The upheaval around health care reform has left many employers feeling either powerless or confused. While many key details of the bill have yet to be defined, a few have begun to surface.  They are unsure whether it will make sense to “grandfather” their current health plans to keep the status quo, offer a “Cadillac” plan and improve their current benefit offering despite the increased expense, or eliminate their benefit plan altogether in hopes that the new health care exchange will  prove to be a cost reduction despite the penalties and tax implications. Another option that many employers who are fully insuring their health plans today is moving to a self-insured or partially self-insured plan. As more and more of the slated changes in health care legislation become effective over the next few years, the timing seems right to explore the financial and operational feasibility of implementing a self-funded benefit plan option to replace a fully insured plan. Moving to a self-insured plan is a means for an employer to attempt to take control over rising costs due to the increased accessibility and coverage offered through the reform. Historically, self-funding wasn’t a viable option for small or mid- sized employers. In addition, the trend of health care inflation still hovers around 10-13% annually and the upcoming reform changes are imposing annual levies reaching $14B, self-insuring may be the solution that employers need to achieve their goals.

The trend for large sector employers to self-insure their health coverage continues to increase at an estimated rate of 4-5% steadily over the past five years.  89% of firms with more than 5,000 employees do so, which is up from 62% in 1999. Approximately 50 million workers and their dependents receive benefits through employer-sponsored self-insured health plans. This represents only 33% of the 150 million total participants in private employment based plans nationwide. Thus, self-insurance or partial self-insurance has become a more realistic option for smaller employers.  In fact, the market has created pressure to lower health rates so many stop loss insurance carriers are now more willing to consider underwriting smaller employer groups. The stop loss carriers have began developing creative funding strategies to alleviate the issues that historically prevented a smaller employer from seriously considering this option. Consider these key benefits and risks as your organization evaluates this option.

1. The employer can customize the plan to meet the specific health care needs of its workforce as opposed to purchasing a one-size-fits-all insurance policy.  An employer who fully insures is limited by the plan design options that a carrier offers and cannot change any variables such as co-insurance, ER visits, or the deductible. A self-funded plan allows the employer to choose what to cover and how the coverage is funded.
2. The employer is not subject to state health insurance premium taxes, state mandates, or carrier margin. All these factors represent roughly 10% of their health care expense. Carrier margin typically ranges from 4% to 6% of premium. Self-insured plans are governed at the federal level (ERISA) not at the state level, so any state mandates that limit the employer are no longer applicable. A federally mandated health care system is a major objective of health care reform so self-insuring is a step that an employer can take to move towards this.
3. The employer costs are the amount for actual claims incurred, stop loss coverage, and the claims administration fees. These costs are roughly broken out as such: Admin 10%, medical 75%, Rx 15%. The claims represent the biggest component of expense which becomes a variable cost instead of a fixed cost through a fully insured plan. This creates an opportunity to capitalize on cash flow opportunities via favorable claims experience. Because the employer maintains control over the health plan reserves and can earn interest on income, income that would otherwise be generated by an insurance carrier through the investment of premium dollars.
4. The employer will have access to more claims-related data otherwise not provided to employers in a fully insured plan. This data is critical for making decisions and managing the plan costs. This relevant information is key for employers as wellness programs which continue to become more prevalent and potentially the way healthcare costs are calculated in the future.

Consider these potential risks or factors associated with self-funding:

1. Depending on the company’s employee count, there may be limited amount of stop loss carriers and third party administrators who want the business. This could be due to a low risk tolerance or limited revenue opportunity.
2. Self-insured plans have a greater degree of HIPAA compliance requirements than those of fully insured plans. Because the employer maintains access and control of protected employee data, the exposure to liability for the employer increases.
3. The employer assumes the risk between the expected claim level and the Stop Loss coverage, which may cause a cash flow disruption when there is an unforeseen spike in claims in a month.  They purchase specific and aggregate stop loss coverage to control this. Monthly claim costs can vary wherein a fixed monthly premium is paid when an employer has a fully insured plan. There are ways to minimize potential volatility from month to month by maintaining cash reserves to account for this.

If you are considering making a funding change, I suggest learning more from your benefits consultant to see what makes most sense for your organization. I urge the smaller employers to explore this option carefully because you may be surprised at the results. For more information on how Centripetal Consulting Group can help you with this and other benefits and HR/Payroll decisions, please contact Centripetal Consulting Group.