a believer in "one-size fits all," she says there is a self-funding strategy for every employer, regardless of its circumstances.
The trick, Beersdorf maintains, is to pair the right approach with the right client. Here are four basic strategies that she often recommends:
The first self-funding strategy that Beersdorf offers up for consideration is an employer-sponsored health arrangement plan under Internal Revenue Code Section 105. “This is what we like to call, ‘self-funding on training wheels,’” she says.
To establish an HRA, the plan must be solely funded by the employer and reimbursements must be for qualified medical expenses as defined by IRS Code Section 213(d). There is no minimum or maximum restriction on the amount of money an employer can contribute, and the amount contributed is tax-deductible to the employer and non-taxable to the employee.
A key advantage is how much control an employer has when designing an HRA. Under the plan, “An employer may restrict which medical plan expenses may be reimbursed,” Beersdorf explains, noting that no set dollar contribution is required.
Another Beersdorf-recommended approach is level funding. This strategy has all the virtues of self-insurance but offers the predictability of a fully-insured plan. Under a level-funding arrangement, employers contribute a fixed dollar amount monthly.
“This method of self-insuring has become increasingly popular over the past several years and is mainly available through national insurance carriers or third-party administrators,” Beersdorf says.
Level-funding introduces aspects of self-funding to employers who are looking to cut costs but are still reluctant to self-fund or partially self-fund. But with level-funding, employers still pay fixed monthly premiums that include the following:
· A fixed sum to cover claims, the amount of which is determined by the underlying carrier’s underwriters.
· An administrative fee to the carrier or TPA who is responsible for processing claims and providing access to a provider network; and
· The cost of stop loss or reinsurance to insure the plan against catastrophic claims.
“One of the benefits of entering into a level-funding arrangement is that the employer has access to its claims and utilization data,” Beersdorf points out. “They can get detailed reporting that highlights where its members are spending their healthcare dollars and—even more importantly sometimes—where they are under-spending for things like preventative care or maintenance medications.”
Yet another route to self-funding is group captives.
“Captives have been used for many years by property and casualty insurers to manage predictable risks, such as worker’s compensation or malpractice,” Beersdorf says. “Due to rising health insurance costs, employee benefit captives have become increasingly popular.”
An employee benefit captive is an insurer that is typically owned by a group of employers, and the captive’s primary purpose is to insure the risks of its owners. By retaining premiums that would otherwise have been paid to a traditional carrier, the employer owners also retain any profits should the captive’s losses be less than the premiums.
The captive protects its owners from losses that exceed its premiums, Beersdorf says, with traditional stop-loss insurance coverage.
4. Partial self-funding
Employers who make use of partially self-funded plans also protect themselves with stop-loss coverage. The employer assumes the direct risk for most of the covered claims, but purchases reinsurance – also known as stop-loss insurance – to guard against unpredictable losses and high-dollar claims for catastrophic illnesses such as cancer.
“A major difference between conventional fully-insured plans and partially self-funded plans is that the stop loss policy insures the employer—not the member,” Beersdorf notes.
Partial self-funding is the holy grail of self-insurance and gives employers complete control over the way the plan’s healthcare dollars are spent. They see how their employees are spending their plan dollars and can quickly intervene to encourage more efficient use of the plan’s provider resources
Best of all, “Employers who partially self-fund their benefits no longer dread their renewal periods,” Beersdorf says. “Their plans typically experience below-trend cost increases—and in some case even decreases in spending.”