| What Is Self Funding? | | | | state insurance laws including reserve requirements, |
| An employer who operates a self funded health plan | | | | mandated benefits, premium taxes, and consumer |
| assumes the financial risk for providing health care | | | | protection regulations. Self funding provides more |
| benefits for its employees. Self funded plans differ | | | | freedom to create plans free from state mandates, |
| from fully insured plans in that employers do not pay | | | | which can result in substantial savings versus fully |
| monthly premiums for health care that employees | | | | insured plans. |
| might be given, the employers, rather, pay only those | | | | However, in addition to ERISA there are other federal |
| claims that employees actually receive. | | | | laws that definitely impact your self funded plan |
| To limit their liability most employers purchase stop-loss | | | | including: |
| insurance. The stop-loss insurer agrees to reimburse | | | | 1. Health Insurance Portability and Accountability Act |
| the employer for health care costs that reach a | | | | ("HIPAA"); |
| certain threshold (usually $25,000-$100,000) in | | | | 2. Consolidated Omnibus Budget Reconciliation Act |
| exchange for premium payments. Generally, the lower | | | | ("COBRA"); |
| the threshold amount the higher the premium. | | | | 3. Americans with Disabilities Act ("ADA"); |
| For example, assume a stop-loss threshold set at | | | | 4. Pregnancy Discrimination Act; |
| $25,000. The employer will pay employee health care | | | | 5. Age Discrimination in Employment Act; |
| claims up to and exceeding $25,000. However, the | | | | 6. Civil Rights Act; |
| employer will be reimbursed for those paid claims over | | | | 7. Internal Revenue Code ("IRC"); |
| and above $25,000. The stop-loss insurer does, | | | | 8. Tax Equity & Fiscal Responsibility Act; |
| however, put annual and lifetime limits on coverage | | | | 9. Deficit Reduction Act; and |
| and will adjust premium costs accordingly. The higher | | | | 10. Economic Recovery Tax Act. |
| the annual and lifetime max the more premium will be | | | | While this is no inconsequential list, a good TPA will be |
| demanded. | | | | able to handle the administration and compliance with |
| The employer's money may solely be used to pay | | | | the most onerous of the statutes listed above including |
| claims or, alternately, it may be a shared expense with | | | | ERISA, HIPAA, and COBRA. However, be aware that |
| employees making some contribution. The money is | | | | while TPAs will provide compliance service they may |
| typically placed in a trust account that is then debited | | | | not accept liability for violations of these laws (other |
| to pay claims as they are incurred. | | | | than for gross negligence), which will rest squarely on |
| What Are the Benefits of Self Funding? | | | | the shoulders of you the employer. |
| Typically, employers automatically save money in the | | | | Who Will Administer Your Self Funded Plan? |
| first 12 months while self-funding. This occurs because | | | | As you can see, choosing the right TPA is one of the |
| claims payments are not processed until the second or | | | | most important if not the most important decision |
| third month. In the first year, employers have 12 months | | | | when deciding to self fund. A TPA can help with the |
| worth of money set aside to pay claims but they will | | | | cash-flow analysis and risk analysis and can administer |
| only be paying 10 or 11 months worth of claims | | | | much of the compliance requirements of a self funded |
| because of the time lag. | | | | plan. |
| Employers also experience savings on direct costs | | | | Here are 10 steps to take when seeking a qualified |
| that are included in fully insured medical insurance | | | | TPA: |
| premiums such as overhead, taxes, profits and | | | | 1. Look for a TPA that is capable of providing a |
| commissions. Most self funded plans use a third party | | | | customized health plan specific to your company's |
| administrator ("TPA") to process and pay medical | | | | needs;a. Your chosen TPA should be flexible enough |
| claims. Most TPA's administration costs are significantly | | | | to create a plan that fits your demographics. Working |
| lower than those included in the premium by an insurer | | | | with your TPA to customize coverage will cut costs |
| or HMO. And the premiums paid to a stop-loss insurer | | | | and improve employees' satisfaction with the benefits |
| are usually much lower than those paid to an insurer | | | | provided. |
| for a fully insured plan. | | | | 2. Check references from some of the TPA's larger |
| Self funded employers also save on premium taxes | | | | clients.a. Ask for a list of the TPA's larger clients then |
| that they would ordinarily pay if fully insured as they | | | | contact the clients to independently verify the client's |
| merely hold money in trust to pay for health claims. | | | | satisfaction with the TPA. |
| Self funded plans are not required to pay to the 2-3% | | | | 3. Make sure that the TPA uses and provides |
