FAQ for Self Funding
Q. What is a fully insured health plan?
A. A fully insured health plan is one where the employer pays a premium to an insurance company for employee health coverage. The insurance premium is due in advance of the coverage and is actuarially projected to cover anticipated claim costs and the insurance company’s overhead, commissions, reserves, various risk charges and taxes. In exchange for the premium, the insurance company assumes the risk of providing health coverage and performs various tasks such as the printing of employee booklets.
Thirty years ago, all plans were fully insured and this type of funding was considered the norm. But today, almost 70% of U.S. employers self-fund some portion of their health care plans.
Q. What is a self-funded health plan?
A. self-funded (or self-insured) health plan is one in which the employer assumes some or all of the risk for providing health care benefits to his employees. He takes control of the assets of his plan, invests them to this advantage, and eliminates the insurance company charges. He can completely redesign the plan if he wants. When he decides to self-fund his health plan(s), the employer usually checks to see how well the insurance company has administered his plan. If he is not satisfied, this is the time to change administrators.
Q. Why do employers self-fund their health plans?
A. There are many advantages to self-funding, the primary advantage being cost savings:
- An employer does not pay full state premium taxes, which usually range from 2 percent to 3 percent of the monthly insurance premium, if self-funded. Every state taxes insurance companies on the premiums collected. The insurance company in turn passed these costs back to the employer. In a self-funded plan, premiums are collected only on the excess loss coverage – a fraction of the regular insured premium; therefore premium taxes are substantially reduced.
- In a self-funded plan, you do not pay insurance company risk and retention charges. An insurance company charges several fees to insure and administer a health plan. Many of these, such as booklet printing costs or actuarial fees, must be paid no matter how the plan is funded or who administers it. However, some insurance companies charges such as risk and retention charges are not applicable to self-funded plans. They simply do not exist in a self-funded situation.
- The employer retains control over the health plan reserves, enabling maximization of interest income. When the employer decides to self-fund and all claims have been paid under the old insurance contract, the employer recaptures any reserves that are left. Usually the employer then invests this money and receives the interest income. Insurance companies traditionally credit an employer much less than the actual interest/income received from that employer’s reserves. The difference between what the insurance companies credited an employer and what that employer can earn by his own investments is another advantage of self-funding.
- Insurance companies are subject to state regulation; self-funded plans only to federal regulation, thereby giving an employer almost total control of the plan design. Having no premium taxes and no insurance company risk and retention charges results in significant savings; however, it is the pre-emption of state regulation that saves the most money I self-funding.
Most states have numerous laws requiring a myriad of coverage’s for an insured plan written in their jurisdiction. A self-funded plan does not have to comply with these state laws. Therefore, an employer can customize his health plan design focusing on his employee’s actual needs and cost savings. For example, if the state mandates that mental health coverage’s can’t have a lower cap than $50,000 a year, then every fully insured plan written in that state must abide by this law. A self-funded plan doesn’t have to abide by this law, and if an employer wanted a lower annual maximum of mental health claims or even wanted to eliminate it entirely, he could write the plan that way.
Additionally, an employer can contract with the managed care system that saves the plan the most money not just the managed care system owned by the insurance company.
- An employer does not have to pre-pay coverage, thereby improving his cash flow. Insurance premiums are due in advance. Self-funded plans pay claims as they’re presented to the claims administrator, usually 60 to 90 days after medical services are received. Therefore, during the first year of self-funding, an employer pays for only 9 to 10 months of claims. This improved cash flow can be used to the employer’s advantage.
- An employer only pays benefits based on his employees’ histories, not someone else’s employees. In all but the very largest of health plans, an insurance company pools the experience of its clients. Therefore, an employer often finds himself paying for the poor histories of someone else’s employee population. In self-funding, each employer pays only for his own employees benefits.
Q. With what laws must the self-funded plan comply?
A. The self-funded plan comes under all relevant federal laws, none of which is specifically for self-funded plans. Depending on the company’s lone of business and size, the federal laws applicable to health plans are ERISA, COBRA, the Americans with Disabilities Act, the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as TEFRA, DEFRA and ERTA. If you have questions, we will be glad to review the specifics with you.
Q. Is self-funding for everybody?
A. No. The major difference between an insured plan and a self-funded one is that in self-funding the employer assumes the risk for the claims and these claims should be somewhat predictable. Therefore, if the employer is very small (less than 100 employees), self-funding is not recommended. Although there are companies as small as 25 employees that so successfully self-fund their health plans, an employer this size should consult us as to the viability of self-funding. Also, if the work force is volatile making future claims difficult to predict, self-funding many not be an option. Volatility of future claims can be smoothed out to a great extent by the purchase of excess-risk coverage, but here again please consult with us for more information.
