What is Self-funding?

There are as many misconceptions about self-funding as there are self-funded plans.

Self-funding has nothing to do with the benefits being offered to your employees and, in fact, can usually give you more control over what benefits you actually offer.

The fully insured model

Under a fully insured plan, an employer pays a fixed premium to an insurance carrier. The carrier collects that premium, pays the claims, and keeps whatever is left. If claims come in lower than expected, the carrier retains the difference. If claims come in higher, the carrier absorbs the loss.

The employer’s cost is predictable. The minimum and maximum cost is the premium paid.

The self-funded model

Under a self-funded arrangement, the employer is responsible for claims as they are incurred. Instead of a fixed premium, the employer’s costs consist of:

• Actual claims paid — the real medical and pharmacy costs of the covered population

• Administrative fees — paid to a third-party administrator (TPA) or to a carrier operating in an administrative-services capacity, often referred to as “ASO.”

• Network access fees — paid to the network that brings providers with whom it has negotiated fee discounts

• Stop-loss premium — insurance that caps the employer’s exposure (details are covered in a separate article)

If claims run below expectations, the employer keeps the difference. If claims run high, stop-loss insurance is what stands between the employer and an unbounded liability.

Who does what?

A self-funded plan is not a do-it-yourself operation. The functions a fully-insured plan carrier used to bundle get unbundled and assigned:

• The Employer is the plan sponsor and the payer of claims. The employer’s money funds the plan.

• The Third Party Administrator (“TPA”) processes claims according to the benefits stipulated by the Employer, provides reimbursement to providers, handles eligibility, produces reporting, and provides overall administration of the plan on a day to day basis.

• The Network supplies the negotiated provider discounts. Employers typically rent access to a national or regional network for an agreed-upon fee.

• The Stop-Loss carrier reimburses the plan when claims exceed the agreed threshold.

• The Pharmacy Benefits Manager (PBM) manages prescription drug benefits, which in most groups now represents a large and growing share of total spend.

Unbundling is the result. Each component can be evaluated, negotiated, and replaced independently — which is not possible when everything arrives as a single premium.

The key is transparency. Traditional, fully-insured plan bundling often tends to bury certain fees and expenses in line-items such as “reserves” and “retention.” In a self-funded arrangement, everything is disclosed.

ERISA

Self-funded plans are governed primarily by ERISA, a federal law, rather than by state insurance regulation, as is the case with most fully-insured plans. Two practical consequences result:

State-mandated benefits generally do not apply. States require insured plans to cover specific services. Self-funded plans design their own benefit structure, adhering to federal requirements and not state. For a multi-state employer, this means one consistent plan design rather than a patchwork of state variations.

State premium taxes generally do not apply to the self-funded portion of the arrangement, i.e. claims, because there is no premium in the traditional sense.

What actually changes for employees

Usually very little that is visible. Employees receive an ID card, use a provider network, and pay copays and deductibles, just as before. The card may carry a familiar carrier name if that carrier is providing administrative services and network access.

What changes is on the employer’s side of the ledger: transparency into where the money goes, and control over plan design.

An Overall Assessment

Self-funding replaces a predictable premium with variable claims cost that is limited by stop-loss. In exchange, the employer gains full transparency, control over plan design and vendors, and the immediate retention of favorable claims experience rather than surrendering it to a carrier for reserves.

The fact is that once your company is covering 50 or more employees (sometimes less with certain carriers), you’re essentially “paying your own freight” whether you are fully-insured or self-insured. That dynamic increases with the size of your group.

For example, if you are fully-insured and have adverse claims experience, you know your rates will increase and that increase will apply to the entire premium. Further, that increase will stay in effect until it is “amortized” off, even if your claims experience immediately improves. With today’s unprecedented inflationary health care environment, you may likely never see a reduction.

If you are self-funded, in the same scenario of adverse claims experience, you may also see an increase in the cost. However that increase will apply ony to the stop-loss premium, which is roughly 20-30% of total plan costs. If your claims experience immediately improves, you will also see that savings immediately. We call it Instant Recognition.

In the final analysis, this is a structural decision, not a product purchase.

This article is general information about how self-funded health plans are structured. It is not advice, a recommendation, or a proposal for any specific employer or plan. Whether any particular arrangement is appropriate depends on facts unique to your organization.