| premium taxes applicable to fully insured plans. | | | | accurate legal information.a. Look for a TPA that is |
| Mandatory benefits imposed by state law are also not | | | | communicative and up to date on changing regulations. |
| applicable to most self funded plans, as federal law | | | | It is essential that your TPA maintains a close |
| governs regulations of most self funded plans. These | | | | relationship or employs an ERISA attorney due to the |
| state mandated benefits are oftentimes expensive | | | | complexity and interplay of federal ERISA and state |
| and cutting them out removes added expense. | | | | insurance regulation. |
| Self funding provides employers the flexibility to design | | | | 4. Understand how a provider (physician/hospital) |
| their health benefit plans. And they have greater | | | | network (PPO) figures into the equation.a. TPA's |
| control of the distribution of benefits as compared to a | | | | oftentimes have relationships with provider networks |
| fully insured plan. In a self funded plan, employers have | | | | and can negotiate on your behalf. |
| access to the money in the claims fund that is being | | | | 5. Investigate how the TPA manages your funds.a. |
| used to pay current claims. This money produces | | | | ERISA requires self funded plans to prudently |
| interest income that can be added to the fund that | | | | safeguard their assets. While not required by law, |
| would not otherwise exist in a fully insured plan. | | | | TPAs generally recommend that employers set up a |
| What Are The Risks of Self Funding? | | | | trust account for their plans. This step fulfills the |
| Despite these important benefits there are several | | | | prudence requirement of ERISA. Many TPAs also |
| risks that must be considered before the decision to | | | | offer client audit reports to verify that their financial |
| self fund is made. The biggest issue in self-funding is | | | | practices prevent fraud and abuse. |
| the potential financial exposure. | | | | 6. Ask whether the TPA processes COBRA and |
| Catastrophic events and high utilization by employees | | | | HIPAA documentation.a. COBRA and HIPAA, two |
| can lead to exorbitant claims costs. This can mitigated, | | | | federal laws, have several notification and compliance |
| as discussed above, by purchasing stop-loss insurance. | | | | aspects that most TPAs will happily administer for you. |
| But proper analysis of your company's potential risk is | | | | Just ensure that your contract states that the TPA will |
| essential when trying to determine the attachment | | | | be liable for COBRA and HIPAA administration errors |
| points for stop-loss coverage. | | | | and that the TPAs errors and omissions policy covers |
| Your company also must be aware of potential legal | | | | COBRA and HIPAA errors. |
| exposure. As a self funded plan you remain ultimately | | | | 7. Learn all you can about the TPA's cost-containment |
| liable for claims decisions errors. In addition, labor | | | | programs.a. Ask how the TPA handles |
| relations problems could arise with employees in event | | | | pre-authorizations, large case management, utilization |
| that employee medical claims are paid late and this | | | | review, and provider network evaluations.b. Also |
| could lead to unrest, job dissatisfaction or a decrease | | | | determine how the TPA manages catastrophic claims. |
| in productivity. Both of these risks make choosing a | | | | A good TPA is usually proactive: Detecting |
| qualified, competent TPA absolutely essential. | | | | catastrophic claims early allows the TPA to reduce |
| Finally, there are many legal complexities that impact | | | | your costs without diminishing quality of care. |
| self funded plans. Most self funded plans are regulated | | | | 8. Find out how the TPA trains its claims analysts.a. In |
| by the Department of Labor and are subject to | | | | addition to finding out how analysts are trained, inquiring |
| federal law, specifically the Employee Retirement | | | | about turnover rate is good idea as well. |
| Income Security Act ("ERISA"). And there are several | | | | 9. Make sure that the TPA practices good |
| important tax law considerations that must be | | | | management reporting.a. Your chosen TPA should |
| accounted for as well. Developing a relationship with | | | | make available periodic reports explaining plan status. |
| an ERISA attorney well versed in self funding can | | | | Reports should detail finances, number of employees |
| save you time, money, and the headache of employee | | | | served, medical costs, use of medical services, and |
| lawsuits. | | | | savings realized from network providers.b. These |
| Is Self Funding Right For Your Company? | | | | reports are invaluable and will provide you with the |
| In general, the decision whether to self fund is much | | | | information you need to decide which services to add |
| easier for those employers with more than 200 | | | | and whether you need to increase or decrease |
