Now more than ever, employers are looking everywhere to control costs. For an employer offering a fully insured plan, a prime opportunity to decrease costs might be found by considering self-funding. By self-funding, employers can achieve savings of 8% to 10% by avoiding certain taxes and carrier fees. Add to that lower claims cost based on pre-ACA underwriting, and the market is ripe for a big wave of self-funding.
Take a look at some of the benefits and risks, and see if self-funding might be right for your company.
What Are the Benefits?
Self-funded employers have much more flexibility in their plan design than insured employers, as they are not subject to state coverage mandates. They also have insight into the actual cost of care, administrative costs, and any loaded fees or additional expenses to the plan.
- Avoid the Health Insurance Industry Tax (HIT): A new tax imposed by the ACA, the HIT is designed to return to the federal government some of the health insurance industry gains achieved from health care reform. It is not tax deductible, which increases the cost impact. Health plans are liable for the payment of this fee; however, it is not applicable to self-insured plans.
- Avoid State Premium Taxes: Many states include a premium tax on health insurers that is passed along to fully insured employers in the form of higher premiums. The tax varies state to state, but on average ranges from 1.5% to 3% of premiums. Self-funded employers are not subject to these taxes under ERISA preemption.
- Avoid Risk and Reserve Fees: All health insurers include expenses loaded in their fully insured premiums for new business sales, marketing expenses, retention of current customers, and for profits. These costs generally run around 3.5% of premium depending on the carrier and do not exist in a self-funded environment other than an amount of cost built into stop loss insurance.
- Clarify and Control Administrative Costs : The cost to administer benefits, pay claims, maintain a network, and provide for the overall operation of the health plan can equal 15% of insured premiums depending on the number of employees covered. While self-funded employers will incur administrative expenses through payment to a carrier, third-party administrator (TPA), or administrative services organization (ASO), they can control these expenses through multi-year guarantees, transparent and unbundled agreements, marketing the plan administration contract, and identifying the most cost effective administrative carriers in the marketplace.
- Avoid State and Federal Mandated Benefits: Over the past several years, states have begun mandating very specific employer health care benefits. Each state has its own unique list of mandated coverages that add significant costs to employers and their employees. Self-insured employers can avoid the state mandate costs under the ERISA preemption, which allows greater flexibility in plan design.
- Capitalize on Savings from Positive Experience : For the years in which health care claim costs are below expectations, employers can add those savings directly to the bottom line of their profit and loss statement. Methods include implementing strategies such as consumer-directed health care, increased cost sharing, claim price transparency tools, specialty networks, value-based plan designs, and wellness programs. Self-funding can enhance these strategies by providing an employer with more leeway on how they design and fund such programs.
- Understand Broker/Consultant Fees: Many insured employers do not understand the full cost of an advisor. By self-insuring, employers see the breakdown of costs their advisors charge and can manage those costs by implementing a fee-based or commission-based structure to fit the employer’s needs.
- Understand Population Health Risk and Cost Drivers : Access to claim information under a self-insured model allows employers to begin to analyze the health conditions and high-cost chronic disease states within their population. Based on these findings, targeted programs can be implemented to impact costs.
What Are the Risks?
For an employer that has outsourced the risk of health care claim costs to an insurance carrier in a fully insured model, the move to self-funding can be an overwhelming proposition. The biggest concern is that of risk assumption and exposure to large loss claims. Before you consider self-funding, it’s imperative to first understand these risks.
- Claims Cost: In any given year, the cost of self-funding may well exceed the expected amount. This is a key element of the risk of self-funding that employers must realize before changing their funding. Some think that they will automatically save money by going self-funded. This is only true in the dollars associated with the fixed cost—but it is not guaranteed when it comes to claims cost.
- Cash Flow: As claims fluctuate from month-to-month, the employer covers the costs of claims—typically on a weekly basis. The administrator will draw down funds out of a bank account funded by the employer. For the high dollar claims that go to stop loss coverage, there can be a delay on reimbursements back to the employer while the claim is processed, eligibility is verified, and proof of coverage issues are resolved. This can strain employer cash flows.
- Compliance: A self-funded employer needs to be aware of the compliance issues related to self-funding, including the requirement to file a form 5500 and related schedules, comply with the Mental Health Parity Act and additional laws and requirements of ERISA, and, most importantly, the new requirements under the ACA that apply equally to fully funded and self-insured plans. In order to avoid any surprises, all of these new issues and administrative tasks should be identified and addressed before or during the implementation of the self-funded plan.
- Fiduciary Responsibility: Under a self-insured model, the employer now bears the sole responsibility to ultimately approve or deny claims, including appealed claims. If the employer starts to make exceptions and approve some claims, but not others, it could open them up to accusations that they arbitrarily and capriciously cover certain appealed claims—an explicit violation of a fiduciary’s duties.
- HIPAA: Another area of significant liability for self-insured employers has to do with the receipt, storage, and transmittal of protected health information (PHI). A self-insured employer has access to claims information that can be identifiable down to the individual employee and dependent level. Access to this information must be controlled, limited, and monitored under strict policies and procedures outlined in the HIPAA regulations. Release of such information, both accidental and deliberate, is subject to fines and penalties under the law.
As an employer begins to consider the pros and cons of self-funding, there are many issues to consider. For an employer that uses a fully insured model, a change to self-funding requires changes to accounting, banking, and administrative processes. It also requires expertise that may not be readily available in-house, such as actuarial support, consulting advice, vendor monitoring, and data analysis. All of these services will require additional expense, but the savings and benefits of self-funding—some immediate and others long term—far outweigh the cost of these services.
For 40 years, McGohan Brabender has been simplifying the delivery of health benefits by managing risk and reducing costs. We are passionate about what we do and have the tools and experience to guide you through the chaos of health benefits management.