A majority of U.S. employees are covered by self-funded healthcare plans. What does that mean for those companies who self-fund their medical benefits?
Self-Funding vs. Fully Insured
Traditional health insurance, known as fully-insured, is purchased from a health insurance carrier, who sets a certain premium for the plans made available to employees. The carrier administers claims and negotiates contracts with providers, hospitals, facilities, and pharmaceutical vendors so employees enrolled in the plan can get healthcare.
Self-funded groups cut out the health insurance carrier and pay for their employee’s claims directly. Most self-funded groups work with strategic vendors such as TPAs, benefits consultants, pharmacy benefit managers (PBMs), and others to meet the healthcare needs of their employees and manage total spending on the plan.
How Does a Self-Funded Group Pay Claims?
One of the most important relationships for a self-funded group is the third-party administrator, or TPA. A TPA processes claims and handles the cash flow of the group’s healthcare spending.
Employees have a healthcare plan just like with fully-insured plans, with deductibles, co-pays, and networks. One advantage of self-funding is a group can design their own plans, rather than taking what is offered by a carrier. Thus, a group can use plan design to drive better outcomes and lower spending by cutting out low performing providers in the traditional insurance network.
As employees interact with the healthcare system, claims arise due to visits, procedures, tests, and treatments. The group’s TPA receives claims and either pays or contests bills as they are delivered. A good TPA will catch any billing errors, which are estimated to affect about 80% of medical bills. Almost universally do the errors reflect an overcharge, resulting in higher spending by the employer.
How Soon Does a Self-Funded Group Get Billed?
Medical billing takes some time to process, unlike traditional forms of spending like groceries or other consumer goods. Providers and health systems may take weeks to months to bill the TPA for a self-funded group, resulting in a claim lag of 60 to 90 days in most cases.
This means that the claims a group pays in one month are usually for services rendered 2 to 3 months prior. It’s important to pay attention to the claims being processed so the group is aware of where money is being spent.
Just like a budget, a group should notice if spending is unusually high in one area.
If pharmaceutical spending is up 50% from last year, perhaps the drugs can be sourced elsewhere for a lower cost?
If emergency department utilization is unusually high, a very expensive form of healthcare delivery, maybe employees could be educated about when they should go to the ER and when they should utilize telehealth or urgent care.
And if the average claim from one provider group or hospital is significantly higher than others, perhaps the plan design can be adjusted to steer employees to lower cost providers. One anomaly of the U.S. healthcare system is that there usually exists an inverse relationship between quality outcomes and cost. By getting better care, employees generate lower healthcare spending.
What if a Self-Funded Group has Large Claims?
Since a self-funded group is financially responsible for it’s employees claims, there is the risk of excessively large claims costing the group hundreds of thousands of dollars, even millions in some cases.
Self-funded groups purchase stop-loss insurance to protect themselves from large claims. To mitigate an excessively large individual claim from an employee, the group may purchase specific stop-loss insurance, which reimburses the group if any one employee’s claims rise above a certain threshold. This amount may be $50,000 to $150,000 in a year, meaning the group is on the hook up to that amount per employee.
A self-funded group will also purchase aggregate stop-loss insurance, which reimburses the group if total spending for the plan is higher than a certain amount. This level is usually set at 125% of expected annual plan costs, which includes both expected claims and fixed spending like administrative costs.
If you have questions about how the LBL Group uses self-funded medical benefits to help companies improve benefits and reduce healthcare spending, click here to schedule a complimentary consultation.