Self-Funding 101 - The Principles of Self-Funding
Historically, employers have turned to the self-funding of their health plans when traditional insurance programs failed to meet their cost expectations. The many thousands of employers in the U.S. who have implemented self-insured medical programs later discovered the other advantages such as coverage flexibility and client-specific benefit plan administration.
A self-funded, or self-insured plan, is one in which the employer assumes the financial risk for providing healthcare benefits to its employees. In practical terms, self-insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium to an insurance carrier for a fully insured plan.
Self-funding is one of the most effective ways employers can control the rising costs of healthcare coverage. In understanding self-funding as a concept and how it differs from fully insured products, we've provided you with some key guidelines on the structure of a self-funded plan.
How Self-Funding Works
- The employer has significant say into the design of the medical benefits plan. Plan types may either mirror fully insured benefit models or can be adapted to meet the specific needs of a member population and budget, through a customized suite of benefit and product options.
- Rather than obtaining medical coverage from an insurance carrier, the employer funds the risk directly from the employer's assets. The employer becomes directly responsible for benefits covered under the plan and is subject only to federal regulation (e.g. ERISA). A self-funded benefits administrator should make suggestions on best-practice funding and reconciliation procedures.
- Stop loss insurance may be arranged to limit the employer's loss to a specified amount and ensure that catastrophic claims do not upset the financial integrity of the self-funded plan. The amount of risk to be reinsured is a function of the employer's size, nature of business, financials and tolerance for risk.
- A Summary Plan Description (SPD) is prepared (usually by the TPA) and distributed to covered employees. The SPD contains all the provisions of the plan, including eligibility, coverage descriptions and plan exclusions and limitations. The TPA typically prepares the plan booklets, ID cards, provider directories and other employee materials.
- The TPA administers the plan. Its responsibilities include maintaining eligibility, adjudicating and paying claims, customer service, utilization management, preparing claim reports, plus arranging for services such as provider network access and implementation of a Pharmacy Benefit Management program.
Benefits of Self-Funding
Elimination of most premium tax: There is no premium tax on the self-insured claim expenditures. Premium tax is applied only to the stop loss premium, which is a fraction of a fully insured premium.
Lower cost of administration: Employers find that administrative costs for a self-insured program administered through a TPA are significantly lower than those included in the premium by an insurance carrier or HMO.
Carrier profit margin and risk charge eliminated: The profit margin and risk charge of an insurance carrier/HMO are eliminated for the bulk of the plan.
Claims/Administration: The TPA should provide fast, efficient claims service. The employer should be provided an electronic enrollment option. ID Cards should be provided within 72 hours of request.
Customer service: The employee should have access to a toll-free telephone number and a dedicated customer service team. Claims and eligibility information should be available over the Internet.
Cash flow benefit: The employer's cash flow is improved when money formerly held by the insurance carrier in the form of reserves, for unreported and pending claims, is freed for use by the employer.
National provider network: The TPA should offer a national integrated program of PPO networks for multi-state employers.
Control of plan design: The employer has complete flexibility in determining the appropriate plan design to meet the needs of the employer and employees. The employer can redesign the plan at any time.
Mandatory benefits are optional: State regulations mandating costly benefits are optional because self-funding is regulated by federal legislation only.
Cost reporting: The TPA should provide a monthly detailed reporting of costs, by department or location, and by type of medical service. Utilization and lag reports should also be available. Fund disbursement journals should be provided electronically.
Annual Health Insurance Industry Fee: As of January 2014, a new sales tax will be imposed on health insurance issuers as a result of the Affordable Care Act (ACA). This fee will apply to all fully insured medical and/or dental business as well as Medicare and Medicaid lines of business. The total amount to be collected in 2014 is $8 billion and by 2018 will increase to $14.3 billion annually collected. This is a permanent tax and will increase beyond 2018 based the annual rate of premium growth. The fee is to be divided between all health insurance issuers, with for-profit insurers required to pay twice as much as not-for-profit insurers. This fee is not applicable to self-funded health plans.