In the world of employee benefits, deciding to go from a fully insured group health plan to a self-funded group health plan can be game-changing. However, it’s imperative that you grasp the intricacies and implications of this shift before taking the leap.
Understanding the basics
For the purposes of this article, we’ll assume two things:
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Only one employer is sponsoring the plan.
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The employer is the plan sponsor. (We’ll use the term “employer” and “plan sponsor” interchangeably.)
Fully insured group health plans
A fully insured group health plan is a simple way to offer medical and prescription benefits to eligible employees and dependents. Regardless of the plan’s design, it involves paying a fixed premium to an insurance carrier. The insurance carrier is the insurer. It assumes the financial risk of covering the state- mandated benefits.
Self-insured group health plans
A self-insured group health plan is different. Under this type of plan, the plan sponsor directly funds the cost of claims. In other words, the employer assumes the financial risk of covering benefits outlined in the plan.
There are many terms used to describe self-insured plans. These include self-insured, level-funded, self- funded, partially self-funded and captive insurance. It’s important to understand the terminology your consultant uses when deciding whether to move from a fully insured to a self-insured plan.
For example, level-funded plans occupy a middle ground. They blend aspects of fully insured and self- insured models. With a level-funded plan, you pay a fixed monthly premium to a carrier. The administrator covers administrative costs and a portion of expected claims. Any surplus funds are held in a reserve to cover claims. If claims exceed expectations, stop-loss insurance kicks in to limit your financial exposure.
Advantages of self-insurance
ERISA preemption, regulatory flexibility and customization
Generally, self-insured plans are not subject to state laws regulating or mandating certain benefits. (Church plans and state and local self-insured plans may be subject to state benefit mandates.)
Through the Employee Retirement Income and Security Act (ERISA) preemption, self-insured plans are often exempt from certain state regulations that apply to fully insured plans. Thus, self-insured plans offer flexibility in plan design and coverage options. If you offer a self-insured plan, you can tailor your benefits package to meet the needs of your workforce. This can help you enhance employee satisfaction and retain talent.
However, federal laws have reduced the freedom and flexibility self-insured plans once had. For example, the Affordable Care Act requires group health plans to cover certain preventive health services without imposing any cost-sharing when received in-network. (There is an exception for grandfathered health plans.)
Other design and benefit mandates include:
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Providing medical and surgical benefits on par with mental health and substance use benefits
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Covering reconstructive surgery after a mastectomy
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Imposing hospital stay minimums after childbirth
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Allowing participation in clinical trials
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Removing preexisting conditions and disallowing rescissions of coverage
Cost control
One of the primary attractions of self-insurance is the potential for cost savings. By directly bearing the cost of claims, you avoid the profit margins built into traditional insurance premiums and gain more control over health care expenses.
Access to data
With self-insurance comes access to valuable claims data. By analyzing this data, you can identify trends, pinpoint areas of high utilization, and implement targeted interventions to improve health care outcomes and reduce costs.
While the general rule is that plan sponsors have access to their claims data, service agreements often severely limit this access. It is imperative that you read, understand and negotiate service agreements with every prospective vendor, third-party administrator (TPA) and pharmacy benefits manager (PBM). Otherwise, you may end up signing a contract that severely limits your access to your own claims data.
Risks and challenges
Financial risk
While self-insurance can offer cost savings, it also exposes you to greater financial risk. Unexpectedly high claims can strain finances, making it essential to have adequate stop-loss coverage to mitigate this risk.
Securing appropriate stop-loss coverage can protect you from catastrophic claims that could jeopardize the financial stability of your plan and your business. Carefully evaluating stop-loss coverage and the policy’s contractual terms is critical. Understand the consequences of early termination, the way claims are handled post-termination, and whether sufficient information is gathered to properly underwrite the plan.
Administrative burden
Managing a self-insured plan increases your administrative responsibilities compared to a fully insured plan. You must oversee your selected vendors, who are responsible for processing claims, maintaining provider networks, meeting compliance obligations and fulfilling other aspects of plan administration.
Key transition considerations
Communication
Clear, transparent and ongoing communication with employees and participants is paramount. Many times, there are different points of contact for different plan components. It’s important that participants understand this to ensure the plan is utilized in an effective way. Inform your employees about the changes to their benefits coverage, how those changes impact them, and any support or resources available to them.
Compliance
First, you must implement a comprehensive Health Insurance Portability and Accountability Act privacy and security program. Include an initial risk assessment, specific policies and procedures, ongoing training and corrective actions.
Additionally, you must recognize that you have more compliance responsibilities because you are acting as the insurer and the plan. While your TPA and/or PBM may help with different plan reporting obligations, such assistance will likely come with additional costs and human resources. This can be frustrating if you weren’t aware of these considerations during the evaluation process.
Vendor selection
Choosing the right vendors is crucial to the success of your self-insured plan. You must carefully evaluate TPAs, PBMs, stop-loss insurers and other service providers to ensure they have the expertise, resources and reliability to support your organization’s needs. And if your plan is subject to ERISA, you must secure a compensation disclosure from each vendor to determine whether the fees they are charging are reasonable.
Conclusion
Transitioning from a fully insured health plan to a self-insured health plan warrants careful consideration. While self-insurance offers opportunities for cost savings, customization and data-driven decision-making, it also entails financial risk, administrative complexity, increased compliance and ongoing oversight.
By understanding the basics, weighing advantages and challenges, and carefully evaluating whether the time to change funding is appropriate, you can make an informed decision. Adequately preparing can help you find a funding method that benefits your bottom line, improves participant well-being and provides benefits your employees will value. Talk to your benefits adviser for more information.
