Are You a Good Candidate For Self-Funded Health Plans?

As Premiums Rise, More Employers Are Choosing Self-Funded Coverage


Health care premiums are skyrocketing. A July 3, 2015 New York Times article, reported that insurance companies across the nation are seeking rate increases of 20%–40% or higher. North Carolina rates in 2016 for Blue Cross and Blue Shield plans could rise an average of 25% if approved and 36% in Tennessee. [1]

“Both Virginia and North Carolina are looking at double-digit rate hikes proposed for ACA plans in 2016. The ACA taxes and fees are a prime reason why many employers are considering self-funded plans.”
                        – Alan Bayse, Consultant, TrustPoint Benefit Advisors, Roanoke, Virginia

Employers are searching for answers as the cost of medical services and drugs spirals upward. A 2011 study by the Employee Benefit Research Institute revealed that 58.5% of employers chose self-funded plans, up 18.5% in the past 13 years.[2]

What is Self-Funded Coverage?

Employers who self-fund provide employee health benefits out of company assets and employee contributions. This model of coverage gives employers flexibility to fund and manage their plan for the unique needs of their company and employees. And self-funded employers enjoy other benefits, such as exemption from certain federal and state fees, totaling up to 6% in savings.

How Would My Rates Be Calculated?

The key benefit for self-funded employers is the ability to save unspent money reserved for claims. Employers who work with benefits administrators manage costs more efficiently—and costs can be transparently analyzed from year to year. Self-funding allows employers to set their premium rates with customized plans for employees. Self-funded plans can fit a variety of budgets, from pay-as-you-go, all the way up to fully-funded rates for maximum liability of coverage. Employers who prefer more predictable budgeting may choose to set rates at this higher level.

What about Catastrophic Claims?

Self-funded employers address the risk of large, catastrophic claims with stop loss insurance, which covers claim costs exceeding the limit chosen by the employer. Stop loss policies are issued with individual (specific) deductibles and aggregate (group) deductibles. The employer is able to choose the level of exposure for a specific plan while protecting business assets. MedCost partners with consultants and employers for access to A-rated stop loss carriers with high-quality plans.

So Who Are the Best Candidates for Self-Funded Plans?

Three out of five covered workers are in self-funded plans, according to a 2013 study by the Kaiser Family Foundation.[3] What type of employer is a good candidate to self-fund? You may find this model a successful strategy for your business if you fit these parameters:

1 Your company wants to know where all your health care calculatordollars are going. 
Benefits administrators should offer cost reporting when managing your plan, as well as a detailed breakdown of expenses when setting up your plan. Stop loss insurance and benefit administrative costs may range from 18%–21%, leaving up to 79% for employers to reserve for the variable expenses of employee claims.

2 Your company likes to customize your health care benefits.
Self-funded plans avoid many state mandates regulating costly benefits because these plans are governed by the Employee Retirement Income Security Act (ERISA) passed by Congress in 1974. ERISA preempts many state insurance laws, offering potential savings. If you want to design your own plan benefits while controlling cost, this choice offers those advantages.

3 You want more autonomy to choose your level of risk.
No matter how health care plans are funded, insurance is based on risk sharing. But in a self-funded plan, you can select deductible limits and the amount of stop loss coverage to cover excessive claims during a plan year. Working with an experienced consultant and benefits administrator can give you the knowledge to make decisions that are best for your company.

4 You prefer to keep health care dollars not spent on actual claims.
Self-funding offers significant savings opportunities on employer assets that are reserved for payments of claims. Cash flow can be maximized either by pay-as-you-go funding or by depositing the full amount of projected claims liability into your account. Funds not spent during a plan year remain in your account, available for future plan expenses.

Does a self-funded plan make sense for you to consider? Contact your health care consultant or Laura at MedCost to make the best choices for your health care plans.


 

[1] Pear, Robert, “Health Insurance Companies Seek Big Rate Increases for 2016,” New York Times, July 3, 2015, http://www.nytimes.com/2015/07/04/us/health-insurance-companies-seek-big-rate-increases-for-2016.html?_r=1

[2] Fronstin, Paul, Ph.D., “Self-Insured Health Plans: State Variation and Recent Trends by Firm Size,” Employee Benefit Research Institute, 2. http://www.ebri.org/pdf/notespdf/ebri_notes_11_nov-12.slf-insrd1.pdf

[3] 2013 Employer Health Benefits Survey, Kaiser Family Foundation, August 20, 2013, http://kff.org/report-section/ehbs-2013-section-10/

Self-Funding: 10 Terms You Need to Know

Confused by all the “insurance-speak” in the health care industry? Here’s a quick reference guide for common phrases in health plans:


1 Self-Funding: Also called self-insurance. Employers choose this model of funding to pay for health claims from company assets and employee premiums. Self-funding allows employers to pay only for actual claims, instead of the fixed premiums of fully-insured plans. A 2013 study by the Kaiser Family Foundation noted three of five covered employees are in self-funded health plans.[1]

2 ERISA: Employee Retirement Income Security Act of 1974, passed by Congress to establish federal regulations for self-funded benefit plans. Self-funded employers avoid fees such as the Health Insurance Provider Fee,[2] Risk Adjustment Fee[3] and Federally Facilitated Exchange User Fee. Self-funded employers also avoid certain state premium taxes.

