As the cost of health insurance premiums and prescription drug costs continue to escalate, along with employees’ use of health care, employers are desperate for low-cost health insurance options.
One option is self-funding a health insurance plan, which is a viable solution for some but not all employers. Many employers continue to find a fully insured plan the most viable solution due to the absence of plan complexity, financial volatility, and administrative demands.
“Generally, the smaller the size of the group, the riskier it is to get into a self-funded option,” says William Brewster, vice president for the NH market at Harvard Pilgrim Health Care. This is primarily due to the ability of a large employer to spread risk across a greater population.
According to the 2017 Kaiser Family Foundation Employer Health Benefits Survey, “Covered workers in large firms are significantly more likely to be in a self-funded plan than covered workers in small firms.” (See chart on page 35.)
Fully Insured Health Plan
Under a fully insured health plan, the employer pays a premium with a fixed rate that is based on the number of employees enrolled on the plan. The health plan will use premiums to pay claims by the plan members, and, in the event that the claims for the group are excessive, the employer will not be responsible for any additional costs during the plan year.
The health plan’s responsibilities include processing and paying medical claims, maintaining a provider network, delivering a pharmacy option and other administrative tasks.
Self-Funded Health Plan
With a self-funded health plan, the employer acts as its own insurer for a portion of the risk. This means the employer pays health care costs and accepts the risk of offering the health benefits. Most employers will contract with insurance companies or other third parties to manage the plan and underlying risk.
“The value of self-funded plans includes the potential for reduced administrative expenses, avoidance of health insurance tax, greater flexibility in plan design and superior reporting of medical expenses,” says Brian Wells, president of Tufts Health Freedom Plan.
For employers that have determined that a self-funded health plan is a viable option, there are several potential benefits to these plans, including plan design flexibility, claim transparency and financial savings.
Tax Advantages
According to America’s Health Insurance Plans (AHIP), the Federal health insurance tax is expected to produce $156 billion between 2017 and 2026, including $14.3 billion in 2018. Per the Affordable Care Act (ACA), this tax was imposed on certain health insurance plans, but self-funded health plans don’t have to pay it, and that can reduce plan costs by roughly 3 percent.
The average state health insurance tax is 2.25 percent of premium, according to AHIP, and these rates range from 0 percent in Utah to 4.265 percent in Hawaii. Most states impose this premium on health plans, but due to the basis of the calculation for self-funded plans, the premium tax for self-funded employers is considerably lower.
Avoiding Mandated Benefits
For years, states have mandated certain coverage requirements within fully insured health plans, and these mandates vary from state to state. Additionally, the ACA imposed a requirement for a health plan to provide “essential health benefits,” including preventive and emergency services. Due to ERISA (the Employee Retirement Income Security Act of 1974) and ACA rules, self-funded health plans are largely exempt from these rules; however, employers, at their own discretion, can include any of these benefits within their plan.
Employers That Should Avoid Self-Funded Plans
Some employers, particularly smaller ones, may find the risk of self funding exceeds the reward. “Since self-insured employers assume the risk for paying employee health care claim costs, it must have the financial resources to meet this obligation, which can be unpredictable,” says Karen Kenney Richard, director of marketing strategy for Health Plans Inc.
Employers with these characteristics may not find self-funding to be a viable choice:
• Historically volatile claims;
• Consistent loss ratios greater than 80 percent;
• Inability to manage an inconsistent monthly cash flow;
• Risk averse ownership or management;
• Current high-risk health plan members;
• Limited administrative support;
• Small businesses (the smaller the group, the greater the risk).
“Employers considering self-funding solutions need to weigh the risk associated with taking on exposure to high-cost cases and potential cash flow impact,” says Wells.
Protecting the Bottom Line
To protect the company and the employees from any unforeseen risk, most employers with a self-funded plan will purchase insurance with “stop loss” protection that reduces the financial risk.
“Self-funding is a business strategy that should be re-evaluated every year, before renewal, to understand how the plan is performing and what prudent steps are being taken to mitigate risk, improve health and strengthen the bottom line,” says Karen Kenney Richard at Health Plans Inc.
For smaller companies that face greater volatility in claims, it can be challenging to accurately predict the volume of claims over the course of the contract period. An aggregate stop loss policy will provide protection to an employer for any claims, in aggregate, that exceed a predetermined threshold. For example, in the event an insurance company forecasts the claims for an employer at $1 million, the employer would purchase aggregate stop loss protection for claims greater than 125 percent of expected claims ($1.25 million).
Keep in mind that 5 percent of all plan members tend to produce 25 to 50 percent of health plan claims. So what happens if one plan member is in need of services that exceed $1 million? With the purchase of a specific stop loss policy (individual stop loss), the employer will be insured against any catastrophic losses that are the result of any individual member in excess of a limit (pooling point/deductible). For example, an employer may purchase stop loss protection of $100,000, and any claims in excess of this threshold will be the responsibility of the insurance company. Specific stop loss policies are available for as low as $10,000 and up to $1 million. The smaller the group, the lower the deductible.
Employers considering self-funding should know the risks involved and work with their employee benefits broker or consultant to complete a thorough analysis, which should consider the organization’s corporate goals, employee population, historical claims, forecasting, risk tolerance and demographics.
Tom Harte is president of Landmark Benefits Inc. in Windham. For more information, visit landmarkbenefits.com.
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