The Pros and Cons of Self-Insured vs. Fully Insured

© benefitexpress 2016
Pro and Cons of Self-Funding Health Coverage
• Self-Funding: What is it?
• Self-Funding in the Marketplace Today
• Fully Insured Model vs. Self Funded Model
• The Mechanics of Self-Funding
• Self-Funding Scenarios
• The Pros and Cons of Self-Funding
• PPACA: Impact on Self-Funding

What is Self-Funding?
• When an employer group wants to offer health benefits to their employees but does not want
to pay an insurance company. Instead they take the place of the insurance company and
“self insure.”
• Two levels of Self-Funding
• Fully Self Funded
 Group retains all the risk – they do not purchase stop loss
 Usually reserved for “jumbo” cases
 Examples: Microsoft, Walmart, General Motors
• Partially Self Funded
 Employer purchases insurance policy to take part of the risk
 On a smaller scale a HDHP with an HRA is an example
 Traditional self funded plans purchase stop loss coverage.

Self-Funding in the Marketplace Today

Mechanics: Benefit Design
Plan Document and Summary Plan Description (SPD)
In a self funded health plan, the employer, with the assistance of their broker or consultant and
attorney , creates, defines and establishes a benefit plan for its employees.
• For groups that are currently fully insured the new plans are normally modeled after their
current fully insured plans.
• Self funded plans are governed by ERISA (Federal law) and are not subject to State
mandates.
• Groups have great flexibility in plan design

Who are the Players
1. The Plan Sponsor
2. Consulting Services
3. Legal Services
4. Actuarial Services
5. Accounting and Auditing Services
6. Stop-Loss Insurer
7. Third Parties Providing Administration Services
8. Third Parties Providing Specialized Plan Admin. Services
9. Provider Networks

Mechanics: Paying Claims
Self-insured employers can either administer the claims in-house, or subcontract this service
to a third party administrator (TPA). TPAs can also help employers set up their self-insured
group health plans and coordinate stop-loss insurance coverage, provider network contracts
and utilization review services.
Third Party Administrators (TPA)
An Important Distinction: Bundled ASO vs. Unbundled Independent TPA

Mechanics: Paying Claims
TPAs provide many services to the employer including:
1. Claim and premium administration
2. Reporting
3. Plan Document Creation
4. Stop Loss Integration
5. Cost Containment Features/Vendors (in house or sub-contracted)
6. PPO Access
7. COBRA/HIPAA administration

Mechanics: PPO Networks for Medical Claims
Physician Networks (PPO)
Self funded health plans will typically “lease” a PPO network in order to provide their
employees access to physician and hospitals, as well as reduce the risk to employer’s claim
fund by taking advantage of established PPO network discounts.
PPO Network Service Type Charge Allowable % Off Billed
PPO A Outpatient Hospital $1,614,407 $607,264 63.4%
PPO B Outpatient Hospital $1,614,407 $757,724 53.1%
PPO C Outpatient Hospital $1,614,407 $957,724 40.7%
Referenced Outpatient Hospital $1,614,407 $386,021 76.1%
Items to consider:
• Robust and easily accessible to its members
• Discount structure and payment timeline
• TPA integration
• Accurately priced by the stop loss carriers

Mechanics: PPO Network for Rx Claims
Pharmacy Benefit Management (PBM)
A PBM is essentially an Rx TPA married to a Rx PPO network.
 Provide access to most major pharmacies
 Negotiate discounts on a employer’s behalf
 Manage formularies on behalf of employer (provide recommendations)
 Many offer mail order and specialty drug programs
Examples: Express Scripts (Medco), CVS Caremark, OptumRx, Med Impact, Restat
Most TPAs contract with numerous PBMs and are willing to integrate the Rx claims
information in their monthly reporting and stop loss filing.
Cost saving opportunities: Rebates and Plan Transparency

Mechanics: Cost Containment
Employers can also add numerous features to help manage both the frequency and severity of
claims. These programs are typically called cost containment.
1. Disease Management
2. Utilization Review and Management
3. Case Management
4. Bill Audit and Review Services
5. Out of Network negotiation
6. Patient Advocacy
7. Tele-Doc Services
8. Specialty Care Vendors: Dialysis, Hemophilia, etc.
9. Wellness Programs
TPAs and PPO networks will typically provide some of these features.