3 SPD: Summary Plan Description that lists health plan terms and conditions, written for a particular employer or organization. The SPD defines the benefit coverage and exclusions. MedCost ensures that coverage and exclusions mirror the stop loss contract. If the stop loss contract does not mirror benefits offered, the employer may have to pay claims that were not covered by the stop loss carrier.

4 Fixed Cost: Predetermined fees that are paid as part of a health plan, regardless of actual expenses. Fully-insured plans are 100% fixed cost, paid out in set premium rates to the carrier. Self-funded fixed costs range from 18%—21% of total plan costs for administrative fees and stop loss insurance.

5 Variable Cost: Also called soft dollars, which may translate into potential savings for a self-funded employer. Prudent employers deposit funds for the total estimated employee claims into a reserve account in the company’s name. These dedicated funds remain in the employer’s account for future medical expenses if not spent during a plan year. MedCost provides professional underwriting services to help employers ensure that they are adequately covered for both expected and unexpected claims.

6 Corridor: Also known as claims or risk corridor, or margin. Underwriters include this as a cushion to cover unexpected claims. Generally this amount is around 25% for self-funded plans and 20% for fully-insured plans. Expected claims plus risk corridor (for variable expenses) determine the maximum liability (or attachment point).

7 Stop Loss Insurance: Coverage designed to protect self-funded employers from the risk of catastrophic claims beyond a predetermined liability. MedCost underwriters recommend policies with consistency between the stop loss policy and the employer’s SPD, to avoid any gaps in coverage when claims are submitted.[4]

8 Specific Stop Loss Deductible: The limit of liability under stop loss coverage on an individual employee covered under an employer’s heath care plan. The employer chooses this amount based on total group size and selected risk tolerance.

Stop Loss Coverage Specific Example


Jane Smith suffers from renal failure and undergoes kidney dialysis. Her claims total $300,000. Jane’s employer is self-funded and has purchased specific stop loss with a $75,000 deductible.

Total Claim $300,000
Employer Deductible $75,000
Amount Reimbursed by Stop Loss Carrier $225,000

9 Aggregate Stop Loss Deductible: This amount is the self-funded employer’s overall or group liability under a stop loss policy. Underwriters typically project expected claims plus a 25% margin to determine an employer’s maximum liability (or attachment point).

Stop Loss Coverage Aggregate Example

insurance

  • Includes claims paid that do not exceed the specific deductible
  • When underwritten appropriately, expenses should approach the amount of expected claims ($4 million), rather than the maximum liability ($5 million)
Expected claims $4,000,000
25% Margin $1,000,000
Maximum Claims Liability $5,000,000

10 Benefits Administrator: Also called a third party administrator (TPA) or administrative services organization (ASO). Employers typically contract with an administrator to handle benefits plan documents, claims payments and provide other services. Experienced administrative companies like MedCost can preserve significant savings for employers through careful management of resources, with customized benefits and targeted products to meet employer needs.

We’ve spent over 30 years in the industry. We know health care choices are complicated and not getting any simpler.

Have questions? Contact your health care consultant or Laura at MedCost for more resources.


 

[1] “2013 Employer Health Benefits Survey,” Kaiser Family Foundation, August 20, 2013, http://kff.org/report-section/ehbs-2013-section-10/

[2] “Affordable Care Act Provision 9010, Health Insurance Providers Fee,” http://www.irs.gov/Businesses/Corporations/Affordable-Care-Act-Provision-9010

[3] “Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors,” Kaiser Family Foundation, January 22, 2014, http://kff.org/health-reform/issue-brief/explaining-health-care-reform-risk-adjustment-reinsurance-and-risk-corridors/

[4] For more information, download Stop Loss Coverage White Paper: Maximizing Benefits, Limiting Risk

ACA Reclassifies Small Business in 2016

Increased Premiums Worry Employers

When a little-noticed provision of the Affordable Care Act (ACA) takes effect in 2016, many businesses will face a number of changes, including increased costs for fully-insured health plans.

For plan years beginning in 2016, many businesses will face increased costs for fully-insured health plans.

Next year, the ACA expands the definition of small employers from those with 1–50 employees to those with up to 100 employees. This will add another 30% of employers into the “small employer” definition.1

Current ACA Definition:

Small Employers

Generally fewer than 50 full-time employees

employee benefit plans

Large Employers

50+ full-time employees or equivalents

(http://www.irs.gov/Affordable-Care-Act/Employers)

Beginning 2016

Small Employers

Generally fewer than 100 full-time employees

employee benefit plans

Large Employers

101+ full-time employees or equivalents

Premiums May Rise

Expanding the small group definition is expected to have an immediate impact on premiums. Under the ACA, groups with 51–100 employees will no longer be separately rated. This could increase premiums for many employers.1

We have seen rate increases as high as 84% as a result of this aspect of health care reform. Escalating cost concerns are causing more employers to search for alternatives to avoid significant increases in benefit plan costs. Expert guidance from consultants and benefits administrators has never been more vital than in the current health care environment.

