Primer on self-funding of medical costs -- what are the pitfalls? What

[Guest Jeff Belanger]

I work for a financial institution in CA that is seriously considering "partial" self-funding of our medical benefits.

We have 200 employees with 120 lives insured in the medical plan that we want to self-insure. The self-insuring option appears to provide us with the option of giving the employee the types of coverages they've enjoyed in the past EPO/PPO vs. HMO/POS. We also believe that because we have a younger, healthier group that we can pay less in actual costs vs. paying fully insured premiums.

My question to the gurus who've done this before:

What are the major pitfalls?

Any surprises?

Overall experience with self-funding?

General advice?

Thank you for your help.

[Larry M]

A major question which comes to mind is "Why do you want to self-fund?"

Do you want to avoid the mandated benefits?

Or do you think you will save some money by

not paying premium tax on the premium to a carrier and, perhaps, getting some investment yield (or equivalent) on the money you do not have to prefund (claims take a while to reach a relatively stable level)?

In return, you will have to get (and pay for) someone to

administer the program;

develop and print brochures;

arrange for the equivalent of a letter of credit (better known as "reinsurance" to handle the expected jumps in claims which will come, but at unexpected and, usually, inconvenient, intervals - especially when there is a downturn in the economy or if your company starts to downsize);

make sure the network of providers and the management of claims is such your employees will get proper treatment and you, as the employer funding the plan, do not get to pay more in claims than you save in premium taxes.

etc., etc., etc.

Now, don't get me wrong, some of my best clients are self funded - but they have a larger employee base. My guess is your size is such that any premium tax and investment yield money saved will be more than offset by the other expenses you will incur.

On the other hand, the THREAT of going self funded should do wonders in the renewal negotiations with your current carrier ...

[Guest Meg H]

If you decide to self-fund, you should definitely consider purchasing stop-loss coverage (especially with such a small group). One catastrophic claim could easily wipe out any potential savings from a self-funded arrangement for the next several years.

[Kirk Maldonado]

My recommendation is to obtain the services who specialize in self-funded plans. There are many issues that only affect self-funded plans that need to be taken into account, and persons that primarily work on fully insured plans would not necessarily be aware of them.

[KIP KRAUS]

1. If you don’t have current claims experience you’re taking a shot in the dark by going self-insured.

2. The credibility factor on medical claims experience on an insured group of 120 is some where around 60 to 70% credible, which means that predicting future claims is going to be difficult at best.

3. Even though you have a young healthy group of employees, one premature baby can cost a ton.

4. Keep in mind that stop-loss insurance premiums are non-participating so premiums paid are premiums gone forever.

5. If you are coming off a community or pool rated product it is easy to see the first year savings, primarily on claims lag, which could be a 20 to 30% of first year after that you will see mature claims from then on.

6. The grass is not always greener on the self-insured side of the business.

We have a self-insured plan for 189 employees in Georgia, which we inherited as a result of a purchase that has paid claims running at $837,000 a year in an area where medical costs are considerably lower than in CA, if this gives you any perspective.

I agree with Kirk. Talk to a professional who deals in plan design and self-insured financing.

[Guest Paul]

In today's environment I would advise against going self funded in most cases. One thing to consider is that the large insurance companies have huge discounts with the providers. So a $ 1 really isn't a $ 1 anymore. In other words, the doctor bill maybe $ 100 but the carrier only pays $ 65. Some (but not all) of this discounts is reflected in the premiums. If you are self funded you are going to pay the $ 100 unless you put a PPO over the self funded plan. The "bottom line" is there are reasons to be self funded but not for a small group (i.e. less than 500) with only one location.

[KIP KRAUS]

Generally I would agree with Paul. However, in our case, because we us Blue Cross Blue Shield as our TPA we get the discounts from using participating doctors and facilities. Even some insurance companies that offer Administrative Services Only (“ASOs”) contracts, which essentially are self-insured will allow you to avail yourself of their network of doctors and facilities if your ASO is written with them.

That being said, I do agree with Paul that your organization is too small for self-insurance. You may be able to find an insurer that will give you a modified self-insured contract such as a minimum premium arrangement with you retaining the run-out liability.

