Self-funding Group Medical Plans. . . Risky?

I recently posted that, “78% of employees across the country receive their benefits from a *self-funded medical plan”. I then added, “what’s the risk of not considering this option”? I was sharing a comment made by Tom Doney of Cypress Benefit Administrators at the 2015 LBG Advisors symposium in Las Vegas (an educational conference hosted annually for benefit plan sponsors around the country).

*It should be noted that benefit plans with stop loss included (to control overall risk) are considered “partially” self-funded. Moving forward that is what is being referenced in this article with the term “self-funded”.

The components of all health plans

Did you know the components that make up all health insurance plans are the same, whether fully insured or self-funded (administration, network, pharmacy benefit manager, stop loss and consultant)? If your plan is fully insured these components are “bundled” together with a carrier (i.e. United, Aetna etc.) and make up your overall annual plan premium. If your plan is self-funded these components may be “bundled” (with one carrier) or “unbundled” (broken out with multiple partners).

Self-funding confusion

Though more and more plan sponsors are considering the idea of self-funding there continues to be a lot of confusion surrounding around the idea. Some plan sponsors have even tried it in the past and because it didn’t work or they had a bad experience they are naturally reticent to move forward. The most common conclusion echoed from plan sponsors considering self-funding is “it’s too risky”

Other commonly held beliefs and questions include:

• We’re too small (i.e. we only have 100 employees on our plan)
• What if we have a claim that exceeds a million dollars?
• What if we don’t have enough money to cover claims-especially early in the plan year?
• We don’t have the necessary reserves set aside to start the program
• If we make a move to self-funding the fully insured carriers may not take us back
• What if we can’t get anyone to quote us?

Self-funding, a new idea?

Self-funding is not a new concept. It has actually been around since the 1950’s. Most large organizations self-fund their medical plans. With program improvements and efficiencies made over the past decade self-funding is becoming a more viable option even for smaller organizations (bundled self-funding programs, level funding, captives etc.).

The impacts of the ACA (Affordable Care Act) are also moving plan sponsors to seriously consider the idea of self-funding. Interestingly, fully insured carriers (UHC, Aetna etc.) now offer their own version of self-funding called ASO (Administrative Services Only).

Self-funding, what is it?

The basic idea of self-funding is that an employer (plan sponsor) pays for its participant claims up to a certain level (at which point stop loss kicks in); any unspent claims money stays with the plan sponsor as reserving (depending on the arrangement).

Note: there are still fixed costs to run the program but the plan sponsor has the ability to budget for maximum plan costs while establishing employee rates (similar to fully insured plans).

Flavors of Self-funding

• ASO (administrative services only): plan components are typically bundled through a carrier (i.e. UHC, Aetna)
• Level Funding Programs
• Captive Arrangements
• Un-bundled Self-Funded (typically the most efficient way to run a self-funded plan assuming all compensation has been removed from the components and moved to transparent flat fee arrangements)

Advantages of self-funding programs

• Operational cost advantages (lower component costs, i.e. administration)
• Ability to design benefits specific to your organization
• More transparency: better access to data
• Ability to see and impact contracts (i.e. PBM)
• Increased market competition (more carrier choices)
• Not subject to certain fully insured ACA taxes

Summary

Self-funding can be a great option for plan sponsors small to large. The first step in the process is partnering with a trusted advisor that understands self-funding and how to successfully implement the program (a lot of which starts (and continues) with plan sponsor and member education). From there the best approach-specific to your organization will become evident.

Ultimately, if designed correctly, the #1 reason to consider a self-funding is the level of control it provides. Control over the components, design, data and reserves.

Long term, self-funding programs have been proven to better control costs (and are more likely to maintain benefits). By the way, the CBO also agrees.

Are you in control of your benefits?

#employeebenefits #selffunding

Check out other posts by Jason Jakobsen