Self-Insured Plan - design questions

[waid10]

My boss wants to switch our company from a fully insured plan to a self-insured plan. We are small (7 employees). Basically, he wants to take the money the company is spending on premiums each year and dump it into an account for each employee. Each employee's "pot" of health dollars can be used for claims each year until it is used up. Thereafter, the employee must fund his own health care costs.

In addition, older employees have more put into their "pot" than younger employees. If an employee doesn't use his entire amount, he can roll it over to the next year.

I have several questions:

1. In general, I know that self-funded plans are not subject to the same amount of regulation as fully-insured plans, but my boss' design seems really strange. Can this kind of plan design even be done?

2. He says he wants to self-administer claims. Would a third-party administrator be feasible for a company as small as ours? If we self-administer, what kind of HIPAA privacy implications are there?

3. Does anyone know of a good TPA in Virginia for a company of our size?

I appreciate any and all insight you can provide. Thanks.

[Don Levit]

waid 10:

You are really too small to do self funding, unless you are looking at a minimum benefits plan.

Will your boss consider combining with other businesses, in the same line of business?

Don Levit

[waid10]

waid 10:

You are really too small to do self funding, unless you are looking at a minimum benefits plan.

Will your boss consider combining with other businesses, in the same line of business?

Don Levit

Don - Thanks for responding. Why are we too small to do self-funding? What is a general rule for minimum size to have a self-funded plan? What is a minimum benefits plan? I don't think he will consider combining with other businesses.

[leevena]

Waid, I need some clarification. I am assuming that your insured plan was costing somewhere around $2000 per month (employee only cost). If that is so, and your employer is going to deposit that amount per month, or $24,000 per year. That means that all of the participants have a total of $24,000 per year to cover themselves with. You do not have insurance. I would even go as far as to say that this is not a self-funded plan because the amount of coverage would be so minimal.

Can he do this plan design (and I say design with a tongue in my cheek)? Yes.

Can he self administer the claims? Yes, but he would be a fool. I doubt if he has any idea about claims adjudication or privacy rules. Let me give you an example, one of your fellow employee turns in a claim for a sexually transmitted disease. Do you really believe it will stay confidential? TPA would cost money, and he has already shown he is cheap.

Let's assume that your employer is fed up and is only willing to spend the current premium amounts. My suggestion would be to find a high deductible plan and ask the employer to apply the money to that plan. At least you will have catestrophic coverage. In addition, I would bring in voluntary plans, such as Aflac or Colonial, to help employees.

And lastly, and I hate to sound harsh, if my assumption above is correct, you may want to go find another job or get coverage from a spouse if you can. Good luck.

[MARYMM]

waid 10:

You are really too small to do self funding, unless you are looking at a minimum benefits plan.

Will your boss consider combining with other businesses, in the same line of business?

Don Levit

Don - Thanks for responding. Why are we too small to do self-funding? What is a general rule for minimum size to have a self-funded plan? What is a minimum benefits plan? I don't think he will consider combining with other businesses.

Sometimes a local Chamber of Commerce or a trade association may offer a group plan that members can participate in. If that is available to your employer, he may be able to find cheaper health insurance that way.

Leeveena's suggestion of a high deductilbe plan makes sense. He could offer that along with Health Savings Accounts to which he and the employees could contribute tax free money (up to certain limits) which can be used for health care or carried over if not used.

What you are describing sounds like a Health Reimbursement Account. See the DOL website for more info on that type of arrangement

http://www.bls.gov/opub/cwc/cm20031022ar01p1.htm

[waid10]

I should have indicated before, that this is a 100 employee company (almost all hourly paid workers) and about 7 employees that would be participants in this health plan arrangement.

My boss does not want to go with a formal HRA because you need to offer catastrophic coverage over and above the reimbursement arrangement. He believes he can merely put money in a pot for whatever types of health claims are needed, get a corporate tax deduction when the funds are used by the participant, and not be regulated under state insurance laws. He is not concerned with adjudicating claims or privacy issues since the office manager according to him will "basically be writing a check" to cover health care related expenses but won't be reviewing the source of those expenses. He feels that with this arrangement, he provides more dollars of health benefit to employees while also keeping premium expense to the company low.

Thoughts?