Q. What is excess-risk coverage?
A. Excess-risk coverage is insurance sold to self-funded health plans to guard against unacceptable losses. There are two types of excess risk coverage:
- Specific Coverage that insures against a single catastrophic claim that exceeds a dollar limit chosen by the employer and agreed to by the excess-risk carrier. For example, specific coverage would come into play if one of the covered participants was in a catastrophic accident and had claims that exceeded the agreed upon dollar limit. In this case, the specific coverage would reimburse for all the covered expenses beyond that dollar limit.
- Aggregate coverage that insures against all the claims exceeding a specific dollar limit chosen by the employer and agreed to by the excess-risk carrier. If all the claims payable exceed the agreed upon dollar limit, aggregate coverage would reimburse the excess. Excess-risk coverage protects the plan against unforeseen catastrophic claims that would cost more than is budgeted in the plan and place undue financial burdens on the employer.
Q. Do I have to redesign my existing health plan?
A. No, not at all. Self-funding doesn’t require a change in the existing group coverage’s you offer, unless of course you want to change them.
Some employers have become comfortable with certain plan designs and decide to leave the plan, as is for a least the first year of self-funding.
Other employers find that the existing plan is excessively expensive because of an overly generous design and/of difficult administrative burdens. Employers redesign these plans to save money and to simplify the plan. The choice is up to the employer. We’d be glad to help with this decision.
Q. What about payroll deductions?
A. Any payments made by employees for their coverage or coverage for their dependents is still handled through the employer’s payroll department. However, instead of being sent to the insurance company for premiums, they are either paid directly to the administrator for claims expenses; or, if being used as reserves, put in a tax-free trust that’s controlled by the employer.
Q. Will my life insurance coverage’s be affected by self-funding my health plan?
A. No. Your life insurance and other benefit plans are completely separate from your health plan. Your life insurance coverage’s will not be affected.
Q. Who will take the place of the insurance company to administer the plan?
A. A large self-funded employer can either administer the plan himself or have a third-party administrator (TPA) administer the plan.
TPAs are specialized administration companies that have come into being because of the growth in the self-funding industry over the past 20 years. In 1991, TPAs administered over $5 billion of self-funded health claims - a figure that’s growing every year.
Only very, very large employers have the resources to self-administer. Many employers fell that insurance companies will not offer the personalized service they prefer? This leaves TPAs as the preferred choice by most self-funded employers.
Q. What are the advantages in using a TPA?
A. The only business of a TPA is administration of self-funded benefit plans. Insurance companies mainly insure – that is their business. TPAs do not insure – they only deal with self-funding. They are the experts.
The bywords of a TPA are flexibility and service. TPAs are entrepreneurs responding to each client’s need, no matter how small the client.
Some of the services offered by TPAs include:
- Plan design consulting
- Cafeteria plan design
- Contracting for excess-risk coverage
- Claims administration
- Contracting with utilization review/managed care companies
- Filing of government forms – 5500 series
- Writing and printing of SPD booklets and plan documents
- Employee communication programs
- COBRA Compliance
- Client reports
Q. Do TPAs do as good a job, or a better job, than insurance companies?
A. A large majority of employers responding to a survey expressed satisfaction with the quality and timeliness of their TPAs claims processing and data reporting. Of course, the quality and capabilities of individual TPAs vary just as the quality and capabilities of insurance companies vary. Each employer must individually evaluate the TPAs under consideration.
Q. Why should I self-fund my health plan?
A. Many employers faced with the same question have decided to implement a self-funded health plan. Their reasons include:
- Self-funding will show a large first-year savings through the lack of premium taxes and various insurance company charges.
- Employers can save considerable money through new plan designs that take advantage of the most up-to-date cost containment strategies.
- Self-funding does not affect the plan from the employees’ standpoint. There does not have to be any noticeable change in the plan unless the employer so wishes.
- The employer receives increased interest from his reserves.
- Every aspect of plan administration becomes subject to competitive market pricing, thereby saving money on such items as claims administration, printing of Summary Plan Description, etc.
- Excess-risk coverage is available to insure the employer against unforeseen adverse claims experience.
Contact Alternative Insurance Resources, Inc. for more information on how to self-fund your health care plans.