What is Self Funding?

Self-Insured Health Plans: Questions and Answers

Q. What is a self-insured health plan?

A. A self-insured group health plan (or a 'self-funded' plan as it is also called) is one in which the employer assumes the financial risk for
providing health care benefits to its employees. In practical terms, self-insured employers pay for each enrolled employees and covered
dependents claims as they are incurred instead of paying a fixed premium per employee per month to an insurance carrier, which is known as a fully-insured plan. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.

Q. How many people receive coverage through self-insured health plans?

A. According to a 2000 report by the Employee Benefit Research Institute (EBRI), approximately 50 million workers and their dependents receive benefits through self-insured group health plans sponsored by their employers. This represents 33% of the 150 million total participants in private employment-based plans nationwide.

Q. Why do employers self fund their health plans?

A. There are several reasons why employers choose the self-insurance option. The following are the most common reasons:

1. The employer can customize the plan to meet the specific health care needs of its workforce, as opposed to purchasing a 'one-size-fits-all' insurance policy.

2. The employer maintains control over the health plan reserves, enabling maximization of interest income - income that would be otherwise generated by an insurance carrier through the investment of premium dollars.

3. The employer does not have to pre-pay for coverage, thereby providing for improved cash flow.

4. The employer is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).

5. The employer is not subject to state health insurance premium taxes, which are generally 2-3 percent of the premium's dollar value.

6. The employer is free to contract with the providers or provider network best suited to meet the health care needs of its employees.

Q. Is self-insurance the best option for every employer?

A. No. Since a self-insured employer assumes the risk for paying the health care claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. Therefore, small employers and other employers with poor cash flow my find that self-insurance is not a viable option. It should be noted, however, that there are companies with as few as 25 employees that do maintain viable self-insured health plans

Q. Can self-insured employers protect themselves against unpredicted or catastrophic claims?

A. Yes. While the largest employers have sufficient financial reserves to cover virtually any amount of health care costs, most self-insured employers purchase what is known as stop-loss insurance to reimburse them for claims above a specified dollar level. This is an insurance contract between the stop-loss carrier and the employer and is not deemed to be a health insurance policy covering individual plan participants.

Q. Who administers claims for self-insured group health plans?

A. Self-insured employers can either administer the claims in-house, or subcontract this service to a third party administrator (TPA). TPAs can also help employers set up their self-insured group health plans and coordinate stop-loss insurance coverage, provider network contracts and utilization review services.

Q. What about payroll deductions ?

A. Any payments made by employees for their coverage are still handled through the employer' s payroll department. However, instead of being sent to an insurance company for premiums, the contributions are held by the employer until such time as claims become due and payable; or, if being used as reserves, put in a tax-free trust that is controlled by the employer.

Q. With what laws must self-insured group health plans comply?

A. Self-insured group health plans come under all applicable federal laws, including the Employee Retirement Income Security Act (ERISA), Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA).

Q. What additional reasons are there that make companies make the switch to self-funding?

A.

• Reduced Premium Tax- There is no premium tax (usually 2-3% of monthly insurance premiums) for the self-insured claim fund. Premium Tax is only charged to the Stop Loss Premium, which is significantly less than a fully insured plan.
• Control of Plan Designs - The employer has the flexibility in determining the plan design that will meet the needs of their employees. The employer has the right to amend the plan to reduce plan abuse.
• The employer has greater flexibility in plan design because under Federal jurisdiction, many state laws mandating coverage do not apply.
• Cash Flow Benefits - The employer's cash flow may be improved when money formerly held by the insurance carrier in the form of various reserves, such as unreported claims and pending claims is freed for use by the employer.
• Interest income is earned and retained by the employer on the health reserves (money remaining after claims have been paid). Reserves can be held in an interest-bearing trust account, producing tax-exempt interest.
• An employers cash flow may also improve due to the claims portion of the plan is not pre-paid. Insurance premiums are due in advance, whereas self-funded plans pay claims as they are submitted to the plan administrator, usually 60-90 days after medical service is received.

Lower Cost of Operation- Administrative Costs through a TPA is considerably less than administrative costs charged through a full service insurance carrier.

Q. What is Stop Loss?

A. Stop Loss Insurance (also called Excess Loss or Reinsurance) is purchased to cover major plan liabilities above a specific dollar amount. Stop Loss is designed to protect the employer from catastrophic claims such as cancers, organ transplants or any unexpected increases in overall utilization. There are two parts to a Stop Loss Policy they are:

Individual Stop Loss - Individual Stop Loss (or Specific Stop Loss) protects the employer against catastrophic claims by a single individual that exceeds a specific dollar limit. For example, if a covered insured incurs catastrophic injuries in an accident and has claims exceeding the contracts agreed Specific level, the Individual Stop Loss coverage would reimburse the employer for the covered expenses beyond that dollar limit.