[Don Levit]

waid 10:

Are you saying the employer wishes to divide the group into 2 classes of workers; those who are salaried and those who are hourly?

He then wishes to provide benefits only for the salaried workers?

I understand an HRA need not have a corresponding catastrophic plan.

You may be confusing this with an HSA.

IMO, you do not need an HRA, other than for accounting purposes, if each employee has their own individual account.

This basically sounds like the employer wishes a limited benefits type of self-funded plan.

If so, he can do so apart from state regulation.

Don Levit

[leevena]

Waid10...thanks for the additional information. I want to address the 7 possible self-funded employees, not the others. If I understand your question, the employer is going to put 7 employees into a self-funded plan and put the premium into the pool to reimburse the employees. Sounds great, but what can he possible expect to put into the fund, $25K per year at the most? One operation or large claim and the money is gone.

Either he is getting bad advice, or your boss is out in LA LA land.

[Larry M]

By the way, claims administration is not a simple process.

It includes (or should include) negotiated discounts from providers. For example, under the insured plan the "retail costs" of a procedure might be $20,000, but the negotiated fees may total only 12,000 (or, if you listen to the docs and hospital, 2,000).

So, in addition to not providing the insured coverage for these 7 employees, he is forcing them to pay higher rates for almost every medical service and supplies than under the old plan.

The office manager can not just "write a check" without determining if the expense meets the requirements of the plan andis not a duplicate payment, or a non-covered expense.

HIPAA requires the employer to maintain privacy about the employees health information and the cost of establishing an appropriate wall between the person handling the claims and the rest of the company may be greater than the annual outlay for the 7 employees. Of course, he could deduct the administrative costs from the fund and save even more money.

As others have implied, something is missing here.

We do not know the employer's reasons for doing this. What is the real motive? It seems peculiar to continue to pay for hourly workers and shaft the salaried ones.

Why not, instead of putting the money in a fund for self funding, just limit the employer's portion of the premium to the current level (perhaps adjusting it periodically) and having the employees pay the balance.

Or, does the employer know that one of the seven is really sick and will be causing the insured plan's rates to go sky high next year unless the employee is removed from the health plan? Nah. What employer would be motivated by such a thought?

[Don Levit]

Larry:

Thanks for providing your posting.

I agree with you that an important part of claims administration is keeping costs reasonable when using plan assets.

If discounts are not negotiated prior to utililzation, doesn't the plan sponsor have a fiduciary responsibility to negotiate discounts after the fact?

Don Levit

[jeanine]

Why would any provider negotiate a discount with a plan of this size? Where's the incentive? I also don't understand the statement that older employees would have more in their pot than younger employees. Is the difference because of the age of the employee or the length of service of the employee?

[Don Levit]

Jeanine:

I agree with you there is not too much of an incentive for the provider to negotiate discounts.

But, if the administrator pays "excessive" reimbursements out of plan assets, might he be personally liable to the plan, as a fiduciary?

Don Levit

[waid10]

Is an HRA considered a health insurance plan? I ask this because could termination of my employer's fully-insured plan in favor of an HRA trigger COBRA since employees would be losing health coverage (if the HRA is not considered a health plan)?

I don't know the real motivation for this. It seems to me that it is cost. I think he is frustrated with the rising cost of insurance and the decrease in benefits under the insured plan. I think he doesn't really understand that what he has proposed isn't really a self-insured plan and that a true self-insured plan would be prohibitively expense for the size of my employer.

[leevena]

Waid10, your question needs more clarification. An HRA, is a relatively new product, and is somewhat misunderstood. What I define as an HRA plan is a combination of a medical plan (fully insured or not) with signficant out-of-pocket exposure and a side-fund funded by the employer to off-set the out-of-pocket amounts. For example, an employer may purchase a $5,000 deductible, 100% thereafter plan. The premium for this is very low. Then the employer will determine an amount (for example $2000) to be set aside for each employee to use as an offset the out-of-pocket amounts. The employer funds the set aside amount through premium savings.

No to answer your questions. Yes, an HRA is viewed as another health plan. However, based on your prior postings, it appears that your employer is considering offering only a "pot of money" for the employees, without an insurance plan. If this is the case, this would not be considered an insurance plan.

