What is Employee Health Benefits Self-Funding
Two-thirds of American employers of all sizes successfully use self-funding for their health & welfare employee benefits. Self-funding (also known as self-insurance) is simply when an employer or groups of employers decide to be their own “insurance company” by paying their own claims, administrative costs, and creating financial safeguards against huge unexpected claims. In other words, the employer or group of employers retain the risk. If the plan has a very good year, the plan or employer gets to save that money, and thus there is a direct incentive for the most cost-efficient plan design and operation possible. Conversely, if the plan has a terrible year, the employer must be prepared to pay from his own pocket or acquire “Stop-Loss” re-insurance. (While most self-funded plans have stop-loss coverage, their legal status is still self-funded. The purchase of a stop-loss policy does not change the self-funded status of the plan any more than the employer buying fire or liability insurance makes the plan “insured”. There is no such legal term as the often-used “partially self-funded”.) The direct vested incentive for cost-efficiency also applies to administrative costs. In a fully-insured plan the employer has no knowledge and no way to now whether he is paying an efficient or exorbitant price for administrative services for his plan. It is all carefully hidden in the premium. In a self-funded plan, the employer either administers the plan himself in-house...in which case he obviously knows the exact cost of administration. Or...there has been a 1,000% increase in recent years of employers or plans contracting with independent Third Party Administration (TPA) firms to do all or part of the administrative services (much like most Americans turn to CPAs to do all or part of their tax preparation). Both market competitiveness and Federal law (ERISA, section 404, fiduciary) require the plan to know exactly what is spent on each aspect of administration and keep it to the lowest efficient amount possible. ERISA is the ultimate consumer protection law, with much stronger protections than insurance or normal business law provide.
Self-Funding FAQs Does self-funding lower the cost of health coverage? The employers’ direct interest in cost-efficiency and ERISA Federal law requirements lead to the obvious answer that self-funding is less expensive. An insurance company commissioned a study by the prestigious research group Temple, Barker & Sloane that showed the real secret of the 40% savings of self-funding with a TPA versus a fully-insured health policy. In a bar chart, it compared the per-month per-person premium of an insurance company plan...versus a bar showing the cost of the same coverage in a self-funded plan administered by a TPA. Each bar was divided between the actual “mechanical” direct costs versus the overhead expense of selffunding/TPA compared to insurance company overhead. As might be expected, the large insurance companies had the advantage of size and thus were considerably more efficient in the “mechanical” costs of administration. However, that efficiency was more than offset by the staggering overhead (huge headquarters, hordes of Vice Presidents, fancy advertising, etc. etc.). Thus, the end result was that the self-funded plans administered by independent TPAs were 40% less expensive than the same coverage by an insurance company. It is simply common sense.
®
®
Have employers of all sizes flocked to self-funding? Yes, there has been more than a 6,000% increase. About a dozen years ago, only about 10% of U.S. employers used self-funding for their health coverage. Today, 65% of U.S. employers use self-funding for their health plans according to many studies, including that done by the respected benefits consulting firm Foster Higgins. In fact, the study showed that only 6% of U.S. employers have stuck with traditional fully-insured health plans. The remaining 29% use hybrid insurance plans such as minimumpremium and experience-rated. Practical note: Self-funding and the ultimate consumer law, ERISA, require rigorous federal enforcement. Despite pleas from the self-funding community for that kind of tough oversight during the 6,000% growth, both Congress and the Department of Labor have been haphazard. What size employers use self-funding? While most people naively think only large employers use self-funding, the truth is that the biggest growth (and need) for self-funding has been among the smallest employers. They are the ones who need the greatest cost efficiency, and they are the ones most often in the nearly 100 industries routinely black-balled by insurance companies for coverage (such industries as restaurants, florists, printers, etc. etc. who are not even offered the chance to buy coverage because they are viewed as having high turnover or an abnormal number of gays and other perceived high risks insurers don’t want). Why does self-funding work so well for small employers? The growth and maturity of the TPA and stop-loss insurance market has provided a very cost-effective (as much as 40% savings) way for even tiny employers to use the advantages of self-funding. Thus, self-funding empowers even employers of 2 people to escape the expensive dregs of insurance company options or being black-balled. Multiple employer (such as sponsored by trade associations) and multi-employer (jointly sponsored with unions) plans have a decades-long successful record as the proven way to maximize cost-effective health coverage for small employers. Common sense note: To be candid, much of the migration of small employers to self-funding has been because they had no choice. They were priced out or black-balled by insurers. Thus, it is not a choice between fully-insured and self-funding. If self-funding continues to be hindered, or is eliminated, especially for smaller employers, those employers will simply not offer health benefits and the number of uninsured among those 65% of U.S. employers will rise dramatically.
