Self-Funded Health Insurance for Dummies: A Self-Funding FAQ

So, you're thinking about self-funding your health plan, or maybe you have a self-funded plan but you're not quite exactly sure how it works.

Good news for you! Welcome to the Self-Funded Health Insurance for Dummies, a FAQ for self-funding your health plan.

We've collected the information below as a quick reference guide for benefits decision-makers who either are currently offering a self-funded health plan or thinking about offering one. As benefits consultants who have been helping employers self-fund their health plans for decades, we know that self-funding doesn't always feel simple. But before we strategize and implement these plans, our job first starts with educating organizations about how these plans work and function. Consider this part of that first step.

As always, let's chat today if you have a question or need a question answered.

Self-Funding Basics

What is Self-Funding?

Self-funding is when an employer takes over the management and administration of their health plan from a health insurance carrier. Without the health insurance carrier, the employer must then pay each claim that comes in, design plans, set up contracts with vendors, partner with networks and PBMs, and more. Self-funding has many varieties (level-funding, partial self-funding, medical stop-loss captive etc.) but the commonality between them is the employer pays variable costs during the plan year, as opposed to a fully insured premium for 12-month periods like with a carrier plan.

What is a TPA?

A TPA or Third Party Administrator is an entity contracted by an employer to be the administrator for their plan and perform the functions that were previously performed by an insurance carrier. Note that a carrier may offer TPA services through what's called an?ASO or?Administrative Services Only agreement.

The TPA helps the employer process and pay claims, send notices to employees, receive and process payments, use their scale to obtain preferential contracts with vendors such as carrier networks, PBMs, point solutions, and more.

What's a PBM?

A Pharmacy Benefit Manager is the contracted organization that sources and manages prescription drugs for a self-funded plan and its employees. When an employee goes to the pharmacist to fill a script, the price that is paid between them and the employer is based on the negotiated rate for that drug from the PBM.

PBMs are a middleman between drug manufacturers and the public, so they have a variety of business structures. These can create value and savings for employers and employees, or they may create extra and unnecessary costs based on their business practices. A TPA and benefits consultant work together to make sure a self-funded organization is working with a quality PBM based on their unique needs.

What is the Risk of a Self-Funded Plan?

A?Self-Funded Health Plan means that an employer has variable healthcare costs, rather than paying a fixed premium for the plan year for each employee like with a traditiona, fully-insured health plan. The risks of a self-funded plan include:

• Large claims which the group struggles to finance
• Compliance risks with ERISA and other requirements
• High fixed costs that limit the possible upside or savings of the plan
• Complicated administration leads to confusion and frustration from decision-makers and employees at an employer
• "No one ever gets fired for hiring Verizon," by which we mean it's easy and blameless for leadership to renew a BUCA plan and accept rising premiums but potentially risky in the short-term to go self-funded

For comparison, a fully-insured plan has risks including increasing premiums over time and little ability to control those cost increases, opaque spending and murky accountability between the carrier and the group, and a lack of accountability among other groups in the risk pool that determines your premiums every year.

What is Stop-Loss Insurance?

Stop-loss insurance is protection for the employer against large claims. Employers pay the claims of their employees up to a certain point, known as an?Attachment?Point. The Stop-Loss Insurance carrier will reimburse the employer for any claims above this deductible. Stop-loss insurance typically comes in two forms,?Specific and?Aggregate, however other forms exist such as?Aggregating Specific.

What is Specific Stop-Loss Insurance

The most common, and the more expensive, type of coverage is?Specific Stop-Loss insurance which insures an employer against claims over a certain threshold per each member of a plan. This insurance is the risk that any one member has high claims.

Small groups who self-fund may have a specific stop-loss attachment point between $10,000 and $50,000, while larger groups may have attachment points anywhere from $50,000 to $250,000 or more.

What is Aggregate Stop-Loss Insurance?

Aggregate Stop-Loss Insurance?insures the employer above total claims for the group over a certain threshold in a given plan year. While specific stop-loss reimburses employers for large claims from individual members, aggregate stop-loss caps the maximum costs for the group in any given year. This maximum amount, or attachment point, is typically about 125% of the projected claims for any given year.