Self-Funding

One sought-after option is self-funding. This flexible solution for health benefits is funded from business assets.

An employer’s liability associated with catastrophic claims is lessened by purchasing stop-loss insurance.2 This additional coverage can be adjusted to limit the risk for a particular employee group. Employers gain assurance that their assets will be protected from unforeseen claim demands on their cash flow.

In addition to escaping certain financial penalties, self-funded plans avoid many other ACA-mandated fees.

Because self-funded health plans do not participate in the ACA-regulated insurance markets, employers who self-insure are not impacted by some ACA fees. Self-funding allows employers to offer health benefit plans that meet or exceed ACA requirements while protecting their own financial interests. Some of the ACA fees that self-funded plans bypass include:

  1. Health Insurance Provider Fee3
  2. Risk Adjustment Fee4
  3. Federally Facilitated Exchange User Fee5

Explore Your Options

MedCost partners with our clients and their consultants to implement strategies for cost containment through self-funding. Many employers are examining self-funded options for more flexible, customized health plans in this uncertain environment.

In future blog posts, we will offer a webinar on Self-Funding 101 and a simple assessment to consider whether self-funding is a good fit for your health management services. Thorough research will yield the best cost containment for your company’s financial assets. For more resources on self-funding, contact your benefits consultant or Laura at MedCost.


 

1http://actuary.org/files/Small_group_def_ib_030215.pdf.

2In North Carolina, stop loss coverage is permitted for groups with at least 26 eligible employees. For more information, contact MedCost underwriting services.

3Paid annually by large insurance carriers (based on total premiums) to help fund subsidies for low-income individuals and families purchasing insurance through Exchanges.

4A per-member-per-month charge that funds the federal Risk Adjustment Program (applies to individual and small group policies).

5Payment equal to the 3.5% user fee rate, multiplied by the policy’s monthly premium. It applies to all plans purchased on the exchange, both individual and Small Business Health Options Program (SHOP). The fee is a federal sales tax on insurance policies sold through www.healthcare.gov to help offset costs.

How to Manage Health Costs

Self-Funding Is a Growing Option

Employers fight a constant battle between income and expenses. As health care regulations grow more complex, employee benefits become a more critical cost. Continued increases in medical premiums have motivated many employers to examine self-funding as a viable alternative to fully-insured plans.

Self-funding, or self-insurance for employee health benefits, is funded with employer assets and employee contributions. This model of funding gives employers the ability to choose an appropriate level of coverage to fit their employees’ risk and benefits selections.

In 2011, 58.5% of employers who offered health coverage chose self-funded plans—an increase from 40.0% in 1998 (Employee Benefit Research Institute).1

insurance1selffunded

What about catastrophic claims? An employer’s liability for large, unexpected claims is lessened by purchasing stop loss insurance, which limits financial risk from catastrophic claims.2 MedCost highly recommends stop loss coverage be included in all self-funded arrangements.

Self-funded employers capture the opportunity to save money by only paying for actual claims. MedCost partners with consultants and employers to realize potential savings, build customized benefit packages and manage risk.

Fully-Insured or Self-Funded?

Let’s compare fully-insured health plans with a self-funded plan:

Fully-Insured Self-Funded
*All costs are fixed *80% variable cost (representing potential employer savings)
*Premiums cover all risk & claims *Stop loss insurance covers catastrophic claims
*Federal insurer taxes are required (2%–3% of premium) *Exempt from federal insurer taxes (employer savings)
*State premium taxes are required (2%–3% of premium) *Exempt from most state premium taxes (employer savings)
*Fewer plan choices & less flexible designs *Custom benefit design & risk selection

 

Reward vs. Risk

Potential employer savings with a self-funded plan can be substantial. Savings from exempted federal and state taxes can total 4%–6%, a significant amount year-over-year. Plus, the margin of funds not spent each year can be reserved in the employer’s account for future claims.

The chart below compares fully-insured and self-funded plans for a hypothetical company with 347 employees. With self-funding, even after paying fixed costs and expected claims, the employer would still keep $619,500 in a company account for future claims.

self funded vs fully insured 17238_MC_blog graphicsRGB-02

 

Through years of experience, MedCost has streamlined financial benefits for consultants and employers in self-funded health plans. Our flexible, integrated choices and cost controls can present a stable alternative to fixed cost insurance plans. For more resources on self-funding, contact your benefits consultant or Laura at MedCost

 

1”Self-Insured Health Plans: State Variation and Recent Trends by Firm Size,” Paul Fronstin, Ph.D., Employee Benefit Research Institute, November 2012

2In North Carolina, stop loss coverage is permitted for groups with at least 26 eligible employees.

3Based on employer’s net paid claims.

4Per employee per year.