Self-funded health plans
Self-Insured Healthcare – An Employer Health Plan Overview
What is self-funding?
As it relates to employee benefits, self-funding (also referred to as self-insurance) is a funding mechanism in which an employer incurs the risk to fund healthcare claims directly for eligible employees. This is different than the fully insured model where the business pays an insurance company a monthly premium to purchase health coverage for eligible employees and the insurance company incurs the risk.
While there are many different names used to describe plan types and structures, a healthcare plan is either in the category of fully insured or self-funded.
With self-funded or self-insured health plans, the employer pays healthcare claims as they are incurred versus paying pre-determined premiums to an insurance carrier who pays health insurance claims as they are incurred. The employer-sponsored health plan is “self-funded” by the company, and employees may contribute toward the cost of the plan. These contributions are typically invested in accounts specifically earmarked for health claims.
Nearly all self-funded employee benefit plans are managed through a third-party administrator (TPA). TPA firms may be owned and operated by a large insurer or, alternatively, are independent companies that assist employer-sponsored plans with overall plan operations, benefit coordination and claims processing.
Self-funded employers also purchase stop loss insurance to minimize financial risk and protect the company from large or catastrophic claims.
The majority of American workers are covered by a self-funded health plan.
Who uses self-funding?
The majority of American workers are covered by a self-funded company health plan.
According to the Kaiser Family Foundation’s 2021 Employer Health Benefits Survey, 64% of covered American workers were in a self-funded health plan. And, self-funded healthcare is more popular than ever. The percentage of public- and private-sector workers covered by a self-funded company health plan increased from 44% to 61% between 1999 and 2014 (reported by: The International Foundation of Employee Benefit Plans).
Why do businesses self-fund healthcare?
As businesses in all industries face the challenge of finding affordable health insurance year after year, many are finding that self-funding offers a smarter and more cost-effective alternative to buying traditional health insurance coverage. This has proven to be true for both private and public employers.
The advantages of self-funded healthcare are numerous and include the following:
Advantage: Lower costs
Self-funded health plans offer several cost-containment opportunities that, oftentimes, make them less costly than fully insured plans for both employers and their employees.
Taxes and Fees
A major driver behind the savings is reducing administrative and tax expenses rolled into the fees of fully insured health plans. All told, these taxes and fees can account for up to 20% of an employer’s cost.
These fees often include:
- Administrative and underwriting costs
- Higher commissions
- State and local taxes
- ACA (Affordable Care Act) taxes on health insurance premiums
Traditional insurance carriers administering fully insured healthcare plans sometimes employ many of these fees to increase revenue and drive profit margins at the expense of the group that sees rising health insurance premiums year after year.
Data Transparency Can Drive Down Costs
Self-funded health plans provide better insight into the healthcare needs of a business’s workforce. When HR and benefits experts review health plan trends, organizations can customize a plan design to meet the needs of their workforce. For example, if a business identifies that a high number of mental health prescriptions are being written, they can add additional psychological support services. Likewise, if employees have high claims related to physical health issues, employers can design early intervention and wellness programs.
Over time, these programs can help create a healthier employee and employee family population that reduces the number and costs of claims, drives productivity improvements and decreases time out of the office.
Reference-based pricing helps reduce health plan costs.
Reference-Based Pricing
Employers leveraging self-funded health plans can employ reference-based pricing as a means to significantly reduce the cost of a business’s health plan, while ensuring fair reimbursements are paid to healthcare providers.
Reference-based pricing (RBP) is a cost-containment strategy that uses an established benchmark, like Medicare, to determine what is paid under the terms of a group health plan for a member’s healthcare services. The group health plan will set forth a maximum amount it will pay for any timely submitted claims under the terms of the plan. Self-insured businesses can add a reference-based pricing solution to their health plan and potentially reduce annual costs by up to 30%. RBP providers review and audit medical bills, reprice them based on Medicare or another benchmark like the actual cost reported by the hospital, and recommend that the plan pay a fair markup on those costs. As a result, employers and employees save money on their healthcare spending.
Think of reference-based pricing as a bottom-up approach, starting at the bottom with a reference metric and then adding a fair profit margin to determine provider payment. This is in contrast to the Preferred Provider Organization (PPO) system, which starts at the top with a price that originates on a facility’s chargemaster and then discounts it to reduce the inflated price.
Health Plan Fund Investment
Employers can make strategic decisions about how to invest healthcare funds and subsequent savings based on insight into their actual plan data throughout the year. With a self-funded company healthcare plan, businesses can manage their funds. This gives executives the ability to reinvest savings back into the business; lower employee premiums, copays or out-of-pocket costs; or expand employee coverage and benefits.
Operational Efficiency
For fully insured businesses, state taxes and laws drive greater regulations and drive up the internal cost of managing varying mandates. Especially for organizations with offices in multiple states, a complex compliance environment can exist with significant personnel resource requirements needed. Self-funded plans are generally exempt from state laws that regulate insurance, which provides consistency in the plan’s operation and decreases complexity and saves valuable time for the finance, legal and HR teams.
