Get the Facts on Traditional Self-funded Benefits
Self-funded benefits can seem like a complex topic, but it’s not. In this information sheet, we outline some of the basic things you should know as you consider whether self-funded benefits are right for your company and your employees.
Why Small Employers Are Turning to Self-funded Benefits
Historically, offering self-funding benefits to employees has been most effective for large corporations and Fortune 500 companies with more than 1,000 employees. Yet in the past 10 years, healthcare costs have risen at a rate approaching 10%, and self-funding has become a more attractive and affordable way for smaller employers to provide healthcare benefits as well. It is now estimated that the average self-funded plan covers 125-400 employees and that 59% of companies within the United States self-fund at least part of their healthcare plan.1
Traditional Self-funded vs. Fully Insured Plans
A traditional self-funded plan is a self-insurance arrangement in which an employer provides health or disability benefits to employees with its own funds. Conversely, with a fully insured plan, the employer contracts with an insurance company to cover their employees and dependents. In self-funded health plan, the employer assumes the direct risk for payment of the claims for benefits. One thing that is similar between both self-funded and fully insured plans is that the terms of eligibility and covered benefits are established in a plan document. In other words, not everything is covered under the plan, and not everyone is eligible for coverage. Eligible self-funded plans come with rights and obligations that were established under the Employee Retirement Income Security Act of 1974 (“ERISA”), the act that makes self-funded benefits possible for employers to establish.
Avoiding Risk to Your Company
How do businesses affordably assume the risk for self-funding claims? Many employers purchase excess stop loss coverage from an insurance carrier. These policies typically provide for risk limitations both on individual claims and aggregate, or collective, claims. However, it’s important to note that you, as the employer, are still liable for funding plan claims regardless of the purchase of excess stop loss coverage. To meet this requirement, employers create a fund that works as a pool for employee claims. A third-party administrator (TPA) typically manages the fund and distributes claim payouts. As the employer, you are the sole entity that has a contractual relationship with plan participants and beneficiaries. The excess stop loss policy runs solely between the employer’s plan and the stop loss carrier. Employees and dependents covered under the self-funded plan have no direct liability regarding payments or stipulations related to the Excess stop-loss coverage. In addition, unlike fully insured plans, self-funded plans are exempt from state insurance regulations under Section 514 of ERISA.
Aggregate Stop-loss Insurance vs. Full Insurance
Excess stop-loss coverage is instrumental in establishing a “worst-case scenario,” or aggregate loss, for any given year. The aggregate stop-loss helps establish a number that you can compare to the expense of having a guaranteed cost under fully insured plans. Essentially, aggregate insurance is an umbrella policy that caps your financial liability within a specified time period. If the aggregate cost does not exceed the plans’ fully insured guaranteed cost, self-funding may be a viable option for you. PCG can assist you in determining a cost comparison.
The Role of a Third-party Administrator (TPA)
While some large employers self-administer their self-funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment. TPAs provide these and other services, including access to:
- Preferred provider networks
- Prescription drug card programs
- Utilization review
- The excess stop-loss coverage
Control Costs with Greater Visibility
Perhaps the biggest advantage of self-funded plans is transparency of claims data. Self-funded employers who contract with a TPA receive a monthly report detailing medical claims and pharmacy costs. Knowing this information becomes instrumental in controlling costs by encouraging employees to avoid unnecessary healthcare costs, such as an ER visit for a minor ailment. Other advantages include plan flexibility, access to national PPO networks, and financial savings through better coverage under that PPO. For example, a visit to a PPO is likely to cost less than a visit to an urgent care clinic.
As healthcare costs continue to rise, more employers will look to alternative ways to finance their healthcare plans. Consumer-driven plans have become popular recently as employers look to shift some of the accountability to employees. For instance, health savings accounts (HSAs) and health reimbursement accounts (HRAs) encourage employees to shop around for the best value when considering elective medical procedures or filling pharmacy prescriptions. Self-funded plans take one step further by providing all claims data to employers. This allows you to establish an exclusive provider organization (EPO), which is basically a PPO that you select that enables you to eliminate high-cost providers.
Get Started With Self-funded Benefits
As you can see, self-funded benefits give you the opportunity to take control of the costs of providing healthcare benefits to your employees. With healthcare costs continuing to rise—and no end in sight—more and more smaller employers are discovering the benefits of controlling costs, getting more visibility into claims data, and maintaining profitability in a changing healthcare landscape. PCG can assist you in establishing a self-funded benefits plan that is tailored to your business’s needs, and those of your employees.
1 “Defined contribution health care pairs with self-insurance,” Business Insurance, May 2015.