Guide to Moving from a Fully Insured to Self-Funded Health Plan
ImagineMD’s friend, Adam Russo, and his team at The Phia Group have done such an excellent job explaining self-funded health benefits and how to implement them that we asked them for permission to share a condensed version of their article, “Guide to Moving from a Fully Insured to Self-Funded Health Plan.”
Enter The Phia Group:
Over half the United States’ non-elderly population—some 150 million people—receive health benefits coverage through an employer-based healthcare plan. Sixty-one percent of that 150 million are covered by self-funded or partially self-funded healthcare plans. Yet many people remain unfamiliar with the concept.
Given that such a substantial part of the population is already participating in self-funded health plans, it’s important to understand the principles of self-funding as well as how they can provide unique cost-containment opportunities within the landscape of today’s rising premium and healthcare costs. In this article, we explore the advantages self-funded health coverage provides over “traditional,” fully insured plans.
What Is a Self-Funded Health Plan?
Both fully insured and self-funded health plans operate under the same basic principle: money is collected and used to pay for medical expenses of the insured population, with the extent and terms of that coverage being outlined and detailed in a policy or plan document. The more people there are contributing to this fund (the risk pool), the better able the fund can bear an occasional “high dollar,” or catastrophic, expense.
Fully insured health plans accept a fixed payment (premium) to assume financial risk for medical expenses (the insurance carrier pays the medical bills with its own assets, so if the premium collected exceeds the claims paid, the carrier keeps the balance; if the claims paid exceed the premium collected, the carrier suffers the loss). Self-funded plans, however, don’t pass that responsibility onto a third party. Instead, a company’s self-funded plan pays claims with the plan sponsor’s own assets (the plan sponsor is usually the employer and employees, both of whom contribute to the plan). These payments occur in a manner that mirrors insurance only from the participants’ perspective, pulling from an established medical trust built up from participating employees’ contributions and/or direct company funds. However, if the claims paid are less than the contributions collected, the employer and employees keep the surplus rather than lose those funds to a carrier.
How Is Self-Funded Health Insurance Different?
Self-funded health benefit plans still pay claims and still have incremental payments to deal with, but in contrast to fully insured plans, they’re handled by the insured entity (the employer) and not a third party (a carrier). You–as an employer–would collect contributions, store them in an interest-earning reserve, hire a third-party administrator (TPA) to pay claims using your own assets, and create and revise the plan to meet your population’s specific needs. You’re also able to exercise more discretion in designing your plan and selecting the coverage and networks most ideal for your workforce. In contrast to expenses associated with a fully insured plan, you’re charged:
- No pooling risk. Self-funded policies are covered under the federal Employee Retirement Income Security Act (ERISA) and do not need to account for the same kind of pooling volatility that occurs in fully insured plans, since their “risk” pool is limited to their own enrolled participants. Your plan will not have to pay more to absorb the risk of other, more costly plans.
- No profit margin: Even more advantageously, there is no carrier making a profit off your premium payments. You get to utilize any money left over to reduce contribution rates going forward or to increase coverage.
- Lower administrative fees: Self-funded plans will still pay for claims processing, stop-loss insurance coverage, and network contract drafting, either done in-house or through the assistance of a third-party administrator (TPA). These administrative fees tend to be lower than their fully insured counterparts, though.
Top Reasons Employers Make the Switch to Self-Funding Health Plans
In a self-funded plan you can:
- Pay Out Claims As They Occur. One of the largest advantages of self-funded health plans is its “pay-as-you-go” claims nature. Rather than paying out large coverage payments or setting up expensive premium installments, companies that self-fund simply make claims reimbursements on an as-needed basis. Claims costs vary month to month and are principally affected only by the care utilized by covered persons, not hypotheticals and projections.
- Pick the Most Beneficial Plan and Network. Companies that adopt a self-funded plan customize it to their employees’ exact needs. What’s more, claims can be monitored directly using claims-analysis software, with coverage adjustments made the following year to better meet your employees’ data-backed healthcare realities.
- Take the Benefit of Your Own Savings. If claims are lower than anticipated for the month, your plan and your participants benefit, not a carrier. You can even earn interest on healthcare reserves when stored in the right account type, further incentivizing money saved.
Key Points to Consider When Making the Switch
Transitioning from a fully insured health plan to a self-funded one takes time and commitment. The switch also involves risk:
- Shock Claims. The biggest risk are shock claims. Shock claims are those “catastrophic” claims that are so large they essentially drain the self-funding reserves that were meant to cover your entire employee pool for the year. Since the innate advantage and core goal of self-funding is to avoid excessive payments, mainly in the form of high premiums (subsequently freeing up cash flows), shock claims could potentially derail the entire model. They represent the largest risk to this form of healthcare coverage. Luckily, there are industry solutions in place to reduce this risk. There are two main solutions addressing shock claims:
- Individual Stop Loss (ISL): ISL protects against large claims incurred by individuals by creating a payment threshold or “specific deductible.” If any single claim goes over that determined threshold amount, ISL kicks in to reimburse the plan for claims subsequently paid beyond that deductible amount.
- Aggregate Stop Loss (ASL): ASL provides the same protection as ISL, only for an aggregation of smaller claims that add up to a total threshold amount rather than a handful of extreme ones. Aggregate stop loss kicks in once the total of claims hits the predetermined benchmark, after which claims paid by the plan more than that threshold are reimbursed to the plan.
- People Covered. How viable self-funded healthcare is for your company depends on a great many factors. These include (but are by no means limited to) the size of your participant population (depth of the risk pool), the demographic makeup of your workforce, the level of medical complexity of your workforce, and the healthcare market in which you operate. Stop-loss “reinsurance” carriers are working hard to make self-funding viable for a broader group of employers. Innovative new programs are being developed to expand self-funded plans into smaller organizations and markets. Using models that prioritize an individual business’s financial discipline, its employees’ health, and its overall risk-tolerance alongside ISL and ASL coverage, plans can be drawn to fit businesses and institutions with increasingly smaller risk pools, allowing smaller and smaller companies to benefit from this model.
As we hope you now understand from The Phia Group’s article above, there are tremendous advantages to self-funding your health plan. You can safely absorb the risk involved in paying for your employees’ healthcare directly while significantly lowering your costs. No wonder 61 percent of all employers choose to self fund!
Further, if you—the employer—are paying for your employees’ healthcare directly, it now matters to you financially that they receive appropriate care, meaning not too little care and not too much care (by some estimates, as much as thirty percent of all healthcare resource utilization is unnecessary). So if you’re truly interested in providing better benefits to your employees that improve their health outcomes and reduce your plan’s costs, you’ll also need to impact your members’ journey at the point of primary care. This is where ImagineMD comes in. When you switch to a self-funded health plan, there are many programs available to provide the right care at the right price that a good health benefits broker can set up for you, but without an effective advocate helping your members navigate the complexities of a well-designed benefit plan, programs with high-potential will be under-utilized and may not achieve their intended ROI. High performance health plans combined with ImagineMD—where the member’s own physician has the time to educate patients about their medical needs and also knows about and uses the programs available under the patient’s benefit plan—in our experience yields the very best medical outcomes while dramatically reducing healthcare costs. You really can reduce corporate healthcare costs while improving benefits.