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What Happens When an Employer Makes the Switch to Self-Funding

The list below was requested by a magazine to help employers to prepare them for what to expect when starting the process of shifting to a self-funded health plan with a TPA. Every situation is personalized, but these are main points to expect.

  >>Almost all self-funded plans use a Third Party Administration firm (TPA) for their plan.  The reason is that, like so many other activities, things have gotten so complex that you need a team of specialists in administration of guiding employers through the ever-changing all-important government compliance.  So, like lawyers advise people in law cases, "Only a fool represents himself".  Consequently, this list assumes that an employer is using a TPA.

>>TPA meets with the employer and asks "What are you seeking in a new self-funded plan?"  This, and the questions below, is important, because self-funding and the design and administration of the plan is very customized and the TPA wants to provide improvement for the employer and plan participants.  So, for example, an answer might be that the employer wants flexibility to design the coverage for the wants and needs of that particular workforce.  Many types of employment tend to generate certain types of medical needs.  Self-funding allows you broad flexibility to steer the money & coverage to things that will most please and most help the workers.

>>TPA asks you “Are you seeking to cut your current coverage & costs, and/or contain the rising costs, and/or get the most bang-for-the-buck (plan design flexibility), and/or other goals?”  (Interestingly, most employers start out saying to cut costs, but then end up designing a much more useful/valuable package for about the same price as the old coverage (but with a handle on cost inflation).  In part, this shows employees that the employer is not cutting their benefits.  As noted, customizing plan design is always popular with employers & workers.

>>TPA explains the concept & general operation of self-funding and major applicable laws such as ERISA, and Stop-Loss...and also explains the enhanced role & responsibility of the employer (which the TPA will help guide the employer for compliance & strategy all during the year).

>>Since self-funding brings fiduciary duty for prudent financial operation of the plan, the TPA will ask the employer for a candid conversation about the financial stability of the company (to be able to fund claims), cost of the current coverage, and (important) whether there are any known current or predicted major or expensive medical conditions among the people to be in the plan.  The best planning for the employer is if the existing insurer will give the employer the claims record of their company for the past couple of years.  However, some employers tend to give a lot of double-talk such as saying that the privacy law does not allow it (not true).  Based on all this information, the TPA may explain that self-funding is not the best fit for all employers (such as those with uncertain cash flow/finances or known massive claims).

>>The TPA will often ask what kinds of new, extra, or special types of coverage the employer and/or workers are considering, and the TPA often offers other ideas of coverages, such as wellness, that have worked with other employers.

>>TPA may give an overview of government compliance and any trends.

>>After answering any questions, the TPA then, or later after coordinating with the rest of the TPA staff, will suggest a plan outline or process to proceed, and the transition process.

<<>>It is important for employers to remember that they are the "self" in self-funding. The employer/plan sponsor is the ultimate decision-maker on all things (and thus carries CEO-like responsibilities).  TPAs provide invaluable year-round help by trying to spot issues in advance, and lay out the options, and explain factors based on what government officials and other employers & plans are doing.  So, being the plan sponsor/(official) "Administrator" is not onerous, but cannot be treated cavalierly.

<<>>Self-funding and especially TPA services are VERY personalized...unique & very responsive to the needs of their particular clients.  That is the strength and phenomenal success TPAs have had over the decades customizing plans & services for self-funded clients.  In the 1970's, it was felt that self-funding was only prudent for groups of at least 5,000.  In 1980, it had dropped to 1,000.  In the next decade, it quickly dropped to 500 then 250, then 100.  Today, the vast majority of employee benefit plans use self-funding.  The key to this market growth has been the expansion of Stop-Loss (a term that means what it says…sort of like re-insurance) and the close cooperation between Stop-Loss & TPAs to make self-funding a smooth process.  Looking ahead, we are told that many smaller employers will be seeking to shift from insured plans under health reform to self-funding.  We are ready, but the items mentioned above will be carefully discussed, and TPAs will be professional and advise employers if self-funding would not be a prudent option in their situation.  

<<>>Almost all comprehensive-service TPAs belong to the Society of Professional Benefit Administrators (SPBA), which is the national association of TPAs and Stop-Loss Service Partners. It is a group of professional sharing, and means that members have nationwide insights & resources. SPBA members also play an active role with government officials in interpretation & application of laws and regulations.