Yes, he does have a self-insured plan. Technically, when an employer promises benefits, and they fund those benefits through their own assets without an insurance contract, that is self-funded. Your problem is that the employer is only promising a small amount of benefit dollars to cover the medical expenses.

good luck.

[waid10]

What I define as an HRA plan is a combination of a medical plan (fully insured or not) with signficant out-of-pocket exposure and a side-fund funded by the employer to off-set the out-of-pocket amounts.

So it is legally permissible to offer the side-fund of employer dollars to off-set out-of-pocket amounts without the medical plan? I guess I thought that was all an HRA was...kind of like a flexible spending account.

[jeanine]

I held off on responding until I did because there are so many issues and things that scream "wrong" that I couldn't begin to address them all. What is the point of taking--in your original post--the same amount of money that was being paid in premiums and dumping it into a fund that the employer administers until the money runs out? The employer certainly won't be saving any money. The only result would be that the employees have lousy coverage and run the risk of incurring huge amount of medical expense. I'm not even going to comment further on the age thing. Why not take premium money, ask the carrier for a high deductible plan (which should be cheaper), and split the remaining amount between the employees in the form of an HRA? At least then your employees would not be out of luck for any catastrophic claims. Something doesn't seem right.

[leevena]

Jeanine..my thoughts exactly. I mentioned the same things early on, yet people keep posting and avoiding the 900 pound gorilla in the room, that being the employer is trying to get out of his plan.

Waid...Yes, he can set up a side fund and give you money for your claims. As I have said earlier, this is ill advised. Read Jeanine and my earlier comments. Unless the employer purchases a high-deductible health plan, I see no other alternatives (given the facts you have told us) for a reasonable plan to be set-up. If I were you, and you were staying with the employer, see if you can get an individual policy, and pay for it from the funds he sets aside.

By the way, not matter how hard he tries, and not matter how much good will he puts into this hair-brain scheme of the side fund, he will screw it up. I am so confident of this, that I am willing to be a large peperoni pizza and a six-pack of Pepsi!

[Guest lmccormick]

Well let me just chime in her and disagree. We have been doing this successfully for a number of years now. Small groups don't need a TPA contrary to popular belief.

We have an HRA account for our US based employees whereby we reimburse up to $4500 year for insurance premiums and $500 for out of pocket expenses. Employees purchase their own individual health insurance at much lower rates than we could ever get as part of a group plan and we essentially reimburse them on a tax-free basis for their costs. Some people use the entire amount each year and others don't.

Then we have another category of employees and we purchase a high deductible catastrophic plan for them. Along with that they have $5000 to spend on health care costs (insurance premiums for family members or out of pocket expenses). What they don't use each year does not rollover but their amount starts over again.

What is preventing these employees from buying a lower cost catastrophic plan themselves and then submitting the claims for any out of pocket expenses to the employer to be paid from his HRA allocation?

The cost for group coverage for a small group of 7 is outrageous. I can completely understand why the employer is opting for doing something different. We've never had any problems managing our program.

[leevena]

Lmccormick, I don't think there is much disagreement between you and the other posters, other than the use of a TPA. If you read some of the earlier posts, many people suggested that the employees purchase a high deductible health plan and use the money to reimburse out of pockets.

Your comment about small groups not needing a TPA is correct, and no one is arguing that. Rather, it is a sense of reality that is being discussed here. Do you really believe that a small group, not use to processing claims, can properly, legally, and within all privacy rules/regulations run an operation like this? Not very likely, which is what the flavor of the prior posts has been. This employer is in no position to adjudicate claims, let alone develop a system and process to protect privacy, or at least that is what is being communicated from WAID10. Also, who will develop the SPD's, do testing, create and maintain bank accounts, distribute records, etc.?

[Guest lmccormick]

Lmccormick, I don't think there is much disagreement between you and the other posters, other than the use of a TPA. If you read some of the earlier posts, many people suggested that the employees purchase a high deductible health plan and use the money to reimburse out of pockets.

Your comment about small groups not needing a TPA is correct, and no one is arguing that. Rather, it is a sense of reality that is being discussed here. Do you really believe that a small group, not use to processing claims, can properly, legally, and within all privacy rules/regulations run an operation like this? Not very likely, which is what the flavor of the prior posts has been. This employer is in no position to adjudicate claims, let alone develop a system and process to protect privacy, or at least that is what is being communicated from WAID10. Also, who will develop the SPD's, do testing, create and maintain bank accounts, distribute records, etc.?

