Self Funded Plans

[Guest Anaurquijo]

Before going any further let me say that "self funding" is new to me and there will by quite a learning process for me throught this research, please bear with me... :confused:

Due to increased medical inflation the City is looking at pursuing self funding for employee health benefits. Being a local government makes a difference with respect to ERISA (but not sure what that means for us exactly). We are a small employer, with 190 employees and about 500 covered lives. We are considering the possiblity of sharing the risk with other employers in the community, but would first need to consider their experience rates, etc. Currently we are fully funded and because we are a small employer, do not have an accurate history of our own experience due to pooling our risk with others. The City wants to "think out of the box" so to speak, in this venture and consider hiring staff to handle everything in house and not go with a TPA, broker, etc. The first thing I am recommending is to seek out an experienced benefits attorney, before going any further. Interested in hearing from some experts out there on your thoughts. Also, any tips on finding an experienced benefits attorney? I noticed this site has some good employment links.

[GBurns]

Without knowing at the least what state you are in makes it difficult to recommend an attorney. I know great attorneys who specialize in employee health plans rather than benefits attorneys ( most of whom are really pension plan and ERISA attorneys). However, they are in Illinois, Indiana, Ohio or the NE area down to D.C.

The first thing that I think that you should do is to start looking at the websites of a number of the larger or more popular law firms. Look at the practice areas and the bios of the lawyers in the relevant practice areas. This will give you a feel for the differencees between benefits attorneys, ERISA attorneys and attorneys who do health benefits. You will not only start to see the differences but get to realize what the issues might be and what you need to know about what they do so as to be able to better select.

You also need to do some research on self-funding, MEWAs, METs and a little ERISA.

The self-funding info you can get first from your present carrier, then from anyone that you think might be a possible bidder. If they will not help to educate you now, How can you trust them to provide good service later?

The MEWA and MET info you can get from some state DOI websites, the PWBA (DOL) and the Association of Pension Benefits Administrators (www.apba.org) (dont worry about the name the info is still good).

[Ron Snyder]

While a health benefits attorney can advise you with respect to the legal issues involved, I don't believe that should be your top priority (and I am an attorney).

I believe that you should seek out a consultant/consulting firm to guide you through the process. Preferably you might select a firm that does not also act as a TPA so that they can independently evaluate service providers and advise you as to costs and services as well as plan design.

But like GBurns, I couldn't recommend an attorney nor a consultant without at least knowing what part of the country you're in.

If I were you I would go out of the way to avoid becoming involved in a multiple-employer plan: your group is large enough to self-fund without taking that risk.

[Guest Anaurquijo]

Thank you for your replies. We are in the State of Arizona. I will look into the DOI website for information as well as law firm profiles. Are you familiar with any institution that provides training specifically for self funding?

I have purchased an employers guide for self insuring benefits, from Thompson Publishing... It is a great guide and I am becoming familiar with many of these concepts.

The difficult part is understanding how to use ERISA regulations, as local governments are not covered. Any local governments out there that are self-funded?

[Ron Snyder]

I am currently working with TPA firms that provide self-funded benefit plans to governmental groups. And as one who formerly practiced in Phoenix, I know that you have some good TPA firms in Arizona.

While it is true that municipal governments are not covered by most of ERISA, most states have taken portions of ERISA and put them into state laws (such as COBRA and HIPAA). Your consultant/adviser/attorney needs to be familiar with your state's requirements.

Caution: There are a couple of states that due to state statute governmental units are not legally permitted to self-fund health plans.

Note: To find an attorney, go to www.martindale.com/xp/Martindale/Lawyer_Locator/Search_Lawyer_Locator/loc_search.xml and search for lawyers and law firms practicing in Health Care in your geographical area. Make sure that the lawyers are "A-V" rated. (A refers to level of expertise and V refers to ethics rating.) Among the attorneys that come up pick one with a firm that also represents local governments so that they can address your concerns specifically.

[Kirk Maldonado]

Although I'm an attorney, and not an actuary or insurance agent, I've worked with a number of self-funded plans. The people that I've worked with have always discouraged small plans from being self-funded. The standard that I've heard is you need 500 life-years of credible experience.

Based on what I've heard from those people, my recommendation would be for you to find a benefits expert who is knowledgeable regarding self-funding. (That person would not be an attorney.) My prediction is that person will tell you that you are too small.

I think that you will find that the people that work with fully insured plans will typically refer out cases involving self-funded plans, because of the need for specialized expertise.

[KIP KRAUS]

I agree with Kirk. Self-funding of a group as small as 190 employees is risky at best. Especially if you have no idea what the current claims experience is. Your best bet is to follow Kirk’s advice about finding a brokerage firm that specializes in employee benefits, particularly group medical.

However, I think life years are more related to group life plans. My rule of thumb is that you need at least 300 employees in a plan before considering self-funding. Even on a group this size without credible claims experience for at least the past 3 years is risky for self-funding. Some will say 200 lives is a candidate for self-funding, but I personally disagree.

[Kirk Maldonado]

KIP KRAUS:

I've heard some people say that only one year's experience is sufficient for self-funding, if there are at least 500 lives. Is that a reasonable rule of thumb in your estimation?

[Ron Snyder]

Since we're posting uncorroborated opinions, I will post mine: groups from 50-500 can save significant amounts by using self-funding concepts. Although 500 lives would be required to have a "true actuarial group" (meaning that experience is likely to mirror the general population).