Statistically, small groups have both specific and aggregate stop-loss, while groups may forego aggregate stop-loss as they increase in size. Aggregate claims are very rare but for the smaller group, an aggregate claim is a big deal and protects them from possible financial ruin. Conversely, a group spending $10,000,000 a year is typically better capitalized to deal with fluctuations than a small group.

Cost-wise, aggregate premiums are a much smaller amount than specific premiums. Sun Life is one of the largest issuers of stop-loss insurance in the market and produces great informational pieces about trends and claims in stop-loss insurance

What is a Network?

A network is the list of providers and negotiated rates and contracts that allow employees to go see doctors and receive healthcare services at set prices. The network may be rented from a large carrier, such as Aetna, Cigna, UHC or others, or it may be customized and tailored. Most groups rent a network from a major carrier by paying network access fees. But groups who are looking for aggressive cost savings may create custom networks.

One point to remember is that your rented network may prevent you from working with certain point solutions.

Self-Funding Glossary: Some Other Terms to Know

PEPM

Per employee per month. Many benefit and solutions cost is determined on a PEPM basis ie "This telemedicine service is $6 PEPM." It's a useful shorthand for assessing the costs of any vendor or resource, such as the TPA fee, network access fee, the consultant's fee, and any outside vendors like an EAP or telehealth vendor.

Reference Based Pricing or RBP

A form of reimbursement where groups pay providers not based on negotiated rates from a network but instead as a percentage of Medicare reimbursement rates, say 160%. This is the most aggressive cost-savings strategy in self-funding but it can create a lot of noise and employee frustration as providers don't like this arrangement much. In some cases, hospitals and medical groups will decline to see patients who have a RBP health plan.

Collateral or Reserves

If part of a captive or other risk pool, an employer will make a contribution and this pool of assets will be used to pay costs in a set risk corridor. If there are unused collateral or reserves at the end of the plan year, then employers will receive a check with the unused funds.

Administering a Self-Funded Plan: What does it feel like?

What happens when an employee goes to the doctor with a self-funded plan?

When an employee goes to the doctor, they show a medical ID that is prepared and printed by the TPA. This features the network and some mandatory information such as deductibles and copays. Once the visit and service are completed, the provider submits a claim for reimbursement to the TPA, just like they do to a health insurance carrier. The TPA sends an EOB to the employee first, then sends a bill for any other additional payments. On a regular basis, TPAs pull funds from the employer to pay approved claims.

From the employee's perspective, this plan works much the same way as a fully-insured or traditional health insurance plan does. They go see the doctor, show an ID card that may feature a big name like Cigna or Aetna for the network, and receive services. They receive communication about the total costs of their visit and then a bill for any outstanding amounts.

How do I pay for my self-funded plan?

An employer with a self-funded health plan pays two types of costs: fixed and variable costs.

Fixed costs are consistent month over month and include fees for their TPA, network access, possibly PBM, consultant, and anything else on a set PEPM or annual basis, as well as the premiums for any stop-loss insurance in place. This is billed once per month.

Variable costs are paid often weekly to the TPA and cover claims for providers, facilities, labs, prescriptions, and any other healthcare service rendered to employees on the plan. The TPA will send the group a list of claims to be paid at the beginning of the week, often via an ACH transfer. The employer can review and approve these claims or dispute them.

What are the costs for my self-funded plan?

As mentioned above, the costs for a self-funded plan may seem complicated but they are all existent and baked into a fully-insured premium; your self-funded plan just breaks these out item by item. The tradeoff for the increased complexity is the ability to customize your vendors and plans and have greater transparency in costs and insights in utilization.

An incomplete list of costs for a self-funded health plan include:

• TPA fees
• Consultant fees
• Network access fees
• Stop-loss premiums
• Collateral contribution, if in a risk pool such as a Captive?
• Medical claims
• Pharmacy claims

This means that an employer is now considered the?Payer, a term previously reserved for TPAs and insurance carriers. We think it's important for employers to identify as a payer because it can lead them to better assess the cost and value of their relationships.

How do I transition to a Self-Funded Health Plan?

