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Self-Funding: Self-Funding Will Flourish in ACA


February 2013


Self-funding will flourish under ACA.  That is the answer to the frequently-asked question from brokers & employers who see or sense uncertainty in the insurer and other funding formats of employee health benefits.  That forecast is not smug or gloating; it is just realistic.  The roots go back prior to President Obama’s election in 2008.  Even then, some major insurers were exploring how to shift their business if health insurance was eliminated or became unprofitable in the US (concerned about single-payer at the time). They found profitable opportunities overseas and ways to sell expertise in this country instead of insurance.  Some of the largest insurers are already saying that will be their future.  Government exchanges, ACOs and other concepts face overwhelming logistical, human nature, and/or actuarial challenges.  Private exchanges face some logistical challenges and are subject to the punitive rules in ACA against “insurance”.

Why is self-funding different?  The Obama health reform law (actually drafted by the Senate with minimal input from the White House) is a hodge-podge of provisions to stamp-out & punish perceived “abuse” and “profiteering” by insurance companies.  Since passage, the President has frequently blamed insurance companies for things.  On the other hand, SPBA provided careful education during the legislative process to show Congress that self-funding was, by definition, non-profit & frugal, and the tough ERISA fiduciary laws carefully monitor & require extensive transparency & reporting, including the business activities  of all service-providers to self-funded plans (such as TPAs, agents/brokers, etc.).  The first factor meant that the many punitive fees, limits & restrictions imposed on insurers were not needed for the non-profit self-funded plans.  The second factor meant that the new MLR, state rate reviews, etc. were unneeded.  In other words, self-funding & TPAs have been obeying the intent of the new ACA law since passage of ERISA in 1974.  ERISA fiduciary duty may seem frustrating sometimes, but it works, and TPAs & self-funded plans have a very successful track record.

Government exchanges face dozens of structural, human nature & actuarial problems, both short term & long term.  They are definitely not evolving the way the law & supporters naively assumed.  Their final fate is unknown, but we do know that people (especially young & healthy because of unfavorable rate bands) will not be flocking to them as bargain sources of health coverage, and insurers can not be expected to stay in to provide the coverage if they are money-losers.

Accredited Care Organizations (ACOs…essentially a remake of the original closed-panel HMO) were touted as the new panacea of cost-efficient health care & payment.  However, that format of HMO, which was the darling of government for decades and received huge government boosts, failed to live up to expectations.  The new ACO version faces some huge challenges of internally coordinating some massive egos of hospital, doctor and payment distribution desires….and also living up to government scrutiny for quality and such.  

So, the moral of the story is that insurers, ACOs, Exchanges, etc. which might have been expected to be sources of health coverage under ACA, have uncertain futures.   That leaves self-funding.  Sure, ACA is providing administrative headaches & lots of additional work for all health plans, and the added workload & responsibility of plan sponsors will require TPAs to charge more in order to fulfill those new employer & plan responsibilities.  However, SPBA TPA firms (who are expert regulatory compliance geeks) have been working on the solutions for 3 years, and have a close candid sounding-board relationship with the people writing the regulations.  That TPA expertise should offset the high costs employers would otherwise need to pay for expensive consultants.  So, SPBA’s TPAs & their clients will face bumps in the road, but there are no dead-ends like the other entities face.

Other factors?

 >>>Custom design:  A major attraction of self-funding has always been the ability to custom-design the plan to give the workers benefits that best fit their wants & needs.  That is a major factor of recruitment & retention of employees (survival of the employer).  Custom design also allows employers much more “bang for the buck” in the types of coverage offered.   These are not new attractions of self-funding, but ACA seems to envision one-size-fits-all coverage, and surveys of both employers and workers shows an increasing appreciation for custom design.

>>>No dumping:  When the law first passed and exchanges were being described as a nirvana, some wondered if employers would gladly “save money” and dump their employer plan and steer workers to government exchanges.  With the prospects of exchanges so troubled, employers recognize that that would be personnel recruitment & retention suicide.

For more information:

This is a once-over-lightly description.  There is a more in-depth perspective on SPBA’s public website at entitled State of the Industry Report & Forecast for 2013.  Besides more insight on prospects for TPAs and client plans, it inspects other relevant factors such as huge changes in the format of the medical community, the employment scene, and the number of uninsured when ACA is fully implemented…and even some what-if speculation if ACA fizzles.

Meanwhile, SPBA member TPAs and our Stop-Loss Service Partners are doing an amazing job being prepared.  Various people in each firm are getting detailed e-mail insights on the intricacies of how the different parts of the law that will impact self-funded clients will evolve or be applied.  We constantly pick our members’ brains for real-world problems & concerns they foresee with various parts of the law & regs, and we convey those to the reg-writers.  So, SPBA’s members are unsung heroes who have steered government to avoid or ease what would have been major problems.

Last, but not least, let me give a caution.  I started my benefits career as a young man involved in the deliberations when ERISA was being drafted, and I have been involved in the hundreds of laws & thousands of regs since.  Every time there is a new law, especially ACA, there is the inclination to grab for some new solution.   It may sound great & simple.  However, too often, it is illegal (even jail time).  So, don’t get your heart set on an idea until you’ve vetted it through ERISA fiduciary and other longstanding laws.  The SPBA public website ( also has a quick reminder piece along these lines on ERISA & fiduciary duty.  Keep in mind the handy self-test which I describe to test any new strategy.  Please take time to explore the many handy pieces (including pull-downs from the black header) on SPBA’s public website.

Fred Hunt   

SPBA is the national association of Third Party Administration (TPA) firms who provide ongoing comprehensive administrative duties to client employee benefit plans.  It is estimated that over half of all US covered workers in every size & format of employment are in plans using some form of TPA.  Only TPA firms and leading Stop-Loss carriers, MGUs, & reinsurers may be members of SPBA for information, meetings, etc.  For membership information, contact or (301) 718-7722.