By Ron E. Peck, Esq.
The majority of people in the United States aren’t familiar with “self-funded” health benefits or “self-insurance,” which is a shame, given that it may just be the best way to maximize benefits and minimize costs. To understand self-funding, one must understand the concepts of funding and risk.
In most cases, insurance (such as auto and home) is provided through what we call “traditional” or “fully-funded” insurance. Here, the insurance carrier tells you what your premium is, you pay, and the carrier takes the risk. This option is great if and when the premium is low. The problem? Insurance carriers don’t print money. As they cover an expanding number of customers who incur expenses greater than their premium, these insurance carriers bump up everyone else’s premiums to compensate.
Enter self-funding. A self-funded or “self-insured” plan is one where an employer collects “contributions” from participants, and uses the money — along with the employer’s own contributions — to pay its own employees’ medical bills. A self-funded employer enjoys:
• Plan Control — Choosing what to cover and exclude, customizing the plan to be generous where the membership needs it;
• Interest and Cash Flow — Funds are in the employer’s hands until they’re needed, meaning interest belongs to the employer;
• Federal Preemption and Lower Taxes — The Employee Retirement Income Security Act of 1974 states that a private, self-funded health plan is administered in accordance with its terms and federal rules, so they’re not subject to conflicting state insurance mandates;
• Data — Employers can examine the claims data, study trends, and allocate resources to address their actual needs;
• Risk Reduction — Steps taken to reduce risk and costs directly impact the employer and employees.
These benefits combine to result in net savings for the self-funded plan within three to five years.
Self-funded health plans are becoming increasingly popular, correlating to rising health insurance costs. Many point to the exchanges created by the Affordable Care Act. Under the ACA, people with costly pre-existing conditions cannot be denied coverage. So, they’ve been purchasing “traditional” insurance policies from carriers via the exchanges. These carriers are limited regarding how much premium they can charge these enrollees, meaning they need to charge more from individual healthy policy holders and employers.
If an employer ranks providing robust benefits for minimal cost as a top priority, self-funding is a no-brainer, right? Not exactly. There are risks associated with self-funding. Among them: the threat of catastrophic claims, inability to fund claims, and new fiduciary responsibilities to plan members.
Most self-funded health plans purchase “stop-loss” — reinsurance that reimburses self-funded plans for claims they pay beyond a deductible. Unlike health insurance, stop-loss reimburses the plan — not the medical service providers. This means that the self-funded plan is on the hook for all the medical bills, regardless of whether stop-loss ultimately reimburses.
Finally, a self-funded employer acts as a plan administrator. That administrator is a “fiduciary”. Law dictates the fiduciary must act prudently, protect the plan, and apply its terms judiciously. Failure to comply with these terms, mismanaging plan assets, or otherwise doing something not in the plan’s best interest could expose the fiduciary to claims of breach — resulting in steep penalties.
If you are an employer, or advise an employer, it behooves you to consider self-funding your health plan. The cost of U.S. health care is on the rise. As more people obtain insurance, medical service providers have deeper pockets into which they can dig for payment. This, along with the fact that patients have little incentive to shop around for the most cost-efficient health care (after all, if I have insurance to cover it, why should I care how much things cost?), has resulted in skyrocketing medical expenses. Add fully-funded insurance carriers’ need to increase premiums to the mix, and only employers with creative approaches to benefit planning will survive.
When it comes to flexibility and controlling how your plan works, self-funding — many are newly discovering — is second to none.
Ron E. Peck, Esq. is senior vice president and general counsel at The Phia Group, LLC.