[Guest Mike Engelhardt]

If there is one piece of advice I can offer you: Hire a fee based consultant or a broker (where there is an established fee regardless of the insurance company/administrator placed with). This person should not only be able to get you competitive premiums and good vendors, but they should have a specialty in ERISA compliance.

Chances are, if you have been fully insured then you have relied on insurance carriers to supply plan booklets. These plan booklets have also served as your Summary Plan Description. You as the employer (not anyone else) are responsible for both the SPD and the Plan Document. Everyone will offer to help you, but when a dispute arises and your SPD comes into questions, then all of those people that assisted you will come back and hide behind the Hold Harmless Agreement which released them from any liability.

DO IT RIGHT, HIRE AN EXPERT.

[Guest Lesley Sifers]

I've had both good and bad experience with self-funding. DO get expert help to design and operate a plan. Also, don't be fooled into thinking that because you have a young group your claims will be lower. Young people, especially males under 30, can have a lot of very expensive accidental injuries. Another thing to think about is what happens if or when you want to go back to fully-insured. You will have to operate both plans for some period of time until incurred claims are cleared under the self-funded plan.

Administration of a self-funded plan takes more time and you may find yourself having to make decisions about whether or not to pay some claims. You may also end up knowing more about your employees' health conditions than you want to know.

[GBurns]

I disagree with advice to use a fee-based advisor. It implies that the fee provides competence, which it does not. There are numerous cases of incompetent fee-bsed advice. Getting the services of an expert who is competent and consciencious is the important factor. Please make a differentiation between a "captive" agent who has few sources and a true "broker" who can shop nationally etc.

[Guest robkt]

I took a group of 76 lives self-funded 12 years ago. The specific stop loss was at $40,000 and the agg was 125% of claims from the preceeding year. A PPO was in place and no drug card ws installed. Instead we paid drugs at 80% to $7,500. Today, the costs for the drug cards is more expensive than the actual claims. 12 years later, we have had kidney transplants, hyperbaric chamber expenses ($55,000), cancer chemotherapy, and a number of other scenarios.....If the plan is properly installed--meaning the client knows the very worst case scenario and the advance feature on the spec is in place along with a good efficient, administrator of claims you will make it through the storms. 12 years ago, my client faced costs of almost $1 million for benefits....today the population is more than doubled - with offices also in California and New York and we haven't hit $1 million. By the way, we cover dental and retirees also under this plan.No stop loss is needed for dental as the annual cap works in its stead. We do not use utilization reviews and other managed features ---they just added to the cost when the plan design did a better job. My client is in the law business .Good Luck!

I support your efforts and forget the nah sayers!

Robyn KT

[Guest Eric Floyd]

It depends on the employer group. I work for a TPA and obviously love the concept of self-funding. We have some clients with as little as 30 employees and self-funding has worked for them. Having said that self-funding is not for everyone.

Questions: How is your company's cash flow? Do you want more control and involvement in your company's benefit plan? Are you committed to self-funding for a 3-5 year period(savings come over a longer period of time)?

Do your research, hire a consultant/broker to shop TPA's for you, and purchase stop-loss coverage both Specific and Aggregate for your group.

My 2 cents, good luck!

[Guest Mike Engelhardt]

I should have clarified my point on "fee based". You should merely decide on a fee which your broker or consultant will work for. Have your representative negotiate insurance products with that flat fee instead of a % of premium commission.

This approach makes more sense for your organization in the long run. After all, why should someone make more compensation if your premiums are continuing to rise. Negotiate a per member fee.

[Guest Kash Browne]

For those who have not dealt in self-funding, there is a lot of work to be done, but if you know what you are doing, it really is painless.

I agree with everyone who said to hire a self funding expert, otherwise you can open yourself up to major financial issues.

