What is Self-funding?
Self-funding is a benefit arrangement in which the employer assumes some financial risk for providing health care benefits for its employees rather than paying a premium to an insurance carrier. With self-funded plans, employers pay health claims as they are presented for payment rather than paying a set premium to a carrier every month. Self-funded plans are subject to Federal Law (ERISA) rather than state insurance law. One unique feature of self-funded health plans is that the fees are unbundled. In other words, the plan is billed separately for each component – such as administrative fees, Provider network fees, stop loss premium, medical management, etc. A fully insured health plan, on the other hand presents a “bundled” premium and the employer does not really know where his dollars are being spent.
|Risk Holder||Governing Laws||Cost to Employer|
|Fully Insured Plan||Insurance Carrier||State Insurance Laws||Insurance Premium|
|Self-Funded Plan||The Employer||Federal Law (ERISA)||Administrative fees, Stop loss premium, medical management fee, Provider network fee, claims, applicable ACA taxes and fees (all charges are Unbundled)|
In a self-funded plan, the employer either administers the plan in-house or contracts with a Third Party Administrator (TPA) to do all or part of the administrative services. Due to the complexities of our laws governing health plans, most employers elect to contract with a TPA for these services. In this scenario, the employer establishes the benefit plan for its employees and contracts with a TPA for a variety of services such as tracking eligibility, billing and submission of premiums to vendors, placement of stop loss coverage, arrangement with Provider networks, preparation of Plan Documents and Benefit Summaries, claims payment, and providing compliance services, etc.
Self-funding is sometimes referred to “Partially Self-funded” or Self-insured. These terms are interchangeable to a degree. Technically when we use the term “Self-funded” we mean that the employer has transferred part of his risk to a reinsurance carrier. Under this arrangement, the employer selects his level of risk and the TPA finds a reinsurance or “stop loss” carrier to cover his excess risk. Conceptually, this is the same as selecting a “deductible” as you would do on other lines of insurance coverage.
The term Self-insured means that the employer bears 100% of the risk for providing health care to his employee population. In other words, there is no deductible applicable to claims, so the employer is responsible for all claims regardless of dollar amount.
There are advantages and disadvantages to self-funding, namely:
- Employer participates in plan experience
- Employer does not pre-pay for coverage resulting in improved cash flow
- Employer maintains control over claims fund and reserves
- Plan can be tailored to fit the needs of the group
- State mandated benefits do not apply to the group
- Some ACA fees and taxes are excluded from self-funded plans, thus reducing cost
- State Premium Tax only applies to stop-loss coverage
- Employer has freedom to contract with provider network of choice
- Lower cost of operation
- Employer has access to claims data
- Monthly claims expenses can fluctuate greatly thus making budgeting more difficult
- Additional risk potential if claims exceed expectations
- Employer takes on fiduciary responsibility for plan
- Potential exposure for employer should legal action be taken against the self-funded plan
Frequently Asked Questions
Does self-funding lower the cost of health coverage?
Yes, reduction in administration costs, hands-on management, the redirection in premium taxes, cash flow management and proper plan design, all lead to savings. As might be expected, insurance companies have the advantage of size and sometimes are more efficient in the “mechanical” costs of administration. However, that efficiency is more than offset by large company overhead (Home Office costs, fancy advertising, etc.). Thus, the end result is that the self-funded plans administered by an independently owned (non-proprietary) TPA will be much less expensive.
What size employer uses self-funding?
While most people naively think only large employers use self-funding, the truth is that the biggest growth (and need) for self-funding has been among the smallest employers. They are the ones with the greatest need for cost efficiency.
Why does self-funding work so well for small employers?
The growth and maturity of the TPA and stop loss insurance market has provided a very cost-effective way for small employers to use the advantages of self-funding. Multiple employer (such as sponsored by trade associations) and multi-employer (jointly sponsored with unions) plans have a decades-long successful record as the proven way to maximize cost-effective health care.
What laws must a self-funded group comply with?
Self-funded health plans do not have to comply with state insurance laws in that they do not have to offer benefits mandated by state insurance law. Self-funded health plan must comply with applicable federal laws, including 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 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) and some sections of the Affordable Care Act.