Although self-funded health plans have been around since World War II, many employers are unfamiliar with their benefits. We offer this short introduction to some of the concepts that are part of self-funding your health plan.

In a self-funded group health plan the employer retains control. The employer manages and controls the plan for its employees instead of an insurance company. In classic group health plans (called fully-insured plans) an employer will pay a set amount per month or year to an insurance company who will then handle all aspects of managing that plan.

In fully insured plans, up to 20% of the premiums paid go to the insurance company. Self-funded employers control these dollars.

A self-funded (or self-insured) group health plan is one in which an employer essentially becomes the insurance company and is responsible for providing health care benefits to its employees. The employer pays for each health claim instead of paying a fixed premium to an insurance carrier. Typically, a self-insured employer sets up a special trust fund to hold monies from employer and employee contributions. Claims are paid out of that fund.

Self-funding is an alternative to paying fixed premiums for group health insurance. Typical plans can include coverage for medical, dental, vision or short-term disability. Self-funding gives the employer the ability to tailor coverage for its employees. The employer only pays for actual employee claims, avoiding the fees and overhead charged by insurance companies.

Advantages of self-funding include:

• Improved cash flow: the employer controls payroll deductions and other monies paid into the health plan – not an insurance company.
• No “pre-payment” for coverages.
• Lower claim costs.
• Lower administration costs.
• Easier plan customization.
• Greater choice in provider networks.
• Improved case flow management.
• Regulated under Federal (ERISA, HIPPA, COBRA, etc.) and not state law. Avoid costly state-mandated benefits.
• Not subject to state health insurance premium taxes on claim amounts.

Stop Loss Insurance

Although an employer can predict the overall costs of day-to-day healthcare for its group, there are less common but very expensive claims that could bankrupt the employer. For example, costs for premature babies can run from $110,000 to $470,000; and costs for organ transplants can run from $110,000 to $600,000. To protect themselves from these uncommon but extreme costs, employers will purchase stop loss insurance.

Stop loss insurance (also called excess loss insurance and sometimes reinsurance) provides protection against catastrophic or unpredictable costs.  Under a stop loss policy, the insurance company reimburses the employer for health claims that exceed certain limits.

Stop loss comes in two forms: specific and aggregate.

Specific (also called individual) stop loss is the form of excess risk coverage that provides protection for the employer against a high claim on any one individual.  Specific stop-loss protects the employer against catastrophic claims by single individuals that exceed a dollar limit (the specific deductible) chosen by the employer. A specific deductible is based on an employer's size and risk comfort and can range from $25,000 to $350,000 or more.

Aggregate stop loss provides a ceiling on the total dollars that an employer would pay during a year. The insurer reimburses the employer after the end of the year for non-catastrophic claims above a determined amount.

Specific and aggregate stop loss coverages are usually purchased together. As employers become more comfortable with self-funding and become large enough to fund various levels of catastrophic claims, they will typically drop aggregate coverage.

TPAs

Self-funded plans must provide for the day-to-day administration of the health plan: paying doctors and providers, providing ID cards, answering employee questions, etc. Most employers choose to hire a third party administrator (TPA) as a neutral intermediary providing these labor-intensive services.

TPAs will typically provide:

• Preparation and distribution of the plan documents and ID cards.
• Adjudication and Payment of claims.
• Maintaining eligibility of employees.
• Preparing claim reports.
• Managed care services such as network access and case management.

What Does HBS Insurance Services Do?

HBS provides an array of services to the self-funding market including: 

• Arranging competitive stop loss insurance.
• TPA selection assistance.
• Life and AD&D insurance.
• Managed care network referrals.
• Mediate in any difficulties or negotiations that might arise with insurers or TPAs.
• Help design cost-effective plans meeting the needs of your employees.
• Coordination with your local broker who assists in the implementation and administration of your plan.
• Providing expert guidance on all aspects of self-funding.

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