A common concern about the Patient Protection and Affordable Care Act (PPACA) is that while it will provide benefits to many individuals in need, it doesn’t address the true drivers of health care costs, such as a rising population with chronic medical conditions or excessive utilization of the emergency room. With PPACA regulations requiring fully insured plans to provide additional benefits and little being done to contain true health care costs, we are basically guaranteeing a fate of continued increases to health insurance premiums with no limit in sight. But there is another option for the employer caught in the crossfire. That option is self-funding or self-insuring their health plan.
When broaching the subject of self-funding, many times employers are left with more questions than answers about the true benefits and risks involved. Previously considered an option only for larger employers, small businesses are beginning to take a closer look as new, innovative self funded programs emerge. While the PPACA is focusing its authority on fully insured health insurance plans and with the development of innovative self funded plans, it may be worthwhile for businesses large and small to take a look.
How Self-funding Works
Self-funding is an employer-based health insurance program in which the employer pays claims directly out of the company’s funds with the added protection of stop loss insurance coverage in the event of high individual claims or high volume annual claims. This arrangement is usually evaluated with the assistance of a Third Party Administrator (TPA) and/or a broker. The TPA generally assesses the provider network, and handles all of the administrative activities including billing, claims processing, and identification cards. This differs from a fully insured product in which the monthly premium for the group is paid directly to a health insurance carrier who administers the plan, bears all the risk, pays claims and keeps any remaining portion of unused premium as profit. While fully insured plans are subject to regulations of the State Department of Insurance, self funded plans are governed by the Employee Retirement Income Security Act (ERISA). Being governed by ERISA means more flexibility and potential cost saving when creating the plan.
Advantages of Self-funding
The most immediate advantage of a self funded arrangement is the ability to manage plan costs. Self funded plans receive favorable tax treatment. Due to regulations stipulated in ERISA, self funded plans are exempt from state taxing. This tax treatment usually provides an instant savings of 2% to 3% in plan costs. A second cost advantage is with excess premiums. In a fully insured plan, if utilization of the plan is less than what was expected, the health insurance company keeps the difference. With a self funded plan, any money set aside for claims that are unused at the end of the year simply remains with the employer to use at their discretion.
Another advantage of being governed by ERISA is the flexibility of plan design. Employers have the flexibility to create a value-based benefit design that best meets their needs including the choice of deductibles, copays, covered services and prescription drug benefits. The employer is generally not bound by requirements that fully insured plans have, such as employer contributions toward premium requirements or certain state mandated plan requirements. This allows the employer to create a plan that provides for cost savings while maximizing benefits that specifically meet the needs of employees. It is important that employers understand that some PPACA regulations do apply when self-funding, such as the requirement to cover dependents up to age 26 and cover preventive services at 100%.
The aforementioned advantages of self funding often overshadow what may be an even greater benefit to self-funding: access to claims data. Traditionally, fully insured employers with fewer than 100 covered employees are not given access to claims data. When an employer self funds, the employer has access to HIPAA compliant claims information. This important information gives employers, large and small, insight into the true cost drivers of the plan and, therefore, allows the employer to take actions to curb those costs. Some measures to decrease overall medical costs may include worksite wellness programs, a disease management program to coach employees with chronic conditions, and providing incentive programs for employees when they make better health decisions.
Challenges of Self-funding
One perceived disadvantage of self-funding is that it is reserved only for larger employers who have the personnel, claims information and experience to properly shop self funded options. But what has become increasingly popular in recent years is the emergence of small group self-funding. In eastern Pennsylvania, for example, some self-funded plan options have been created as prepackaged, easy to understand plans. This saves time and effort on the part of both the employer and the health insurance broker to shop self funded options and compare those options with existing fully insured options.
Another perceived disadvantage of self-funding is that smaller groups lack the employee population to properly spread the risk. While this may have previously held some truth, these small group self-funded plans have analyzed and accounted for every aspect of risk. The outcome is a product that protects against risk through a combination of stop loss insurance and a fixed monthly amount. The design allows employers to take advantage of the perks of self-funding without taking on any unnecessary risk.
Why Brokers are Key
It is important for employers to seek professional assistance from a health insurance broker or agent when making the decision to self fund. Health insurance brokers can assist employers with weighing the available self-funded options and plan designs to maximize coverage and minimize expense. As the PPACA continues to unfold and further regulations are created, the health insurance industry will continue to evolve as well. But regardless of emerging trends, self-funding provides employers the opportunity to take control of the costs during a very uncertain time.