Self-Funding: Why Use Self-Funding?

Why use self-funding?

Clarification:  Self-funding is best known as a funding vehicle for employee benefit plans, especially health coverage.  That is the topic of this paper.  However, self-funding is also broadly used for such things as Workers Compensation and Property & Casualty coverage.  The governing laws & focus is so different that those are generally considered totally different.  So, this is health employee benefits.

Self-funding is, by far, the largest type of health employee benefits. 

It sometimes has different marketing names, such as ASO, partially-self-funded, and sometimes the marketing package is confusing to determine its precise legal status, such as some minimum-premium and experience-rated.  However, under law, the cute marketing names fade away, and a plan is either insured…or self-funded.  The marketing names confuse statistics of market share, but when applying the strict legal definition of self-funding, my nearly 40 years in employee benefits would say that about 75-80%% of people in employee benefit health plans are using self-funding.  This represents a huge growth in the small-to-medium size market of corporations as well as phenomenal growth among state & local government employment and religious organization workers.

Why the success & market dominance?

>>> It is simply business economics.  It usually costs less, because any savings remain with the plan, not kept by an insurance company.   Also the self-funding main regulatory law, ERISA, requires strict reporting, so fees paid for administration (traditionally hidden within an insurance company) are clearly stated and the precise package of services desired is negotiated with a Third Party Administration (TPA) company.  So, to be blunt, instead of leftover money or savings going to paying for insurance company skyscrapers, with self-funding any unspent money remains as plan assets to help pay future costs.

>>>Regulation is uniform nationwide, not like insurance which is state-by-state.  Also, in most self-funded plans, the over-1,000 state-mandated benefits do not apply.  This is very important in the modern world of branch offices, telecommuting, out-of-state commuters & dependents, COBRA or other reasons plan participants might be spread out.  Self-funding for corporate plans is regulated by ERISA (Employee Retirement Income Security Act of 1974), which was designed to be and remains the ultimate consumer-protection & transparency law.  The employer/plan sees absolutely everything, because they are in charge.  To laymen, it may seem overwhelming and demanding, but TPAs are experts.  TPAs may also grumble, but they have seen how seemingly-silly safeguards provide huge protection & structure for employers and workers when something unexpected happens.  ERISA is a good discipline, and employee benefits have thrived under it.  Even state & local government employee  and religious worker plans that are not technically subject to ERISA, tend to follow the ERISA format because it is such a win-win-win for all parties.

>>>Custom Designed (most bang for the buck).  Would you rather have a custom-tailored & designed suit or a standard off-the-rack (especially if the custom-designed is apt to be cheaper and fit your preferences)?   Custom designed would be the choice.  Self-funding is a health benefits plan custom-designed for each employer or workforce.  It is not some standard insurance company policy.  This can make a huge difference in cost as well as giving employers & workers  what they most want & need.  For example, a plan of veterinarians wanted excellent coverage for things like prophylactic rabies and other things related to working with animals.  A metal manufacturer’s workers wanted toxic screening and couldn’t care less about rabies coverage.  So, letting the plan trustees (who usually know what workers want) custom design the plan allows coverage & dollars to go to items wanted.  That’s a win for both employers and workers…the most-wanted bang for the buck.  (Of course, most federally-mandated benefits & rules (such as COBRA and HIPPA Privacy apply to all kinds of employer plans).

What if we get hit with a few gigantic or just a high total dollar level of claims?  Is a self-funded employer stuck? 

The same question would apply to an insurance company if customers’ claims were larger than money the insurer had on hand to pay for them.  The answer is that self-funded plans and insurance companies do the same thing to protect themselves and the plan participants.  They buy re-insurance…which has the logical name Stop-Loss in self-funding.

Stop-Loss, like self-funding, provides considerable opportunity for plans & sponsoring employers to custom design that coverage.  Some employers have strong cash flow & reserves, so they are willing to absorb a higher trigger for Stop-Loss to begin reimbursing the plan or employer (whichever pays the premium  for the Stop-Loss coverage) for expenses covered by the Stop-Loss policy.  Most Stop-Loss policies give self-funded employers or plans  a double trigger to give protection in two different scenarios.  One is the “Aggregate attachment point” trigger (if the total dollars of all the claims exceed a set point).  In addition, for further protection, let’s say that everyone had been very healthy, but one person had a hugely expensive cost.  That’s when the “Specific attachment point” would trigger reimbursements, even though it is only one person and the total of that one claim may not trigger the Aggregate attachment point.  So, it gives the plan & employer more protection and peace of mind than just an insurance company deductible.  Meanwhile, many of the conditions and levels of coverage in Stop-Loss may be negotiated in advance to best fit the plan/employer’s situation.