Many of my clients are 100 ee's plus and have enjoyed the flexibility of self-funding and controlling their own fixed costs, but with that comes some risk. Fully insured products are risk free, meaning that the insurance carriers take on that responsibility. In essence, becoming self-funded with a reinsurance/stop loss policy in place puts the employer in place of the insurance company, however, putting stop loss in place limits your risk. There are benefits to being self-funded which were mentioned in some earlier responses, such as elimination of the premium tax, reducing general administrative costs, reducing risk and profit charges, eliminating or reducing contingency reserves, etc. Self funding can reduce cash costs by eliminating actual reserves and you simply hold a liability entry on your books. Overall service can be enhanced by contracting services out to specialty vendors. Additionally, many TPA's (third party administrators), are more responsive than insurance companies.

Sitting down and talking with someone who knows what they are doing and explaining the entire process will help you decide. Don't let anyone scare you out of at least taking a serious look. Most groups of 100+ are ideal candidates to self-fund. Of course, the demographics of a group matter whenever you are looking at fully insured or self funded plans.

[Guest John Link]

As a representative in a TPA, you can't make a blanket statement about the size of your group in consideration on self-funding. Much more goes into it especially regarding what the true needs of the client are and the direction they want to head.

[Guest Michael Watkins]

After reading all the replys I did not see any remarks regarding run-out protection. Be sure you ask about run-out costs should you decide Partial self-funding is not right for your company. Remember if you go back to fully insuring you will have to pay for someone, preferably the TPA you hire, to administer the claims process as well as fund the claims incurred as they are processed. Thses costs will have to be paid on top of any fully insured premium you will have at that time.

For my clients who go to self-funding I have them accrue, over one or two years, the run-out costs so if they decide they want out of self funding they have the funds available.

One last note, it is my opinion that partial self-funding is ,at least, a two year proposition. Looking at one isolated year is not a true indication of how your plan will perform over time.

Good luck, and don't forget to ask about your run-out protection!

[Greg Judd]

Originally posted by Michael Watkins

After reading all the replies I did not see any remarks regarding run-out protection...

Good catch Michael, & also points up the more general issue of internal mgmt preferences & capabilities. If a small biz isn't run by a person who enjoys mulling financial issues, self-funding could be a bit like undergoing root canal. On the other hand, if they like holding onto the $ they make....sort of an opportunity cost determination.

[Guest John Fraser]

Self-funding is a tool that is neither inherently good or bad, just like a chainsaw. If used properly,it can be very useful. If used improperly, it can be dangerous. Employers should keep in mind that most of their insurance premium goes to pay claims and only about 15-25% goes for administration (non-claims items). It is easy to reduce the administration costs using self-funding. It is not so easy to reduce claims costs. Employers need to have a good strategy to manage claims cost. A 10% reduction in claims will usually save an employer far more than a 20% reduction in administration fees. Self-funding is not an area for amateurs. Employers should definitely hire an expert who works for them, not for a carrier or TPA.

[Kirk Maldonado]

I think that one often-overlooked advantages of self-funding is avoiding the mandated benefits under state insurance law (because of ERISA preemption). That can add up to substantial savings in states such as California.

[jeanine]

I think the point about avoiding state mandates is well taken. Are there other major tax consequences to be considered when deciding insured vs. self-funded? I'll apologize in advance for not having much of an accounting/tax background. I know (at least I think) that an employer can reduce its tax liability by the amount of premiums paid and the amount of claims paid by taking the claims from its general assets. But does it work out to a bigger tax benefit to self-fund and is this better for a smaller or a larger company?

One last thought, anyone care to comment what the wave of the future may be? Thought around here is that insured will gain over self-funding especially since the Feds keep expanding ERISA mandates. I'm still inclined to believe self-funding is more attractive.

[Kirk Maldonado]

Why do people believe that the federal mandates would make fully-insured plans more attractive than self-funded plans?

[jeanine]

I'm not so sure it makes insured more attractive but rather makes self-funding less attractive. I don't agree with this but some in our organization do.

[Kirk Maldonado]

Why do they believe that the federal mandates make self-funding less attractive?

[jeanine]

Probably because our insured product guy tells them it is. I guess its more a mental thing. We do have some self-funded plans that don't offfer benefits that they would be required to offer under Ohio insurance law. I guess they figure this saves them money. So whenever they are required to offer something under ERISA it appears they are losing some advantage. I still stick to the proposition that self-funding is more advantageous. I'm not sure if this is because you can control the plan/benefit design, there is some better tax consequence, or just the preemption issue and removal to federal court. I'm trying to prove a point here at work but I don't have any idea whether the tax advantage is substantial.

