“What, me? Self-funded?” This was often the response brokers and consultants would hear from small and mid-size employers (100 to 500 employees) who perceived self-funded plan design as something that could only work for much larger employers who could better manage (and stomach) the risk.
However, with new Affordable Care Act requirements and proposed double-digit rate increases for fully insured plans and public health exchanges looming for 2016, many employers who previously dismissed self-funding as a viable option for their medical benefit plan design might want to take a closer look.
According to the Kaiser Family Foundation, approximately 57% of all health plans in the U.S. are now self-funded. While self-funding may not be right for every company, employers should at least consider it a potentially viable option and perform the due diligence to see if self-funding can help them meet both the financial and cultural goals they want to achieve with their company’s benefit plan.
Traditionally, the biggest barrier has been employers’ reluctance to assume the financial risk that comes with self-funding. However, it may ultimately be a greater risk to remain fully insured and continue treating your annual health care spend as an expense rather than an investment.
With fully insured plans, your premium rate is set at the beginning of each plan year, so you have a good idea of your total annual costs and can budget accordingly. While this provides you with short-term financial certainty, it leaves you with little control over the ability to understand utilization, improve employee health and reduce overall costs.
Think about it. How many times has your fully insured premium rate decreased from one year to the next? If you answered never, you are not alone. In a fully insured plan, any under-utilization typically winds up as extra profit for the insurer as added compensation for assuming the risk. On the flip side, if your total employee utilization exceeds the insurer’s actuarial estimates used to set your premium rate, the insurer will recoup that loss through a rate hike the following year. If this sounds like a “no-win” or at the very least a “no risk-no reward” situation, that’s because, for the most part, it is.
It is absolutely true that self-funded plans require the employer to assume more risk. However, with the right plan design you can manage that risk and subsequently position your company for much greater rewards than can ever being achieved under a fully insured plan. For the most part, these rewards fall into two main categories: control and cost savings.
In a self-funded plan, the most immediate reward is control. Self-funding offers you more control over plan design, range of benefits offered, levels of employee contributions and, most importantly, access to employee health data. While insurers are typically reluctant to share plan data, in a self-funded plan, you are the insurer, so you immediately gain complete access to claims data. With ownership of this data, you can now begin to understand utilization and develop programs and incentives to better manage and improve employee health such as outcomes-based wellness and premium differentials for healthy behaviors.
With self-funding, you now have the data and the flexibility to select the best-in-class components for each part of your plan. This means you can build a customized plan that addresses specific employee needs as well as company objectives.
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With control comes increased administrative burden, which, aside from risk, is the second thing that causes employers to avoid self-funding. Employers often fear that the added workload associated with plan management, analysis, reporting and compliance will be too much to handle. And they’re right. Trying to do this all in-house is not the recommended approach. Use your broker or consultant to help you identify the right third party administrator and pharmacy benefit manager to handle key administrative functions such as claims processing and payment, medical management, prescription drug programs, utilization review and customer service.
Under a self-funded plan, you can eliminate costs that are typically incurred under fully funded plans such as claim reserves, profit margin, premium taxes and other built in fees which are included in the premium rate on top of the estimated costs of claims. These reserves and fees can range from 10% to 30%.
Self-funded plans are also regulated differently than fully insured plans. They come under federal law (ERISA) and, as a result, are not subject to the often dizzying array of state-by-state regulations and costly mandates. In addition, while self-funded plans are subject to many ACA provisions, they are exempt from the ACA’s health insurance company tax (HIT) which adds another 2% to 7% to the cost.
In a self-funded plan, you can either fund expenses by depositing expected costs into an account each month or paying them as they come due, which helps improve cash flow. By avoiding advance premium payments, you can invest your money rather than simply spending it with an insurer.
In order to manage risk effectively and protect your company’s financial health against catastrophic claims, it is essential to have stop-loss coverage as a component of your self-funded plan design. Stop-loss insurance provides reimbursement for specific individual catastrophic claims or higher than anticipated annual aggregate claims. Stop-loss insurance is what gives smaller employers the confidence and peace of mind to self-fund their plan because it caps their level of risk and financial exposure to large claims.
While self-funding plan design has been around for more than 30 years, in the industry has been disrupted by new provisions and requirements of the ACA, the trend toward more consumer-driven health care and continued increases in premium rates. These are compelling reasons for companies to explore self-funded plan design. You no longer need to be a large, Fortune-ranked company to self-fund. Companies with less than 100 employees are finding success with self-funded plan design. With the right approach, self-funding can prove to be a very cost effective, flexible and successful solution to benefits needs. Overall, companies that self-fund typically average a 20% reduction in total overall benefit plan costs. So, don’t let your fear of risk cause you to miss the opportunity to gain more control and reduce costs.
Flowers is vice president, marketing and product development at Lifetime Benefit Solutions, a full-service third party administrator.
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