Vocabulary note:  One of the marketing terms I mentioned that is sometimes used for self funding is “partially-insured”.  This term was used more when Stop-Loss was a new concept, and the term was to let employers & plans know that there was  back-up insurance.  As Stop-Loss has become more dominant,  the term has been getting less use, because some employers & plans think it means that the overall coverage is just a warmed-over insurance policy.

>>>Caution:  Stop-Loss is a valuable parachute for self-funding.  After spending time carefully designing the coverage and funding in the basic plan, there is a temptation to take an attitude of “oh, disaster could never happen” or start cutting corners, costs, or protections when considering Stop-Loss.   Just like a parachute is not the place to cut corners, scrimp on cost, or forego protections, be as attentive & careful in purchase and maintenance of your Stop-Loss as you would be with a parachute.  In both examples, you don’t want to discover that you short-changed yourself when it is too late to fix.

Who administers all these details??

>>>Good news:  The vast majority of self-funded employee benefit plans use professional Third Party Administration (TPA) firms.  TPA is another word that gets over-used, under-used and misused.  Most employers & plans will want a TPA that has broad knowledge and offers comprehensive services.  Virtually all comprehensive-service TPA firms are members of SPBA .  So, a quick check would be to ask if the TPA is a member of SPBA.

>>>TPAs’ experience not only helps save dollars, and maximize personalization for the coverage and the Stop-Loss, but TPAs are on the cutting edge of government compliance.  Because SPBA members service the largest portion of Americans with employee health coverage, and because the clients are in every size & format of employment, SPBA has uniquely large & broad perspective.   Consequently, SPBA members have earned a respect & role as real-world experts with whom the legislation drafters and especially those who interpret laws and write regulations rely in totally-candid face-to-face brainstorming.  Every year there are about a dozen laws or requirements which would have been unworkable  or troublesome which get eased or even eliminated thanks to discussions with SPBA and its member TPAs.  This means that an SPBA TPA is like getting an experienced guide to help you through the jungle of laws and regulations which impact all kinds of health plans.

What impact will health reform have on Self-Funding compared to Insurance??

>>>Health Reform attacked and limited insurance companies in many ways.  The future of insurance companies (meaning which will remain in the market, what markets or offerings they may drop, the impact on their prices, etc.) remains uncertain and could change suddenly.  Personally, I think the attack was sad & unfair, but that is the law. 

>>>Charges of insurance company excessive profits and lack of transparency was a main target of the law.  As described above, self-funding has no “profits”.  Any unused money or savings remain to pay future bills.  Also as noted above, ERISA regulations & fiduciary duty have always required the most expansive transparency & reporting of any law.  So, self-funded plans are comparatively unscathed by health reform, and can thus continue to offer employers and plans the cost-effective much-desired flexibility of plan design.   (This is not to say that TPAs will be constantly providing extensive government compliance analysis and services that will hit all employers & plans with red tape & requirements.)

>>>As state exchanges and federal rules about plan requirements evolve over the coming years,  insurance company plans are expected to become more and more dictated and standardized.  So, self-funding becomes more and more the last bastion for  custom-designed most-bang-for-the-buck employee benefits.

That’s the story of self-funding.  So, as I said at the start:  Would you rather have a custom-tailored & designed suit (probably for less total money) …..or something off the rack.?

What about dropping employee plans or using some governmental plan?

>>>Important: Employee benefits are entering a major change in role for American employers!  It used to be that health coverage was a minor after-thought benefit.  Today, it is a key to attracting and retaining key staff.   Employee health benefits is a business-survival tool.  What do I mean?  SPBA has advised a lot of other countries with governmental health systems.  So we have heard their candid reports of the problems.  We also see some of the problems starting in the U.S.

>>Government plans (Medicare, Medicaid and soon the many state Exchanges) pay low, which means that  doctors & facilities often won’t take those patients, or they wait longer for an appointment.  For an assortment of  demographic & financial reasons we are on the verge of a very serious doctor shortage, and there are predictions of thousands of small & medium hospitals shutting their doors.  So, the days when anyone can get a quick appointment, diagnosis, start treatment, and come back to work quickly are coming to a close.  In many countries, workers are out for months just waiting for an appointment or diagnosis.  How many businesses can afford to have employees off for weeks or months.

>>So, the new role of employee health benefits is becoming like other crucial protections to keep the employer functioning.  Valuable equipment gets service contracts in order to get instant repair.  An employee benefit health plan with the employer is custom-designed and an invaluable “service contract” to get workers back at work as quickly and efficiently as possible.   Employers who decide to not have employee health benefits are putting their whole business at risk.

Fred Hunt – SPBA  Past President

SPBA is the national association of comprehensive-service Third Party Administration firms and leading Stop-Loss Service Partners. All services, meetings, etc. are for members only.