June 6, 2013

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Cut Out the Middle Man

The Basics of Self Funding

June 6, 2013

As employers prepare for upcoming changes to healthcare law, more and more employers are becoming interested in self funding as a way to save on costs while providing health benefits to their employees. Self funding is a model in which a company directly covers the healthcare costs of its employees rather than paying premiums to an external healthcare insurance company.

According to Patricia Berridge, co-founder of Stealth Partner Group, more than half the workers in the United States are covered by some form of self-funded medical plan, and the larger a company is, the more likely it is to be self funded. However, self funding doesn’t have to be limited to large companies, and an increasing number of small to medium-sized companies are choosing to do so. 

Mark Selman, principal at Tall Tree Administrators, explains, “The tools exist today to allow employer groups that are down to 50 [employees] to comfortably self fund and have all the tools, all the data, and all the advantages presented to them that have historically been reserved for companies that have 5,000-plus employees.”

What is Self Funding?

  • In a self-funded system, the company assumes all the costs of providing healthcare to employees. This differs from a traditional, fully funded system, in which the company pays premiums to an insurance company, which is then responsible for covering the employees’ healthcare costs.
  • Self funding has been an option for employers since 1974, when the Employee Retirement Income Security Act (ERISA) was passed. Self-funded plans are governed and regulated under ERISA.

How Does Self Funding Work?

  • The employer sponsoring the plan works with a third-party administrator to set up a summary plan description (SPD), which governs the terms of the plan and how money will be collected and disbursed. The third-party administrator also carries out day-to-day parts of the plan such as issuing ID carts, coordinating vendors and providing customer service to employees who have questions or concerns with their insurance.  
  • Premiums paid by the employer or employee are collected in an employer’s trust account, rather than paid to a separate insurance company. The employer must use that money in accordance with the SPD.
  • The company purchases stop-loss insurance. This is a key component of self funding that covers the company in the event of unusually high costs. Stop-loss insurance is made up of two components: specific coverage, which insures the employer against catastrophic expenses incurred by one individual, due to events such as premature birth, cancer or organ transplants, and aggregate coverage, which insures the employer against unusually large claims for the entire covered group due to high frequency or an unexpected number of large, catastrophic claims.
  • The company partners with a preferred provider organization (PPO), a network of doctors and medical facilities. This allows the company to contract specific rates for types of medical procedures before they are performed and billed.
  • The company can also partner with a utilization review company to determine what medical procedures will be pre-authorized and which will need to be approved beforehand.
  • If it chooses, the company may also implement other programs to help decrease costs and improve employee health. Examples include wellness programs, which provide incentives for employees to practice healthy behaviors; bill-review or auditing programs; and medical advocacy programs.

What are the Benefits?

  • Companies that self fund are able to access and control the data related to their employees’ insurance claims. For example, they can see how much money is spent each month on inpatient procedures, outpatient procedures and emergency room visits. These data allow the employer to make efforts to cut costs and be better informed for upcoming decisions. Under current laws, insurance companies are not required to provide claims data to their clients with fewer than 100 employees.
  • Self-funded companies can tailor their health plans to fit their own needs, as long as they provide a set of minimum benefits. For example, companies can offer additional benefits in order to attract high-quality job candidates.
  • If a self-funded company spends less on claims than it set aside through premiums for a given month, it keeps any leftover funding. Companies who pay premiums to external insurance companies pay the same premium, even if their costs are less.
  • Self-funded companies end up paying less in state premium taxes because they are only taxed on the premiums they pay to their stop-loss insurers, which are taxed at a lower rate.
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