If you're exploring moving your health plan to self-funding, you'll start by identifying your risk management strategy (only stop-loss insurance or will we use a captive or other risk-sharing strategy) and then obtain quotes or proposals from vendors such as a TPA, PBM, telemedicine, and more.

A major roadblock for some groups in this process is that in order to obtain a quote for stop-loss insurance, carriers often require claims data to set a premium. For many small and even some mid-sized groups, they may not receive much, if any, claims data from their carriers. If this is the case, they may need to work with a captive that quote based off their renewal or any number of AI-based vendors who use EOBs and other information to assess risks in your employee population.

We recommend that groups looking to go self-funding give themselves at least 3 months or more lead time before their next renewal. If their organization has multiple layers of decision-makers, such as a board or HR committee, we recommend 6 months in order to satisfy all existing stakeholders. With the natural volatility in claims costs, financial leaders and other executive leadership have to understand how this plan works, above and beyond what was required of them with a fully-insured health plan.

If you want to discuss a possible timeline for if you were to transition to a self-funded health plan, schedule time with us today for a complimentary discussion.

Cost Containment Strategies

The total costs of a self-funded plan in any year are largely a factor of two things: the number of claims across an employee population and the average size of those claims. Most groups chose to self-fund their health plan for the savings opportunity, and one of the best ways to save through this style of plan financing is to address either the number of claims or the average cost of claims.

Cost containment strategies are various methods by which a group can spend less money overall in their health plan. Let's explore a non-exhaustive list and please click here to talk to a consultant if you are looking to implement any of these or find more!

Point Solution

A general catch-all term for 3rd party vendors selling a service around a given condition, need, payment strategy, or more. This includes a mental health EAP, a telehealth vendor, a chronic kidney disease resource, a surgical resource, a second-hand service, and more.

These vendors seek to streamline some subset of claims and employee needs for a group in such a way to improve employee outcomes, reduce costs, and improve the employee and employer experience.

Telemedicine

Members can have great outcomes by working with providers through virtual means such as audio, text, or video, and these visits cost less to the payer. This can be a great way for employees to receive immediate care for less severe conditions such as sore throats, headaches, UTIs, and more, in a way that is less expensive than going to urgent care or the doctor's office.

If the employee needs further services such as being physically assessed or a prescription, the provider can order this and direct the employee to the right resource. This is a good opportunity for?Care Navigation in which a service directs employees to the lowest cost and highest quality provider.

What is Direct Contracting?

Direct Contracting is an alternative payment method for employers where instead of reimbursing for claims with a large set of providers, employers only reimburse for claims from certain medical groups or health systems.

An example of direct contracting is how Boeing directly contracted with MemorialCare to provide affordable and integrated healthcare to employees in the Orange County area.

The purpose of doing this is lower rates for services and improve outcomes and experience for employees. Employers use plan design (lower cost-sharing like deductibles and copays) to direct employees to a certain medical group or health system and thereby negotiate reduced rates with those providers. The medical group or health system likes this because, like any business, they'll offer a discount for the increased volume of patients and utilization they'll see over time.

You can read more about direct contracting here.

What are Bundles or Bundled Payments?

A Bundled Payment is when an employer pays a provider a flat amount for a service such as a knee surgery. In this model, the provider accepts the risk/reward that they reduce complications over time and are financially rewarded for doing so. This creates an incentive to eliminate unnecessary services and reduce costs by improving outcomes.

The RAND Corporation has good extended reading on bundled payments if you're interested in reading more.

What is Integrated Primary Care and the?JAMA article on Intermountain Healthcare?

Wow what a smart question, thanks for asking! In 2016,?JAMA published research on the impact of integrating mental and physical healthcare in a team-based primary care setting as practiced at Intermountain Healthcare in Utah. The TL;DR is this practice resulted in better clinical outcomes for patients (your employees), lower rates of healthcare utilization (fewer claims), and lower costs.

You can read the full research article if you want a deep dive, but suffice to say, self-funded plans can benefit financially and employees benefit healthwise when primary care is emphasized in a holistic manner.

Customizing Benefits with a Self-Funded Plan

The employer creates their plan document and has significant leeway with how and what they cover in their health plan. Of course, they have to cover mandatory health services due to the ACA, but employers and consultants use custom plan design to drive participants to quality and affordable care in a variety of ways.