Mechanics: Stop Loss Insurance
Since the employer is accepting the financial responsibility for the medical claims there are
two main concerns.
1. Large Claimants
2. Over Utilization
Stop Loss insurance provides protection against both scenarios.
1. Specific stop loss coverage covers catastrophic claims
2. Aggregate stop loss coverage covers against “over utilization” by providing a maximum
out of pocket for the employer’s collective claims.
The availability of competitive stop loss coverage is one of the most critical components in
determining an employer’s ability to self fund.

Mechanics: Stop Loss Insurance
Specific Stop Loss (Individual)
1. Employer is responsible for all claims on every member until the deductible is met.
2. Carriers can provide various deductible options to suit a group’s risk tolerance.
3. The higher the deductible the lower the price for the insurance.
4. Occasionally, specific individuals will be subject to a higher deductible known as a laser.
Aggregate Stop Loss (Group)
1. Claim maximum (aggregate attachment point) is normally set 25% higher than expected
claims (25% corridor)
2. Aggregate can be difficult to secure due to lack of claims data
3. Aggregate coverage is cheap (“sleep insurance”), historically a group has a 2% chance of
hitting their maximum.

Mechanics: Specific Stop Loss Coverage
Specific Stop Loss Insurance (Individual)
Specific stop loss coverage provides protection from catastrophic losses on each individual
insured under the plan.
Example: An employer group with 250 employees selects a $75,000 specific deductible.
Employee John Smith has a heart attack and the total claims incurred during his
hospital stay totaled $195,000. The employer is responsible for the first $75,000 in
medical claims incurred by John Smith. The stop loss carrier then reimburses the
employer for the $120,000 that exceeded the specific deductible.

Mechanics: Aggregate Stop Loss Coverage
Aggregate Stop Loss Insurance (Group)
Aggregate Stop Loss Insurance provides a second layer of protection for self funded health
plans intended to limit the plan’s maximum financial exposure. The aggregate “deductible” is
determined by the insurance company and is regularly set at 125% of the expected claims for
the group.
Example: A stop loss carrier evaluates a 250 EE company’s data and develops an expected
claims attachment point of $2M. They then adjust it by 25% to arrive at a maximum
claims attachment point of $2.5M.
Items to consider:
• Aggregate coverage can be difficult to secure due to a lack of claims data.
• Aggregate coverage is not always purchased since medical claim costs rarely exceed 125%
of expected claims.

Mechanics: Stop Loss Contract Options
Standard Stop Loss Contract Options
Since all claims are not received and paid within the Plan Year, stop loss is sold with various
“contracts” offering coverage for claims incurred prior to the effective date (run-in) and claims
that are paid after the policy year is over (run-out).
Two important terms:
1. Incurred (first number)
 Incurred date refers to the date the member receives care.
 This number designates the number of months qualified claims can be incurred.
2. Paid (second number)
 Paid date refers to the date the claim is paid by the administrator.
 This number designates the number of months a qualified claim can be paid.
Typical turn around time from incurred to paid is 6-10 weeks.

Mechanics: Stop Loss Contract Options – 12/12
• A 12/12 contract has no Run-In or Run-Out protection.
• Sometimes sold with a Terminal Liability Option (TLO).
• This contract can be used to help a group transition to self funding.
1/1/2016 12/31/2016
Incurred
Paid
12/12
Claims must be incurred and paid in the same 12 month period.

• This type of coverage is called Run-Out.
• It is also available in contracts on a 12/18 and 12/24 basis.
• Fully insured policies are on an incurred basis and typically offer a 12/24 or greater.
1/1/2016 12/31/2016
Incurred
Paid
12/15
Claims must be incurred within 12 months and paid within
3 months following the end of the coverage period.
3/31/2017

10/1/2015 1/1/2016
Incurred
Paid
15/12
Claims must be incurred within 15 months
and paid in the 12 month coverage period.
12/31/2016
• This type of coverage is called Run-In.
• It is also available in contracts on an 18/12, 24/12, and paid basis.

Self-Funding: A Fully Insured Prospect
A prospective client currently offers (3) health plans to its employees: HMO, Low PPO and
High PPO. All plans are currently fully insured through a major insurance company. The CEO
and CFO of the organization believe that the insurance company is making money on an
annual, consistent basis off of their workforce’s good claims’ utilization and costs. They also
desire the cash flow benefits and plan design control that self-funding offers.
The broker. Consultant and the client work to secure claims data, enrollment information, plan
designs, etc. so that the stop loss carriers will have enough information to make an
appropriate evaluation of the risk. After working with multiple stop loss markets, the group
receives their stop loss quote(s) and now have the ability to determine total cost scenarios
including potential claims liability, stop loss premium and plan administration.