| employees. In fact, self funding is not widespread | | | | contributions from employees and put you on notice |
| among small employers, only 12% of those with just 3 | | | | regarding other necessary changes or alterations. |
| to 199 employees self fund their health plans, according | | | | 10. Review bids from stop-loss insurance providers.a. |
| to the 2007 Kaiser Family Foundation Survey of | | | | After you have chosen your TPA, it can contract for |
| Employer Health Plans. The more employees you | | | | stop-loss insurance on your behalf. Be cognizant, |
| have the easier it is spread the risk. Medical claims | | | | however, that self funded plans are required by ERISA |
| tend to be quite volatile and smaller employers | | | | to obtain several bids.b. Ensure that you are able to |
| oftentimes cannot maintain the cash-flow necessary | | | | easily review the bids and make sure that you do |
| to fund those months where costs are excessive. | | | | some due diligence checking on the stop-loss carrier. |
| To determine whether self funding is the right option | | | | You may not want to deal with a new company that |
| for your company, you should perform a risk analysis | | | | is unfamiliar with the business and is inexperienced.c. |
| and cash-flow analysis, then examine employee | | | | Lastly, ask your TPA their procedure when renewing |
| demographics and covered dependents. You should | | | | or changing stop-loss carriers. A good TPA is aware |
| also review the claims history of your company. You | | | | and will put you on notice that the renewal procedures |
| must know the age and distribution of the claims | | | | and claims definitions are often complex. These |
| submitted by your employers in order to determine the | | | | complexities are purposefully drafted by the stop-loss |
| risk that you will be accepting by self funding. | | | | carrier to avoid claims liability.d. A quality TPA will |
| With this information you will have an idea about the | | | | ensure that you are made aware of these |
| general age of your employees and be able to identify | | | | complexities and will make sure that you are not left |
| what their aggregate health claims reveal. For | | | | holding the bag with thousands of dollars of unpaid |
| example, if your employee population is older the data | | | | claims. |
| may reveal expensive conditions of age such as heart | | | | Conclusion |
| disease or cancer. Or perhaps your employees are | | | | For those employers who have the size and available |
| disproportionately overweight, then you may see more | | | | cash-flow, a self funded health plan can result in |
| diabetes claims or at least be put on notice that these | | | | substantial medical claims savings. A self funded plan |
| types of claims are likely. On the other hand, if your | | | | offers the flexibility to design customized benefit plans |
| employees are young they may have very little | | | | and provides much more control over plan benefits |
| utilization but may be susceptible to sport injuries. At | | | | than the typical fully insured medical plan. |
| this point, you must review utilization rates for the last | | | | However, there are numerous risks and potential |
| 3 to 5 years. | | | | pitfalls including legal and compliance hazards, human |
| With this data in hand you should be able to determine | | | | resource and employee relation headaches, and |
| whether you can reasonably afford self funding. Be | | | | potential liability for mishandling claims. Most large |
| realistic, however, about your company's cash-flow. | | | | companies find that these risks can successfully |
| Claims do not arrive in an orderly fashion over a 12 | | | | mitigated with the help of a qualified, competent TPA. |
| month calendar period. Some months are more | | | | Implementing a self funded health plan is not to be |
| expensive than others. You cannot postpone claims | | | | undertaken lightly, but failing to do so may mean |
| payments you must have adequate cash-flow and | | | | wasting thousands of dollars every year on fully |
| enough reserves to immediately pay claims. The | | | | insured premiums. Performing the cash-flow analysis |
| assistance of a qualified TPA, insurance broker, and/or | | | | and risk analysis detailed above will give you a good |
| ERISA attorney is essential at this point and a | | | | idea whether your company is ready to self fund. At |
| competent professional will be able to assist you to | | | | that point if you believe self funding is a viable option, |
| determine whether self funding is a viable option. | | | | contact a qualified TPA or ERISA attorney and with |
| What Impact Will ERISA & Other Laws Have On | | | | the assistance of a competent professional you can |
| Your Self Funded Plan? | | | | design a self funded plan that not only meets the |
| Most self funded plans are subject to ERISA and the | | | | needs of your employees but also bolsters your |
| comprehensive bundle of regulations associated with | | | | bottom line. |
| this statutory scheme. ERISA, however, preempts | | | | |