Reducing Emergency Room or Emergency Department Utilization

Employers can increase the difference in copays between the ER/ED and urgent care to get employees to go to the right site of care. It's common for groups to analyze their claims and see that members are accessing the emergency department for low severity needs such as sore throats or UTIs. Employees with these needs can be incentivized to access urgent care or telemedicine services by reducing those costs or increasing the copay to access the ER.

How can I use my Self-Funded Plan to Give Employees Better Fertility Coverage?

Most health plans have poor fertility benefits. Employers can customize their self-funded plan to cover certain fertility services and to preset amounts so employees can receive quality fertility services and receive needed treatments.

Mental and Behavioral Health

Self-funded health plans can be designed to put a greater emphasis on mental and behavioral health through plan design and more. Mental healthcare is hard to access and afford for a number of reasons. Self-funded plans can address many of these deficiencies, in conjunction with point solutions available in the market today.

How can a Self-Funded Health Plan Help an Organization Meet its DEI Goals?

Healthcare unfortunately has many examples of health disparities across socioeconomic, racial, and sexual orientation and identity lines. With a self-funded health plan, an employer can better understand how its employees interact with the healthcare system and put in place strategies to address disparities in outcomes and access.

Examples of how to do this include offering a provider directory like Hued, education, and communication to employees, partnering with vendors and point solutions focused on specific disparities or care gaps, and more.

Captive Questions

Some groups use stop-loss insurance as their only form of risk management. The group pays 100% of their claims up to the attachment points, then transfers all risk above that level to their stop-loss carrier. However, some groups and consultants may instead introduce a risk pool in the middle in the form of a?Medical Stop-Loss Captive.?In addition to the risk management, there are some practical reasons that small and mid-sized employers use a captive as part of their self-funding strategy.

What's a Captive Insurance Company?

Quite simply, a?Captive Insurance Company is an insurance company that provides insurance back to its owners. This can take many forms, such as 831(b) micro-captives or group captives.

What is a Group Captive for Medical Stop-Loss Insurance?

For our purposes with self-funded health plans, a?Medical Stop-Loss Captive is a group of employers who come together to share risk between what they pay themselves and what they transfer to an insurance carrier.

In many ways, the group captive is a risk management technique that is practiced at the largest insurance carriers for many groups. The advantage for self-funded groups can be put like this.

You're getting broken up for a group project and you have the choice of joining two groups. The first group is unaware of their grade so far in class and not clear on the rules of the assignment. The second group is much more driven to get a good grade in this project because they see themselves going to college or grad school, and they are equipped with the tools and strategies to get a good grade on this assignment.

Your grade will be the average of your group partners' efforts and results.

Which group do you want to join?

What is the Advantage of a Group Captive?

With a regular health insurance policy from a carrier, the carrier sets premiums for the year and at the end of the year, all profits are retained by the carrier. On the other hand, employers share in the risk and reward of a captive program, where they can enjoy the reward of underwriting profits and investment income.

A simple image to use is three buckets for paying claims. The first bucket is up to the specific and aggregate attachment points - the group is paying 100% of their members' claims up to this point. The captive is the second bucket, in which employers contribute money and the bucket pays claims for the group up to another set point, say $500,000. The third bucket is the stop-loss insurance provided by a carrier.

After the plan year, the captive looks at its books and compares expenses to amounts paid in by employers in the pool. If there is a profit, meaning the bucket as a whole took in more than it paid out, it will pay a rebate or return of unused premium to employers. For many employers, this can be a six or seven-figure check.

Additionally, a group captive can use its scale to negotiate better rates with networks and vendors and provide a mastermind of similar employers looking to manage their costs proactively.

Still Feeling Like a Self-Funding Dummy or Looking for More Info?

Good news - you can schedule time with one of our consultants today to answer your questions and give you ideas for your own group.

It's our job to help employers not only offer quality benefits that make healthcare affordable and accessible but to also help them feel confident and empowered in the decisions they make for their employees and their organization. I hope this article gave you a better foundation for the way a self-funded health plan works.

For more reading on employer health plan strategy, be sure to connect with me and follow my newsletter Competitive Advantages for more content!