Self Funded Health Insurance
Self Funded Health Insurance
What is Self Funding?
Self funding, or having self funded medical benefits, means that an employer takes on the responsibility to pay their own healthcare claims without the use of a health insurance plan.
A self funded group still has all the features of a regular health insurance plan, they just handle those features directly or with the help of an advisory team.
This team will likely include a TPA to perform the tasks traditionally covered by a health insurance carrier, including claims administration, billing, rental of provider network; a pharmacy benefit manager (PBM) to source pharmaceutical drugs; and other strategic vendors to deliver care and reduce group costs.
How Does Self Funding Work?
A self funded group still has premiums and purchases insurance- it’s just a bit different than with a fully insured health insurance plan.
The self funded group directly pays any and all claims. Therefore, significant medical claims can and do come up over time. In order to contain total plan costs, self funded groups purchase stop-loss insurance to cover claims above certain thresholds per employee and for the group overall, known as specific and aggregate stop-loss insurance.
What is Stop-Loss Insurance?
The threat of a bad claim year is one of the biggest concerns for a self funded group once it commits to paying its employee’s claims. Stop-loss insurance limits the liability of a self funded health plan in any given year due to catastrophic claims. It establishes a certain dollar amount that the company will have to pay in a year, above which insurance kicks in and will reimburse the group.
In practice, this means that a company commits to paying for claims up to a certain point, above which the stop-loss carrier will reimburse the group for any claims. Stop-loss insurance therefore creates a maximum plan cost in a given year.
There are two types of stop-loss insurance: specific stop-loss insurance and aggregate stop-loss insurance.
Specific Stop-Loss Insurance
A self funded group has great incentive to manage regular healthcare spending on behalf of it’s group. But as will happen, an employee may incur a significant bill due to a significant medical episode.
A self funded group will buy specific stop-loss insurance in order to protect itself from a particularly expensive claim in any given year, Specific stop-loss sets a dollar amount above which the carrier will pay the claims. Below that amount, the group is responsible for paying all claims. This limits the group’s exposure in any given year to significantly high healthcare claims.
Aggregate Stop-Loss Insurance
Aggregate stop-loss insurance is similar to specific but it address the costs of the total group, rather than specific employees. If the group has total claims above a certain aggregate point, the carrier will reimburse the self funded group for those excess claims.
This coverage will protect the group in a particularly expensive year and the aggregate attachment point sets the absolute high water mark for a group’s costs in any given year.
How Common is Self Funding?
The majority of large employers self fund their employees healthcare costs. The proportion of groups that are self funded decreases with company size, which makes sense given the administration and financial considerations involved with moving from fully insured health plans to self funded medical benefits.
According to the Department of Labor, 89% of employers with more than 5,000 employees self fund their medical benefits.
Conversely, 73% of groups with 100 to 199 employees and 60% of groups with 200 to 499 employees have fully insured group health plans. So the majority of employers in America have fully insured health benefits.
But interestingly, because larger firms are more likely to self fund their health benefits than smaller firms, 61% of covered workers are in a self-funded health plan (KFF 2019 Summary). This number has been stable in recent years, although it was around 44% in 1999, the earliest figures KFF has available. This means that fully insured health benefits have been steadily decreasing for the last two decades.
What are the Advantages of Self Funding?
Given that larger groups are more likely to self fund their health benefits than smaller groups, let’s look at the advantages of self funding.
Self Funding Regulation
Federal law, specifically ERISA (the Employee Retirement Income Security Act of 1974) exempts self-funded benefit plans from most state insurance laws. This includes such things as reserve requirements, premium taxes, and consumer regulations. One thing to note is that ERISA applies to benefit plans established by private employers, but not public employers.
Access to Healthcare Data to Target Cost Drivers
Groups with fully insured medical benefits pay a premium to a health insurance carrier who handles claims administration and other tasks associated with medical benefits. At the end of the year, the insurance carrier presents a renewal rate to the group depending on how the last year did, anticipated future claims, and other considerations.
However, the group doesn’t receive any data about how it’s insurance premiums were spent in the preceding year. Therefore, a fully-insured group doesn’t know what claims are driving it’s premiums up and what actions it can take to reduce it’s claims.
Self-funded groups pay for their own claims, so they know where they’re spending money and where and why their employees are accessing care. This allows a self-funded group to strategically and tactically address what’s driving their healthcare claims.
Are employees over-utilizing the emergency department? How about the group presents education on using telehealth and urgent cares.
Are employees with a chronic disease accounting for a larger share of claims spending than expected? A self-funded group can implement various chronic disease management strategies to improve the health of those employees and drive down future spending.
A self-funded group can use it’s healthcare data to respond proactively to the healthcare concerns of it’s employees. It’s more directly incentivized to provide preventative care, address care gaps, and improve employee’s health.
Recover Insurance Company Profits
Since the Affordable Care Act (ACA) was passed in March 2010, health insurance companies have seen their stock prices soar.
From the day the ACA was signed on March 23, 2010 to ten years later on March 23,2020, major insurance carriers saw the following growth:
UnitedHealthcare: Stock price rose from $29.31 to $194.86
CIGNA: Stock price rose from $36.79 to $130
Humana: Stock price rose from $26.79 to $214.43
Aetna: Stock price rose from $27.82 to $212.70
BlueCross / Blue Shield: Stock price rose from $56.25 to $174.68
If the ACA was supposed to rein-in insurance companies, what happened? The profit that insurance carriers earn on fully-insured premiums drives their stock price and market capitalization.
Self-insured groups have more volatile healthcare spending than fully-insured groups, but have the opportunity to save money in the long-term. This is why self-funding is an effective long-term strategy to handling medical benefits.
If You’d Like to Know More About Self-Funding
Self-funding isn’t right for every group, and it takes consultation and analysis to determine if a fully-insured group should switch to self-funding their medical benefits. But by self-funding a health plan, a group gets access to it’s healthcare data, can design strategies to simultaneously improve benefits and reduce costs, and can reap the benefits of a well-run and thoughtfully designed healthcare plan. Self-funding puts employers in the driver seat of their healthcare spending and gives them the ability to push back against what’s wrong in our healthcare system today.
This is why self-funding analysis is a core component of our Strategic Healthcare Plan.
If you’d like to know more about self-funding medical benefits, click here to schedule time with one of our consultants.
Our Expertise Includes:
- Helping employees understand the value of benefits offered by their employer
- Simple, easy to start and maintain administration with ongoing support for employees only a phone call away
- Ongoing support for human resources and benefit administration
The LBL Group utilizes a series of steps to build a reliable client strategy that creates unique solutions for the future.