[KIP KRAUS]

jeanine:

Last I knew, premium tax savings for a small self-insured group are minor. Somewhwere around 1 to 2% depending on your state and whether or not an insurer is a domestic (state based)or foreign (non-state based,but admitted) insurer.

[Larry M]

Kirk asks why federal mandates will make self funding less attractive.

One of the major advantages for a multi-state company to self fund is the avoidance of conflicting state mandated benefits for insured plans.

The variations among the states concerning their insurance laws also affects the costs of doing business by insurance companies who are licensed in more than one state.

One of the suggestions advocated by both employers and some insurance companies is to have the federal government take over the supervision of the insurance industry ("Over our dead bodies" shout the state insurance commissioners) and eliminate the individualized state insurance laws (and departments).

This will lead to one set of rules for insurance companies and one set of mandated benefits for employers.

Thus, goes the argument, one of the major reasons for self funding will have been removed.

[Kirk Maldonado]

Larry M:

You posit a very good argument as to why self-funding is currently more attractive. While I agree with you, it does not respond to my question

My question is why do federal mandates make self-funding less attractive.

[KIP KRAUS]

Larry:

Thanks, but no thanks to the feds. Overseeing the insurance industry. However, I do agree that state mandated benefits are a major problem for insurers and employers. It would be advantageous to everyone to have a national standard, but I fear the special interest groups would have a major problem with that. How else would acupuncturists, chiropractors, psychologists, midwives, message therapists, nurse practitioners, osteopaths, podiatrists, social workers and other such practitioners get their piece of the pie?

Why should only 5 states mandate coverage for acupuncturists? Is it because they have a concentration of acupuncturists? What about only 19 states mandating coverage for nurse practitioners, 28 states cover nurse midwifes (must be the sparsely populated states????)

If my memory is correct, I believe that New Hampshire mandates coverage for a hair prostheses for loss of hair after chemotherapy (did some politician’s family member have a claim denied?).

Then we have the great Bible belt state of North Carolina that mandates coverage for pastoral counselors, Huh?

Birthing centers in Pennsylvania? I don’t know anything about birthing babies Ms Scarlet!!!!

There are too many special interest groups out there to have a national agreement or standards on what practitioners or medical coverages should be mandate in medical policies. Keep self-insuring when you can and maybe the insurers will put enough pressure on the insurance commissioners to do something that makes since.

[jeanine]

I think the argument that more federal mandates makes self-funding less attractive is this: In a state such as Ohio, there are relatively few requirements for health insurance, an exception being HMO's which are more heavily regulated. If the federal govt starts requiring benefits such as maternity stays, mastectomy reconstruction, etc. that bring the mandates up to par with state mandates, why not insure and let the insurance company bear the risk. I don't think we have quite gotten to the point where federal mandates are as burdensome as state mandates. But every time the feds do mandate something it causes some of our groups (especially smaller ones) to rethink the self-fund vs. insure situation.

[KIP KRAUS]

Jeanine:

I think you will find that in any group medical plan that is experience rated, the employer bares the risk of claims and cost of stop-loss premiums regardless of whether they self-insure or fully insure. Even in the case of a non experienced fully insured plan the cost reflects the claims experience. Therefore, any mandated benefits are going to end up costing the employer/participants.

[Guest keith frazier]

this is actually more of a question.......is a self-funded plan in association with insurance required to file a seperate 5500 from the other welfare benefit plans funded solely with insurance or can it be aggragated with the other plans.

keith frazier

[KIP KRAUS]

If your welfare plan document is a “Wrap” document that encompasses all of your welfare plans into one plan (including your self-insured medical plan) it’s my understanding that you can file one 5500.

[Greg Judd]

Basically, Kip's covered it. The filings are about plans, vs funding methods. That's the organizing principle. Practice is another matter. Firms submit in a wide variety of ways. Much would depend on your organization's operating style; for example, are you buying/selling entities (with their own plans) regularly?