Is It Right for Your Organization?
Many employers have at least entertained changing their funding arrangements on group medical plans from fully insured to full or partial self-funding. What are the pros and cons of this approach?
- In a fully insured program, the employer transfers 100% of the risk to the insurance carrier. By self-funding, employers agree to bear the risk of claims activity up to pre-determined levels (if stop loss protection is purchased.) Instead of paying the insurance carrier the fully insured premium each month, the employer only pays “fixed costs” which are composed primarily of claims administration fees and stop loss premiums. If the employer purchases DM (Disease Management) or other add-ons like PPO network fees, these are also included in the monthly fixed costs. So, by only paying a portion of the total plan costs each month for fixed costs, the employer funds claims as they are paid (up to pre-determined levels) instead of “advancing” the entire fully insured premium to the carrier.
- Taxes: Groups that are fully insured automatically pay state premium taxes of around 2% each year. This goes away with self-funding with the exception of the state premium taxes that would be applied to the specific and aggregate stop loss premiums (more on this later.)
- Better Plan Design Control: Self funded groups can typically design their plans with much more flexibility that fully insured arrangements where the insurance company generally dictates the plan design with certain variations permitted. Additionally, self funding allows the plan sponsor to “carve out” certain benefits like pharmacy in order to achieve greater cost savings. Groups with 1000 or more employees that are fully insured can do this also, but the medical premium typically takes “a hit” which in some cases can impact the potential savings that could have been realized by moving to the alternate PBM (Pharmacy Benefit Manager.)
How is this a pro? If the employer has good claims experience, they will be able to immediately participate in the savings by improving monthly cash flow. These funds can then be reserved for future claim activity or diverted to other corporate uses.
NOTE: When considering self-funding, take a hard look at your groups’ demographics. Do you have a young, relatively healthy population, heavy male participation, with similar new hires coming on board regularly? If so, then you are an excellent candidate for self-funding. You can still have positive results even if you don’t have the most favorable demographics, but make sure you have advanced cost containment measures in place to control claims cost. If you can get your hands on a three year claims history for your company, you can take a better look at whether this type of funding might actually work in your favor. We recommend a retrospective analysis where the proposed stop loss deductible is superimposed on the prior experience to see how the plan would have fared if it had been self funded.
Note that self funded employer groups also have greater ability to customize their plan designs to reflect changes in claims patterns than fully insured plans do.
- If your groups claims experience turns south, you could end up actually paying more than you would have under a fully insured arrangement (to predetermined maximums.) How much more depends on the “aggregate corridor” which is typically 115-125% of the “expected liability.”
- Understand that if you enter a self-funding arrangement and ever want to move back to a fully insured contract, you will need to pay the “run-out” for incurred but not paid claims that were in process before your switch over date. You will need to fund these run-out claims in addition to the fully insured premiums for the new arrangement. During this year, you might end up actually spending more than you would have had you remained self-funded.
- When you enter into a partially self-funded contract, you have to pay closer attention to the details. Things that are a given in a fully insured program need to be double and triple checked in a partially self-funded type plan. For starters, make sure your stop loss policy language is in sync with your summary plan description. Annual and lifetime limits need to be consistent. If not, you could have a lawsuit of your hands.
We recommend that any employer wishing to entertain self funding make a 3 year commitment to staying in that funding mechanism. Claims will fluctuate and there is nothing than can be done about that. There are strategies to reduce “submitted claims” to lower levels, but by and large, you should expect your paid claims to ebb and flow. At the end of the three years, you can then make a determination on whether self-funding has been a good choice.
Let’s assume you make the decision to go self-funded. What should you look out for?
Smaller groups concerned about cash flow need to make sure that their “specific stop loss” (this is the insurance that is purchased to protect the plan against individual claims that go above a pre-determined level) includes “specific advancement.” This stop loss feature requires the reinsurance carrier to fund claims once they reach the stop loss deductible amount instead of the employer having to fund the excess claims and then wait for reimbursement from the stop loss carrier. For a very large claim, employers can get squeezed from a cash flow perspective if this feature is not included. If the claim is challenged by the stop loss carrier, time can drag on and the employer’s cash flow is negatively impacted. Always include this feature in your stop loss contracts, if possible.
Aggregate reinsurance is designed to protect the plan when the total groups’ total annual claims exceed a pre-determined level. Small to mid-size employers should always consider purchasing this coverage.
If you are concerned about cash flow protection, we recommend “aggregate accommodation” which will divide your annually aggregate liability in twelfths. As the plan progresses through the year, the claims administrator will only collect claims dollars from your claims account on an accumulated basis, i.e. a plan having a $100,000 annual aggregate liability is only responsible for $8333/monthly. So, if claims in month 3 exceed the three month total to date, the plan sponsor will only have to fund up to that level. The excess is pushed forward to the next month and so on.
Think about your populations’ stability. If you think there is a reasonable chance you might have a reduction in work force due to poor economic conditions or changes in the market you compete in, try to negotiate the removal of the “aggregate floor” that many stop loss contracts include. With many contracts, if your population reduces, say 40% from where it was at the beginning of the contract term, the reinsurance carrier will only reduce your claims liability by 10-20%. This amounts to an artificial rate increase during the year. Try to get your liability limits to stay in cinch with your population counts, if possible.
Renewals are always fun, aren’t they? When partially self-funded, understand how your renewal factors and rates are calculated. Is the carrier using a “blended formula?” Meaning, are they using a manual block of business adjustment along with your actual claims experience in order to determine the rates? If so, make sure the underwriter stays relatively consistent from year to year with the claims credibility percentage. Of course, you should expect your claims credibility factor to go up the longer you stay with the carrier…just keep an eye on it to make sure the underwriter isn’t abusing you.
These are just a few of the areas you should consider when thinking about going with a self-funded arrangement. There are many more so if you would like to take a deeper dive, just let us know. We’ll be glad to answer any questions you might have.