I need basic info on self-funded plans

[Guest Rooster]

I'm trying to learn how a basic self funded plan operates. Any help, comments, feedback would be greatly appreciated. So an employer collects premiums from employees (the employer may also pay a part of this cost). Do these premiums go into a bank account that the employer will use to pay claims? If claims exceed the value of premiums collected then are claims paid from the employer's general assets?

If so, what happens to this money if the value of premiums collected is larger than claims incurred? Does the employer keep this money? Do they use it for the following year? Are these premiums considered plan assets? If so do they have to be held in a trust?

Sorry for all the questions but I'm just trying to gain some background information on how this stuff operates. Thank you.

[KIP KRAUS]

In the simplest self-funded medical plan, benefits are paid from the general assets of the employer and this does not require setting up a special bank account for employee contributions. In addition, the plan would be wise to purchase stop loss insurance, which would also be a charge to the plan. In addition, the TPA will have to be paid to process claims, which is another charge to the plan.

In the absence of giving you an underwriting lesson on this message board, keep in mind that whatever is going to be charged to the employees is going to be determined by the expected total cost of the plan less what the employer is going to contribute. In my estimation, unless the employer is going to expect the employees to pay the major portion of the cost then any excess over the expected cost would typically exceed employee contributions and therefore no refunds would to need be given back to employees.

[Kirk Maldonado]

There is an organization based in Orange County California that is called the Self-Insurance Institute of America, or something like that. You should try contacting them for basic information.

[Guest Rooster]

So if participant premiums covered all claims for the year and there were some participant premiums left over at year end, would the employer be required to return the money to participants? Would this money have to go into a trust? VEBA?

[mroberts]

A self-insured plan runs the exact same way a fully-insured plan works except that you are on the hook rather than an insurance carrier. Therefore, if your claims experience was better than expected and there is money left over at the end of the year, this will be reflected when calculating the equivalency rates for the next year and the rates my only go up 15% instead of 20%.

Also remember, that self-insuring your health plan in and of itself probably isn't going to save you money. For every employer who saves money self-insuring a health plan, there is going to be one out there losing money. The key reason you should be looking at self-insuring your health plan is to take control over the plan. This will help you avoid any state-mandated benefits and craft a plan that fits your employee needs and works within your budget. Shoot me an email if you would like to discuss further.

[jeanine]

I can't imagine that the amount collected from participant premiums would ever cover the amount of claims paid. Typically, a plan collects 0-30% of the premium charged on an insured plan. The employer kicks in the rest of the premium. Self-funded uses a similar calculation. Most employees have no idea of the value of the benefit they receive through employer contribution to the premium or the total cost of providing benefits through self-funding.

[KIP KRAUS]

I agree with Jeanine. It is highly unlikely that the amount the employees pay for their medical coverage is going to be more than enough to cover claims, admin fees, and stop-loss coverage. If it is, the employees are getting the royal shaft. Even if they were paying 50% of the expected cost of the plan, it’s highly unlikely that there would be any money to return to the employees. First of all, medical claims are going to be approximately 75% to 80% of the total cost of the plan so if employees are paying 50% of the cost there is not going to be any overpayment by the employees.

Why are you stuck on this particular feature of a self-insured medical plan Rooster?

[Guest Rooster]

Ok well at least my gut feeling has been correct in that this would be a highly unusual situation. However, a buddy of mine told me that his employer requires employees to pay 100% of the premium on their self insured health coverage. It appears that they have had a low year on claims and that some of this money was left over. Employees were informed that the employer would hold this money and use it to reduce premiums the following year. It just sounded unusual to me but he has confirmed this is what will happen. My thoughts are that this money may need to be placed into a trust account and I was hoping someone had seen a similar situation.

[KIP KRAUS]

I have never heard of any requirement to put excess medical plan funds in a trust just because costs were lower than contributions. However, typically if the plan has had an excess at plan year-end reducing costs for the upcoming year is expectable.

Keep in mind that just because there was an excess one year doesn’t mean that this will occur every year. In fact, based on projections for the next year costs may be higher than the previous year.

There are still some variables that we don’t know such as:

Was this the first year of self-insurance?

Are employees only paying 100% of paid claims and the company is paying the administration fees and stop-loss premiums?

Is the employer booking reserves and taking this into consideration with regard to employee costs?

What is the employer going to do when costs exceed premiums?

How many employees are in this plan?

This is a very odd situation at best. In the 30 years I've been in this business I've never heard of an employer of any size requiring a 100% contribution for medical coverage.