With a smaller group in good health it is possible to obtain significant savings by raising the deductible under a health insurance policy to $5,000 or higher. 80% of all individuals do not spend over $1,000 per year for medical and 92.5% of individuals do not spend over $2,000 per year. Why pay an insurance company to cut the checks for claims below those levels? In fact groups of 50 can self-fund up to $5,000, groups of 50-100 can self-fund up to $10,000 and groups of 100-500 can self-fund between $15,000 and $75,000 quite well.

This can either be done in connection with a high-deductible health plan or specific and aggregate stop-loss coverages. And most TPA firms and their actuaries can advise as to appropriate stop loss limits.

So speaking as an actuary and an attorney, I believe that you can be successful with a group of your size.

[KIP KRAUS]

Kirk:

I don’t see any creditability in one 12-moth period of claims because they are not mature claims. Depending on plan design there could be at least 2 to 3 months of claims lag (incurred but not paid) involved. If you had at least 15 to 16 months of claims and wanted to take a chance I’d say have at it, but it still is a crapshoot in my opinion. 36 months at a bare4 minimum is a better determinant for claims projections.

As to Vebaguru’s comments, if you are a medical underwriting actuary you must know that most group insurers will not even write an experienced rated medical plan for groups of under 200 lives, because the claims experience in their opinion is not 100% credible. My comments are based on years of experience consisting of work with a major group insurer, as employee benefits broker and from designing and negotiating benefits as an employee benefits manager.

Your examples of partially self-insuring medical plans based on the designs you used have merit. However, whether the insurer cuts checks or a TPA cuts them there will be a charge for claims processing. In addition, stop-loss premiums for a small non-credible group would probably be prohibitive not to mention that in my experience that stop-loss premiums go up each renewal by 15% to 25% regardless of any claim hits. Finally, given the way stop-loss carriers (except maybe Kamikaze Life and Six Gun of Texas) are cherry picking its risks I find it hard to believe that one would even consider insuring a non-credible group at any price.

My advice for groups for up to 200 lives is to continue to work with insurers to design a cost effective medical plan until that is exhausted. If this doesn’t work then go for self-insuring if you think you can predict future claims and can get the catastrophe claims covered at a reasonable price.

[Ron Snyder]

I would point out that a municipality is likely to have several years of claims information. I know multiple TPA firms who specialize in partially self-funded plans. In general they are able to save clients with 50-500 employees between 6% and 12% on their health plans.

[Larry M]

Before we go too much deeper into whether self funding is better than being fully insured, I believe we should step back, go to the original post, and identify the problem.

"Due to increased medical inflation the City..." is thinking of solving that problem by going self funded.

Self funding, will not stop medical inflation!!

If anything, it could create a higher jump in claim costs if the City loses the significant discounts (an assumption I have made) the current carrier has negotiated with providers.

By far, the major costs of any group employee health plan involve claims. If your claims are high, your costs are high; if your claims are low, your costs should be low. Even in those situations where your experience is partially pooled, your overall costs should follow the level of your claims.

With self funding, you have the potential advantage of eliminating certain marginal expenses associated with the plan. These are commissions, premium taxes and the insurer's margin for profit and risk.

With self funding, you take on the expenses of adminstration of the plan and the risk of having claims exceed your budget. [With an insured plan, you can walk away from the insurer if your claims are too high and leave it with the deficit....well, maybe one or two times.] You also have a more direct line of liability in the case of claims or eligibility which are perceived to have been mishandled.

If the City wishes to regain control of the costs of the health plan, it can do so by directing its attention to the design of the plan. It is possible to save a substantial portion of the City's costs by appropriate changes in the plan.

If it self funds the plan, the City will have to hire persons or firms to do the chores curently performed by the carrier - such as: claims administration; developing and printing certificates of coverage and summary plan descriptions; maintaining knowledge of changes in the laws which affect the plan; negotiating discounts and standards of care with various providers of care -physicians, hospitals, pharmacies.

It appears as if the City also is thinking of bringing all the adminstrative capabilities in house. I believe such an approach, if it could be done, will prove to be much too expensive for the City - just for the administrative expenses alone.

In my opinion, the logical step for the City to follow is to engage a good group health consulting actuary - on a fee for service basis - to help it identify, and expense, the options available to the City.

There is an article on the Small Business Council of America's website which discusses the handling of group insurance renewals and expands upon these comments. It is at

http://www.sbca.net/archieve.asp

[Guest Anaurquijo]

There is obviously so much to consider before the City decides which way to go. I did manage to get actual claims experience for us for the period of 9/01 through 8/02, which shows that 92.7% of our premium is going to actual paid claims. I am not a benefits expert and even I know this is not good. Our carrier is trying to pull up past year actuals for our review. Is this suicide for us to still consider self funding?

[GBurns]

Now you should do the basic math.

You know the $ value of the 92.7%. Add the admin fee, the cost of the brochures, SPD and other employee communications, the cost of the stop-loss, any reserving requirements etc. Add a margin for safety.

This should give you a good picture of how much your current plan would have cost(ed) you if you were now self-funded.

If you can get a fully insured plan for this price then you do not need to even consider self-funding. Why take the risk?

If you can only get similar coverage for a much higher price then you have a basis for considering taking the risk.