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Organizations use new tools to compare fully insured and self-funded health care plans.
The dramatic escalation of employee health care costs has prompted many CFOs and HR managers to look for new ways to gain control over premium expenditures and vendor fees. Self-funded employee health care insurance plans are one alternative that can allow firms to reduce and manage their health care costs and improve cash flow while still delivering the health coverage they desire for their workforce.
In self-funded plans, the employer takes on the financial risk of funding their health plan from its assets and becomes responsible for managing and administering the benefit plan.
Self-funded plans are governed by the Employer Retirement Income Security Act (ERISA) and are appealing to employers because of the greater level of flexibility that comes with being able to tailor the plan to their needs with fewer state-mandated features. While firms take on additional financial risk, they are able to limit their total risk through the purchase of a stop-loss policy and benefit from the increased cost savings typical of the self-funded model.
Recent statistics indicate that self-funded plans continue to grow in popularity. According to the 2008
Kaiser/HRET Survey of Employer-Sponsored Health Plans, 47 percent of employees in firms with 200 to 999 workers are self-funded. The survey found that a much higher percentage of workers in preferred provider organizations (PPOs) are in a self-funded plan (64 percent) compared to those in conventional "fully insured" plans using health maintenance organizations (HMOs), high-deductible health plans (HDHPs) and point-of-service (POS) plans. These figures suggest interest from all types of employers in alternative funding mechanisms and different ways to manage health care programs.
Under a self-funded arrangement, the employer assumes the health plan liability and risk in exchange for more significant control over the plan’s administration and funding levels. This differs from traditional fully insured plans where the insurance company assumes the risk, controls the plan administration, establishes reserve capital levels and manages other major decisions concerning the health care coverage provided to company employees and dependents.
When a company elects to self-fund its health plan, it can purchase excess insurance coverage to protect itself from extreme claims and utilization levels. This excess insurance is called employer stop-loss (ESL) coverage. In addition to covering the potential losses inherent with any group benefit plan, ESL coverage provides protection for the entire covered group, reimbursement for medical expenses above a specified dollar amount, and cover for catastrophic and high dollar claims such as transplants, leukemia, renal failure and premature births.
To obtain ESL coverage, employers should be prepared to provide the following information to an insurer:
Once the employer secures excess coverage from an insurance carrier, it may contract with a third party administrator (TPA) for claims adjudication, benefit plan administration, oversight of managed care networks (e.g. PPOs) and management of service vendors such as pharmacy benefit managers and disease and case management firms.
Fully Insured Plans vs. Self-Funded Plans
Individual employer needs and circumstances will determine the right health coverage for each company. However, in most instances changing from a fully insured plan to a self-funded plan can allow a company to gain more control quickly over its insurance obligations and benefit requirements.
Characteristics of Fully Insured Plans
Characteristics of Self-Funded Plans
Insurer accepts full risk.
Employer accepts the full risk; however, risks can be mitigated through the purchase of employer stop-loss coverage.
Insurer determines reserve levels.
Employer determines reserve levels with guidance from its employer stop-loss provider.
Insurer manages reserve capital.
Employer manages the reserve capital; employer stop-loss coverage can be purchased to mitigate catastrophic specific or aggregate exposures.
Insurer retains excess reserve and capital at year’s end.
Employer retains excess reserves.
Insurer manages and oversees all the service vendors.
Employer manages and oversees all service vendors, thereby exercising more control over the type and quality of care as well as the cost of care provided by the service vendors.
Obstacles to Switching to Self-Insurance
Historically, the requirement of two years of detailed claims history has limited the ability of organizations to move toward a self-funded health plan. Primary employer health plan providers have resisted disclosing this information consistently, citing federal privacy rules. Previously, companies without a detailed claims history could obtain quotes only for employer groups of 250 or less.
Recently, the development of new analytical capabilities to quote fully insured cases has afforded more employers the ability to receive quotes without providing a detailed claims history and to use comparative scenario modeling to evaluate the cost differential between fully insured and self-funded health care plans.
“The ability to now provide stop-loss quotes on fully insured business that otherwise would have been turned away is a huge breakthrough,” comments Karrie Andes, chair of the annual
Savvy Self-Funding Healthcare Conference & Expo. “By overcoming this quoting hurdle, it opens up more opportunities for employers and plan sponsors to consider self-funding.”
Lower Costs, More Control
The following key objectives are common to companies seeking to self-fund their health care plans:
Self-funded plans enable employers to better manage and control their health care spending while still being able to tailor a plan with the features desired for its workforce. “We’ve just finished our first year on a self-funded health plan backed by stop-loss insurance,” comments Tad Roan, CFO of Crescent Directional Drilling in Houston. “We saved over $600,000 this year by being self-funded. We have especially enjoyed the flexibility and freedom."
Matt Leming is sales leader for the employer stop-loss business at
Swiss Re, one of the world’s largest global re-insurers. U.S. products are underwritten by Westport Insurance Corp., a member of the Swiss Re group.
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