Real Life Scenario: A Fully Insured Prospect
$2,950,000
$2,750,000
Fully Insured
Premium
$200,000
$65,000
$35,000
$400,000
$1,800,000
$450,000Risk Corridor
Expected Claims
Stop Loss
Ancillary Vendors
PPO Access Fees
Plan Administration
Maximum
Liability

Self-Funding: Disadvantages & Potential Exposures
1. Securing competitive stop loss – group size, location, available claims data
2. Potential claim liability – claims can come in above expected
3. Not building claim reserves – claim reserve underfunded
4. Looting claim reserve for other expenses - can lead to insolvency
5. Over-generous employers – exceptions are not covered by stop loss
6. HIPAA Compliance (“hands-on”)
7. Nondiscrimination Testing

Self-Funding: Advantages
1. Control of the plan design
2. Ancillary service flexibility
3. Collection of health plan data
4. Lower administrative costs
5. Cash flow benefits
6. The ability to build reserves
7. Elimination of carrier profit margin
8. Reduced premium tax
9. Avoidance of Health Insurance Industry tax

PPACA: How It Affects Self-Funding?
Interest is mounting because…
• It historically has been even before PPACA. In 1999, 44% of all employees were covered in
a self funded environment. Today, that number has grown to 63%.
• PPACA requires employers with 50 or more employees to pay or play. This may leave
employers looking for health benefits and self-funding is one of the more long term, cost
effective approaches.
• Better strategic position to adjust benefits to control increased provider costs.
• Fully insured premiums expected to jump to accommodate new provisions as a result of
PPACA.

PPACA: How It Affects Self-Funding?
Interest is mounting continued…
Other considerations:
• Limited exposure to MLR rules
• Guarantee issue rule, not applicable to stop loss carriers
• Stop loss premiums will not likely be subject to all the ACA fees
• Some additional advantages-
 “Essential Health Benefits”
 Avoidance of Health Insurance Tax (HIT)
 Most premium taxes
 State mandated benefits

PPACA: How it affects Self-Funding?
PCORI Fee & Transitional Reinsurance Fees will apply to fully insured and self funded health
plans, however self funded health plans are exempt from both the Risk Adjustment Fee &
Health Insurance Industry Tax due to ERISA law.
What do the fees equal in savings for the self funded client versus fully insured?
Group Size: 250 Employees
Annual Premium: $2,750,000
Estimated Renewal Trend: 5%
1/1/2014 1/1/2015 1/1/2016 1/1/2017
Renewal Premium $2,887,500 $3,031,875 $3,183,469 $3,342,642
Estimated HIT Fees $66,412 $98,536 $103,463 $133,706
HIT % 2.3% 3.25% 3.25% 4.0%
* For illustrative purposes only. Fee Estimates taken from the Oliver Wyman Study.

Reduced Premium and ACA Taxes
Fully Insured Self Funded Self Funded
Annual Premium Premium Tax
Health Ins.
Industry Tax
Total Premium Tax Savings
$1,000,000 $25,000 $23,000 $48,000 $5,000 $43,000
$2,000,000 $50,000 $46,000 $96,000 $10,000 $86,000
$4,000,000 $100,000 $92,000 $192,000 $20,000 $172,000
$6,000,000 $150,000 $138,000 $288,000 $30,000 $258,000
$8,000,000 $200,000 $184,000 $384,000 $40,000 $344,000
$10,000,000 $250,000 $230,000 $480,000 $50,000 $430,000
$40,000,000 $1,000,000 $920,000 $1,920,000 $200,000 $1,720,000
Note: Self funded premium tax assumes stop loss premium is 20% of fully insured premium.

Contact
Larry Grudzien
Attorney at Law
708-717-9638
larry@larrygrudzien.com
larrygrudzien.com

The Pros and Cons of Self-Insured vs. Fully Insured

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to The Pros and Cons of Self-Insured vs. Fully Insured

Similar to The Pros and Cons of Self-Insured vs. Fully Insured (20)

More from benefitexpress

More from benefitexpress (20)

Recently uploaded

Recently uploaded (20)

The Pros and Cons of Self-Insured vs. Fully Insured