Self Funding Health Care
Self-funded health care is a self insurance arrangement whereby an employer provides health or disability benefits to employees with its own funds. This is different from fully insured plans where the employer contracts an insurance company to cover the employees and dependents. In self-funded health care, the employer assumes the direct risk for payment of the claims for benefits. The terms of eligibility and covered benefits are set forth in a plan document which includes provisions similar to those found in a typical group health insurance policy. Unless exempted, such plans create rights and obligations under the Employee Retirement Income Security Act of 1974 (“ERISA”).
Stop Loss Insurance
Many employers seek to mitigate the financial risk of self funding claims under the plan by purchasing stop loss insurance from an insurance carrier. These policies typically provide for risk retention limitations both on a specific claim and aggregate claims basis. An important aspect of self funded group health plans lies in the requirement that the employer remain liable for funding of plan claims regardless of the purchase of stop loss insurance. What this means, in turn, is a fund or company’s own bank account creates a pool of their employees and is managed & distributed to claim payouts. In other words, only the employer has a contractual relationship with plan participants and beneficiaries. The stop loss policy runs solely between the employer and the stop loss carrier and creates no direct liability to those individuals covered under the plan. This feature provides the critical distinction between fully insured plans (subject to State law insurance regulations) and self funded health plans which, under the provisions of Section 514 of ERISA, are exempt from State insurance regulations.
Stop loss policies have historically been effective for large corporations, however in recent years this has changed to allow even small companies as small as 5 to take advantage of Self Funding. The stop loss feature has also historically been most cost effective for large companies, This has also in recent years changed dramatically. No longer do you have to have more than 50 members to consider self funding.
Stop loss policies should be distinguished from “reinsurance” arrangements. Under reinsurance arrangements, one insurance carrier cedes risk to another carrier to lessen its risk. Reinsurance arrangements fall under specific State insurance regulations designed to assure the financial integrity such arrangements. While some large employers self-administer their self funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment. Third Party Administrators provide these and other services, such as access to preferred provider networks, prescription drug card programs, utilization review and the stop loss insurance market. Insurance companies offer similar services under what is frequently described as “administrative services only” or “ASO” contracts. In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.
Why Self Funding?
The time has never been better to seek out alternative solutions to controlling healthcare costs. With industry changes and rising costs, it’s important to take the time to find out what insurance options are available. Among these alternatives are self-funded plan designs with stop-loss insurance.
Until recently, self-funded plan designs with stop-loss insurance were primarily attractive to larger groups. But because of recent innovations and approaches, now smaller groups (5 or more) can take advantage of the savings these plans may offer while maintaining the financial protection against large claims.
Self-funded plan designs can provide employers with flexible plan alternatives that are similar to the traditional coverage that they may have today, but can offer lower costs with the opportunity for a refund of their maximum liability funding at the end of the contract period.
Most of the small group self-funded plan designs being offered today are considered maximum funded plans (pre-funded), meaning the employer is funding their maximum liability on a monthly basis. And, with stop-loss insurance, employers are protected from the financial impact of big claims.
Another key consideration that self-funded plans with stop-loss insurance provide is the transparency and opportunity to control costs through claims data and utilization reporting. The information you would have available can provide useful insight in determining cost-effective plan designs in subsequent contract periods.
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