While certain laws and limitations can pose obstacles for employers when it comes to self-funding health plans, options exist. An HRA enables an employer to purchase a High Deductible Health Plan and build a health plan below the purchased plan’s deductible. This allows an employer to keep their premium costs low, while offering a Gold or Platinum level benefit.
Case Study: How it works for the employer
A company with 45 employees has purchased two Bronze level medical plans and used an integrated HRA to fund the amount below the maximum out of pocket; leaving their employees with a total exposure of $0. In an average year, the plan utilization is low; the group’s total HRA exposure is $300,000, but they only end up spending around $30,000 of that.
What is a “self-funded” plan?
The answer can depend to some extent on the size of the employer, but the basic components are:
- Some risk is borne by the employer or plan sponsor (with potential gain as well)
- Claims are paid by an insurance company or Third Party Administrator
- Stop-loss insurance is generally readily available to limit the risk. Individual stop-loss coverage is essentially a very high deductible, typically in the range of $25,000 to $250,000 or higher. That would limit the risk for a given individual. Many plans also include aggregate stop-loss coverage, which limits the risk to the plan for the cumulative claims total.
- The plan can be broken up into component parts, each one analyzed separately so that if there is a problem with one component it can be changed without changing the rest
- Self-funded plans do not have profit margins built in, as one generally sees with fully insured plans (even non-profit health plans typically build in a margin)
- Self-funded plans usually come under the federal law ERISA which can make the plan exempt from many state mandates (exceptions include employers in Hawaii, certain governmental plans, church plans, and native American organizations)
- For smaller employers, a common option is a “Level Funded” plan which generally costs more and is less flexible but reduces some of the risk to the employer or plan sponsor.
- Potential for significant cost savings
- Reduction in state premium taxes (in most states) and carrier profit margin
- Greater flexibility in plan design and avoidance of most or all state mandates
- Greater potential for employee and employer engagement
- Ability to evaluate each component of the plan separately
- Vastly increased knowledge of the plan, its claims experience, and component costs (HIPAA protected).
- Ability to install wellness and biometrics to reduce claims costs on a direct basis
- A greater ability to save money through the use of telemedicine providers, which is becoming an important trend for the future
- Greater ability for HR to act in a strategic and consultative manner in helping to guide the company’s healthcare costs
- Greater ability to create special networks, Centers of Excellence, and medical tourism (perhaps even within the immediate area)
- Ability to look at enhanced Reference Based Pricing and Value Based Insurance Design.
- Cash flow swings and total cost could exceed fully insured plan if claims high and safeguards are not imposed
- More employer engagement required to optimize effectiveness
- Self-funded plans are more complicated because it is often designed with a combination of components
- Must create and hold reserves for year end run out or plan termination
- IRC §105(h) discrimination testing applies
- Wellness and biometrics (if instituted) might cause employee morale issues if not handled correctly
- More technical expertise required on the part of the adviser/consultant
- Alternative fully insured and stop-loss markets might not be available later if there is severely adverse claims experience
- Insurance carrier or health plan tools and resources for wellness, etc., might not be available if self-funded
- Somewhat increased reporting requirements (ACA tracking, state compliance on-going work, etc.)
- Stop-loss coverage can be more price sensitive to on-going claims than a fully insured plan.
When an employer establishes a partially self-funded plan, it takes over control of almost all aspects of the plan:
- Outside party administration to adjudicate claims and provide general plan functions such as ID cards, plan materials, etc.
- Purchase of “specific” and possibly “aggregate” stop loss coverage to protect against high claims
- Rental or creation of a “preferred provider” network to reduce base costs
- Set up of plan reserves to pay claims incurred but not reported prior to the end of the plan year
- Avoidance of some or all state mandated coverages as it sets its own plan design and requirements
- Claims Utilization Review, disease management, data analysis, nurse answer lines, discharge planning, telemedicine, etc.
- Risk is taken by the plan sponsor (usually employer) to a greater extent, and it has fiduciary responsibilities.
- Savings from wellness or related initiatives result directly in lower employer costs.
- Plan not tied to large fully insured pool with shared risk – the individual plan cost/claims experience is counted