To gain control over rising healthcare costs and to avoid certain health reform taxes, many employers are considering converting from a fully-insured (fixed premium) funding arrangement to a self-insured (pay-as-you-go) funding arrangement.
Before an employer makes such a change, there are several things that should be considered:
Risk and Reward
- While a self-insured employer is no longer subject to an insurance company’s pricing, under a self-insured funding arrangement an employer will be responsible for paying health claims for employees and their dependents as they are incurred as well as other fixed costs associated with administering the plan. As such, an employer must be financially able to absorb potentially large shifts in the volume of claims on a monthly basis and be willing to take on that risk. Generally an employer will set aside, into a specific fund, the funds needed to pay claims.
- Larger employers, those with 500 employees or more, and employers with a large population of younger workers may find that claims are statistically steadier over time.
Administration and Plan Design
- The employer will need to select and hire an experienced Third Party Administrator (TPA), or insurance carrier, to manage the payment of claims, secure discounted services from health care providers and maintain plan eligibility.
- The plan design should be reviewed to determine if state mandates will be covered and if other provisions of the plan should be changed to help the employer better manage the cost of providing comprehensive health coverage.
- Once the plan design has been determined, the employer will be responsible for preparing a plan document and Summary of Benefits Coverage for distribution to plan participants
Risk / Financial Protection
- To protect against catastrophic loses, or higher utilization in claims costs, employers often purchase stop loss insurance. Employers will want to work with an experienced advisor to determine the appropriate type (specific stop loss and/or aggregate stop loss) and level of coverage . It is extremely important that the employer’s advisor has a good understanding of the provisions of the stop loss contract and that the provisions are communicated clearly to the employer.
- For example, it is imperative that an employer understand run in claim and/or run out claim provisions to be sure they understand any areas for potential exposure.
- It is also imperative that the advisor understand the many riders and options that can further protect the employer from exposure. By doing so, the advisor can tailor coverage to the specific needs of the employer.
- Stop loss protection should not be purchased strictly on price – as noted above there are numerous contract provisions that should be reviewed to protect against catastrophic claims. In addition some other traits to consider include:
Financial stability of stop loss carrier and market history;
Accuracy in processing and paying claims;
Relationship with selected carrier or TPA;
Understanding of healthcare reform legislation and obligations.
The decision to begin self-insuring should not be taken lightly. When you begin to look at the self-funding option, you should work with experienced consultants/brokers who can help you understand and navigate these issues and the continually changing landscape of healthcare law.
Written by guest author:
Senior Vice President | Employee Benefits
Marsh & McLennan Agency | New England
500 Boylston Street, Suite 300, Boston, MA 02116