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Self-Funded Health Insurance

What is Self-Funding?
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Under an insured health benefit plan, an insurance company assumes the financial and legal risk of loss in exchange for a fixed premium paid to the carrier by the employer. Employers with self-funded—or self-insured— plans retain the risk of paying for their employees' health care themselves, either from a trust or directly from corporate funds.

Most employers with more than 200 employees self-insure some or all of their employee health benefits. Employers with fewer than 200 employees also commonly self-fund, but these employers require greater stop-loss insurance protection than larger employers (stop-loss insurance is discussed in greater detail later in this brochure). As a general rule, employers with less than 50 employees fully-insure their group medical benefits.

The risk assumed in either situation is the chance that employees will become ill and require costly treatment. When employees have few claims and few expensive illnesses, the self-funded employer realizes an immediate positive impact on overall health care costs. Conversely, if the employee group has unfavorable claims experience, a self-funded employer would incur an immediate expense beyond what may have been expected.

ERISA

Self-funded health plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts state insurance regulations, meaning that employers with self-funded medical benefits are not required to comply with state insurance laws that apply to medical benefit plan administrators. On the other hand, insured plans must comply with some of ERISA's requirements, but are primarily governed by the state where covered employees reside.

The distinction between state and ERISA regulations is important when determining if self-funding is right for an organization. Multi-state companies with insured health plans must comply with the regulations of each state in which they have plans and covered employees. Multi-state self-funded plans need only comply with ERISA

What are some of the Components of Self-Funding?

The risk an insurance company takes with an insured plan can be translated into a dollar amount for the employer. That dollar amount is the premium an employer pays each month for the insured group medical benefits. The premium amount includes the following:

• Current and predicted claims cost;
• Administrative fee;
• Premium tax paid to the state; and
• Insurance company profit.

Employers who self-fund their medical benefits do not pay the premium tax or insurance company profit. They do, however, assume the costs of paying for claims and administrative functions Typically, employers with self-funded health plans will outsource plan administration to a third party administrator (TPA) or insurance company who charges the employer a fee for performing administrative services.

Stop Loss

Employers with self-funded health plans typically carry stop-loss insurance to reduce the risk associated with large individual claims or high claims from the entire plan. The employer self-insures up to the stop-loss attachment point, which is the dollar amount above which the stop-loss carrier will reimburse claims. Stop-loss insurance comes in two forms: individual/specific stop-loss insurance and aggregate stop-loss insurance

Individual/Specific Stop-loss Insurance

Individual/specific stop-loss insurance protects a self-funded employer against large, individual health care claims. Essentially, it limits the amount that the employer must pay on a specific individual. For example, an employer with a specific stop-loss attachment point of $25,000 would be responsible for the first $25,000 in claims for each individual plan participant each year. The stop-loss carrier would pay any claims exceeding $25,000 in a calendar year for a particular participant.

Aggregate Stop-loss Insurance

Aggregate stop-loss insurance protects the employer against high total claims for the health care plan. For example, aggregate stop-loss insurance with an attachment point of $500,000 would begin paying for claims after the plan's overall claims exceeded $500,000. Any amounts paid by a specific stop-loss policy for the same plan would not count towards the aggregate attachment point.

Why Do Employers Choose Self-Funding?

An employer may choose to offer a self-funded health insurance plan for a number of reasons.

• Instead of trying to purchase a “one size fits all” health plan, self-funded plans can be customized to fit the needs of an employer’s workforce.
• Employers with self-funded plans control the health plan cash reserves, allowing them to maximize interest income (insurance companies otherwise generate interest income for themselves by investing premium dollars).
• Self-funded coverage is not prepaid, as it is when the employer pays premiums to an insurance company. Therefore, companies who self-fund their health plans have improved cash flow.
• Self-funded plans are not subject to conflicting state health insurance regulations and benefits mandates. Instead, these plans are regulated by federal law.
• Employers with self-funded plans are not subject to state health insurance premium taxes.
• Employers can contract with the providers or a particular provider network that will best meet the needs of its employees.

Contact BBDi to learn more about Self-Funded Health Insurance.