Give your self-funded health plan strategy a tune-up.
Advantage: Visibility into health plan performance
Companies that self-fund healthcare have greater visibility into utilization and paid claims. This enables the business to understand both the plan’s big picture and its details. With access to aggregate health plan data, employers can more easily manage costs, proactively engage in preventative measures, provide alternative care, deliver wellness programs and, as noted above, secure savings.
With a self-funded plan, visibility into the types and frequency of claims helps businesses with their long-term financial planning, instead of putting them at a disadvantage during annual negotiations with traditional insurance carriers.
Advantage: Flexible plan design
When businesses self-fund their employer-sponsored healthcare plan, HR can easily customize options that make the most sense for the workforce, instead of being locked into a traditional insurance carrier’s options.
With a wide variety of healthcare options from numerous providers, savvy organizations leverage their self-funded health plan as a competitive hiring advantage by offering better features and coverage, which might include telemedicine, mental healthcare, physical wellness and maternity/paternity leave.
Self-funded businesses typically contract with a third-party administrator (TPA) to administer the plan, including making claim payments to providers. TPAs provide employers with greater flexibility and can help set up group health plans, coordinate stop loss insurance coverage, deliver provider network contracts, if desired, and offer customized reporting.
What other differences exist between self-funded healthcare and fully insured health insurance?
When employers provide health benefits to employees, there are other key differences between self-funded and fully insured health plans.
At a high level, the benefit payment model differs as follows:
Self-funded Healthcare — The employer provides health benefits directly to employees, incurs the risk and pays healthcare claims as they are incurred.
Fully insured health insurance — The employer purchases health coverage from an insurance company that carries the risk and pays healthcare claims to the claimant’s providers.
At a more nuanced level, these healthcare plans differ in several other ways:
Payment:
Self-funded health plans — Self-funded businesses pay employee healthcare claims, plus administrative fees and stop loss coverage.
Fully insured healthcare — Fully insured businesses typically pay a monthly per-employee premium (PEPM) to their insurance carrier.
Stop loss coverage:
Self-funded health plans — Stop loss insurance helps to limit an organization’s liability in the event of a catastrophic claim or a year with an unusually high number of claims. A stop loss policy is a prudent backstop for many employer-sponsored health plans, since unusually high medical expenses could compromise cash flow or severely deplete a company’s reserve fund. To select the right type of policy, know the options.
- Individual stop loss (ISL): Provides protection against large claims incurred by individuals by creating a payment threshold or “specific deductible”. If total claims for a claimant exceed that determined threshold amount, ISL reimburses the plan for claims paid above the deductible.
- Aggregate stop loss (ASL): This coverage caps your liability for claims that fall below the deductible and that are, therefore, not eligible for reimbursement under the ISL coverage. The total of these claims over the contract period are capped by an attachment point or threshold. Eligible claims above that threshold are reimbursed by the carrier up to a predetermined maximum.
Fully insured healthcare plans — Fully-insured plans do not need to purchase stop loss coverage because the risk associated with catastrophic claims are borne by the insurance carrier, not the group health plan.
Regulations:
Self-funded health plans — Self-funded plans are subject to federal regulations – specifically, the Employee Retirement Income Security Act of 1974 (ERISA). ERISA was enacted in 1974 to protect workers from the loss of benefits provided through the workplace and preempts state insurance regulations. The Act sets requirements for disclosure, reporting and fiduciary standards; claims; and continuation of health coverage.
With few exceptions, self-funded companies are not required to comply with state insurance laws that apply to medical benefit plan administrators.
In addition to ERISA, there are additional laws that impact self-funded health plans. Federal compliance for self-funded plans is overseen by an in-house employee, a TPA or legal counsel that functions as the plan administrator and fiduciary.
- Health Insurance Portability and Accountability Act (HIPAA)
- Consolidated Omnibus Budget Reconciliation Act (COBRA)
- Americans with Disabilities Act (ADA)
- Economic Recovery Tax Act (ERTA)
- Age Discrimination in Employment Act
- Tax Equity and Fiscal Responsibility Act (TEFRA)
- Deficit Reduction Act (DEFRA)
- Other laws are also mandated
Fully insured Healthcare — Fully-insured plans are subject to ERISA regulations, other federal acts, and must follow state law and mandates. Multi-state companies with fully-insured health plans must comply with the regulations of each state in which they have plans.
Additional resources for businesses considering self-funding healthcare
Understanding Self-Insured Group Health Plans – Self-Insurance Institute of America
Stop-Loss Definition White Paper – Self-Insurance Institute of America
A Model Self-Funded Health Plan – Self-Insurance Institute of America
Self-funding Overview – Health Care Administrators Association
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