What other advantages does self-funding offer? (1). As noted, self-funding allows an employer to have control over his costs, how to handle them, and to be free from the worry of being dropped or having a claim rejected arbitrarily by an insurance company. In fact, section 404 of ERISA (fiduciary responsibility) makes it a civil and criminal offense if what is best (most “prudent”) for the plan and individuals covered by the plan is not done. ERISA is the ultimate consumer protection law...giving far more protections than provided to employers and individuals under insurance or normal business protection law. Note: It is often said that self-funded plans get a price advantage because they are exempt from the 1-2% state premium taxes. In truth, the costs are about the same for self-funded plans, which often must pay IRS user fees as well as the costs of required CPA audits and complex ERISA filings. (2). Self-funding is also consumer-friendly by letting each employer custom-design the plan coverage for his particular workforce and finances. Thus, while some people complain that self-funded plans are exempt from the nearly 1,100 state mandated health benefits (such as toupes in one state and hair implants in another)... market competition for good employees dictates that the most important and wanted benefits will be included, and the money saved from the frivolous ones can be used to lower the out-of-pocket costs burden on employees and/or add extra benefits specifically useful to that workforce. For instance, many employers with a heavily female workforce tend to increase benefits for mammograms, and other services which are more useful for those workers than state-mandated toupes and hair implants would have been. Common sense note: Self-funded plans tend to be more humanitarian because the employer sees the workers every day, and if there
®
is a problem, he can’t blame it on some distant faceless insurance company. Thus, there is the self-preservation and morale incentive to give the best benefits possible for the price. (3). In recent years, most employee benefit laws and rules have technically been employer requirements...the responsibility of the employer not the insurance company or plan. (Example: COBRA continuation of coverage and Medicare Secondary Payor require the employer to do things.) Each year there are about 1,500 new laws, regulations, interpretations, opinions, and major court cases from about 100 different governmental entities which apply to employee benefits. Most have crippling penalties for even innocent failure to comply. Selffunded plans and TPAs have a unified interest with the employer to do the complex compliance. Insurance companies (quite legally) often tell employers “Too bad, but it is an employer responsibility, not the insurance companies’ job” (even though information from the entity administering the plan is usually necessary to comply or pay for the requirement). Common sense note: Thus, many employers have moved to self-funding as a way to better obey the law. Are self-funded plans willing to have a “level playing field” with Insurance companies & Blue Cross/ Blue Shield in the health reform process? The playing field is actually level already. Both self-funding and insurance companies each have costs and requirements the other does not, so it’s already quite equal. Selffunded employers and TPAs are eager to have the private employee system work as broadly and efficiently as possible. In fact, we have tried on many occasions to show ways to achieve those goals. However, if there is zeal to re-level the playing field, it must be remembered that among the thousands of laws and rules governing self-funding are many designed to limit who may be covered and the types of expenses that may be reimbursed from a self-funded plan. To avoid conflicts in Federal law, such “level playing field” reforms must be carefully worded to accommodate or amend those limiting rules. This requires that people intimately familiar with all thevarious laws, rules, and interactions (from nearly 100 government entities) be involved early in the legislative drafting and negotiationprocess. SPBA has made a specialty of knowing those thousands of requirements and interactions (both written and unwritten). We are eager to see a constructive solution...and SPBA is willing to help anytime and in any way.
Samples of Harmful Government Policies towards Self-funding
...and thus making it harder for employers to offer employee health benefits: (1). Each year, government cost-shifts $40 billion of its extra costs onto private health plans & employers, which are actually government responsibilities. Government must think of employee benefits as people...not revenue pawns. The same is true for the nearly 1,500 new requirements every year. The mandates & limits are usually well-intentioned...but end up swamping hard-pressed employers with administrative and specialinterest benefit costs. (2). The smallest most helpless employers who need self-funding most are the ones facing the most government discrimination. Some “reform” bills totally deny the self-funding option to employers below 50 or 25 workers, or continue crippling good MEWAs.
About PayerFusion PayerFusion is dedicated to assisting employers in providing comprehensive employee health benefits through cost effective self-funded solutions. From plan design and stop loss coverage selection to claims management and benefits administration, our services provide employers with the highest level of support at every step. Contact us at 1.866.752.8881 or email info@payerfusion.com for more information.