Small groups are exempt from the bulk of those requirements. If the medical claim falls within the IRS regulations as a reimburseable medical expense, it's not too hard to figure out. She's talking 7 employees.

Now what I will disagree with is not recommending the employees get their own catastrophic coverage if the employer isn't going to provide it for them. While it is very unlikely that someone will have a catastrophic health event, if they do, it could prove very costly and they should want to be protected.

[leevena]

Lmccormick...I do not mean to be disrespectful, but you are not correct. Small groups are not exempt from any of this. Remember, all the employer is doing here is putting some money (appears to be $25k per year) into a pot and then reimbursing 7 employees for their out of pocket expenses. And do you really believe that an employee of this firm can really determine what is eligible expense and what is not an eligible expense? Come on, trained claim adjudicators don't always get it right.

No one is saying that this can't be done...I am saying that the probability of this being done correctly and legally is slim.

[Guest lmccormick]

Lmccormick...I do not mean to be disrespectful, but you are not correct. Small groups are not exempt from any of this. Remember, all the employer is doing here is putting some money (appears to be $25k per year) into a pot and then reimbursing 7 employees for their out of pocket expenses. And do you really believe that an employee of this firm can really determine what is eligible expense and what is not an eligible expense? Come on, trained claim adjudicators don't always get it right.

No one is saying that this can't be done...I am saying that the probability of this being done correctly and legally is slim.

Perhaps the term "bulk of" was exaggerating a bit. However, the are exempt with regards to certain things like Cobra (employers with less than 20 employees are exempt). I'm sure I was thinking of other things that small employers are exempt from like the materitiy leave thing. As far as being able to determine eligible expenses goes...absolutely. It's not that difficult and there is a lot of guidance out there. I've been doing it for years. Now granted out employees don't have a lot of claims and often it's a no-brainer when the funds being reimbursed are paying for insurance premiums or co-pays. The employees have a list of what is reimburseable and I've not found one yet trying to claim cosmetic surgery or some other such item that would not be allowed. Believe me, I'm not scared.

[jmor99]

Imcccormick: What you are doing is a far, far cry from what waid10 is describing. You are talking insured contracts plus an HRA for your people. There are no insured contracts in waid10's scenario. What that employer is attempting to do is absolutely ludicrous. NO plan, no matter how small, is exempt from ERISA disclosure requirements. If nothing else, the employer is opening himself up to potential employee lawsuits, not to mention what one auto accident will do to the claims fund, or a premature baby. This is absolutely crazy!

Employer not subject to COBRA? Fine. Then he's subject to state continuation laws.

The gotchas go on and on.

By the way, it sounds like the employer is mixing some elements of HSAs in with his "plan". Under an HSA, employees 55 or older can put in an extra $700 in 2006.

Maybe this small employer is the next Bill Gates of insurance plan design. Carriers, take note!

[Guest lmccormick]

Imcccormick: What you are doing is a far, far cry from what waid10 is describing. You are talking insured contracts plus an HRA for your people. There are no insured contracts in waid10's scenario. What that employer is attempting to do is absolutely ludicrous. NO plan, no matter how small, is exempt from ERISA disclosure requirements. If nothing else, the employer is opening himself up to potential employee lawsuits, not to mention what one auto accident will do to the claims fund, or a premature baby. This is absolutely crazy!

Employer not subject to COBRA? Fine. Then he's subject to state continuation laws.

The gotchas go on and on.

By the way, it sounds like the employer is mixing some elements of HSAs in with his "plan". Under an HSA, employees 55 or older can put in an extra $700 in 2006.

Maybe this small employer is the next Bill Gates of insurance plan design. Carriers, take note!

I don't think what we're doing is a far cry. We don't mandate anyone purchase their own health insurance but we surely do recommend it. It is an individual choice. I'd have to go back and reread the original post but it sounds pretty much like he's simply setting up an HRA to reimburse employees for their out of pocket costs. There is nothing wrong with this so long as the employees know what they're actually getting.