Aggregate Stop Loss - Aggregate Stop Loss insured against non-catastrophic claims exceeding an agreed upon total dollar amount for a plan year. The maximum liability (Attachment Point) point is established by the insurance carrier.

Individual and Aggregate stop loss coverage's are usually purchased together. As employers become more comfortable with self-funding and take on appropriate catastrophic thresholds, claim flows become more predicable and the large employers will typically drop the Aggregate coverage.

REINSURANCE BASICS

Individual Stop Loss

An Individual Stop Loss (ISL) policy allows self-funded employers to protect themselves from large claims incurred by an individual employee or dependent.

When an employee or dependent's covered claims exceed the ISL deductible, covered amounts in excess of the deductible are reimbursable to the employer under the ISL policy.

The ISL deductible is selected based on the number of covered employees, the employer's capacity to assume some of the risk, and the medical claim experience of the plan. ISL financial policies include:

• "12/12" Incurred and Paid
• "12/15" Incurred and Paid Policy
• "15/12" Incurred and Paid Policy
• "Paid" Policy

"12/12" Incurred and Paid

• Provides coverage for medical claims incurred and paid during the first policy year.
• Generally considered as an appropriate replacement policy type for an employer moving from a fully insured to a self-funded medical plan.
• With most reinsurance carriers, upon renewal converts to a "Paid" policy.
• Least expensive policy type, as it is the most restrictive.

"12/15" Incurred and Paid Policy

• Run-out type of policy
• Provides coverage for medical claims incurred during the agreement year, and paid during that agreement year or within the three months after the end of the year.
• An appropriate replacement policy type for an employer moving from a fully insured to a self-funded medical plan. The plan provides greater protection for claim situations that occur toward the end of the agreement year.
• Usually renewed on the same 12/15 basis as the first policy year.
• More expensive than a 12/12 plan, but provides more protection for late-filed claims.

"15/12" Incurred and Paid Policy

• Run-in type of policy
• Provides coverage for medical claims incurred during the three-month period prior to the effective date of the agreement (run-in period). This run-in period is provided only once, prior to the effective date of the policy.
• An appropriate replacement policy type for employers who are currently self-funded with a Stop Loss policy, which doesn't cover run-out claims.
• With most reinsurance carriers, at renewal this policy type converts to a "Paid" policy.
• More expensive than a 12/12 plan but provides additional coverage for "gap" protection.

"Paid" Policy

• Provides coverage for claims that are incurred while the agreement remains in force.
• Accumulates claim dollar amounts toward the agreement year in which the claim is paid.
• Provides continuous, uninterrupted coverage when claims are incurred in one agreement year but paid in the next year.

ISL Product Options

Advance Specific Reimbursement

Advance reimbursement provides employers with protection against unplanned cash flow drain by "advancing" funds to the employer for incurred claims for an individual whose covered claims exceed the annual ISL deductible by a stated amount, most often 20%. Advanced reimbursement is subject to certain specific requirements, such as complete pre-processing, timely filing, current premium, timely check issuance, and minimum $1000 per request.

Aggregating Specific Deductible

Aggregating Specific Deductible provides a cost saving feature to the Individual Stop Loss product. This option is best suited for clients who can afford to incur additional exposure in exchange for a reduced ISL premium.

How it Works:

With the Aggregating Specific Deductible option, there are two levels of deductibles to be satisfied before reimbursement occurs:

•  Individual deductible; and

•  Aggregate deductible.

The first level, the individual deductible, acts in a similar manner as a standard ISL deductible, whereby individual claimants incur covered expenses which are applied to the individual deductible. However, instead of receiving reimbursement for claims in excess of the individual deductible, these covered expenses are applied toward the second level, the aggregate deductible. In effect, there is a second tier of liability over and above the individual deductible which the policyholder agrees to assume.

In exchange for the policyholder assuming an additional layer of claims, the ISL premium is reduced. In essence, the policyholder is trading "hard dollar" savings for a potential increase in "soft dollar" liability. Generally, the premium reduction will be larger at lower ISL deductibles since there is a greater likelihood that claims will be incurred in the layer between the individual and aggregate deductible, thereby lowering the reinsurance carriers exposure.

Aggregate Stop Loss

An Aggregate Stop Loss (ASL) policy protects the employer against fluctuations due to claim frequency. The employer's overall claim liability is limited to a certain dollar amount, referred to as the Attachment Point . The ASL policy provides reimbursement when covered claims for the plan as a whole exceed the Attachment Point.

ASL policies are available in the policy types described below. To avoid gaps in coverage, we recommend that the employer match the policy types between the two types of coverage; i.e. a 12/15 ISL policy with a 12/15 ASL policy. While the sample contracts reflect an annual contract, a cash flow option (monthly accounting) is available.

• "12/12" Incurred and Paid
• "12/15" Incurred and Paid
• "15/12" Incurred and Paid
• "Paid" Policy (at Renewal)