On your own

It’s no secret that it is increasingly difficult for employers to afford the cost of providing health care coverage for their employees. According to a recent study by Pricewaterhouse Coopers, between 12 percent and 15 percent of companies’ payroll costs stem from health care, up from 8 percent five years ago.

Smart employers are looking at all of their options to hold the line on health care costs. Some companies are reducing benefits, or asking their employees to contribute more to the cost of health care coverage. However, there is a solution that doesn’t typically result in increased costs for either the employee or employer — it’s called self-funding, and for employers that can afford to take on risk, it’s an attractive alternative to paying fixed premiums for group health insurance.

How self-funding works

With self-funding, the risk for medical cost is assumed by the employer rather than an insurance company or managed-care plan. Employers pay only for claims that employees incur, plus a fee for an administrator to process claims and handle other administrative tasks. The employer budgets for these expenses through a claims liability account.

Employers also purchase stop-loss insurance coverage, which is designed to protect against medical expenses above a certain limit. The stop-loss insurance carrier reimburses the employer for claims above their liability. If expenses do not exceed budgeted expenses within a plan year, the employer retains the savings. These funds can be used to pay future expenses or transferred to a 501(c)(9) trust account, which allows employers to earn tax-free interest on employee benefits.

Benefits of self-funding

Self-funding offers numerous benefits to employers.

  •  Cash flow benefits. The employer’s cash flow is improved when money formerly held by insurance carriers (reserves to cover health-care costs) remains under the employer’s control and can be invested.
  •  Premium taxes are eliminated. These taxes vary by state, but range from 1 percent to 3.5 percent. In most states, including Michigan, there is no premium tax on the self-funded claim fund.
  •  Mandatory benefits are exempt. Self-funded plans are subject to the Employer Retirement Security Act of 1974 (ERISA), a federal law. Under ERISA, self-funded plans are exempt from state laws and regulations, so employers can decide whether to offer state-mandated benefits that are required for fully insured plans.
  •  Employer control. Self-funded plans may be tailored to fit the needs of the group. This means the employer has complete flexibility to develop a benefit plan that will be cost-effective and valuable to their employees.
  •  Claim cost containment and utilization controls. A wide variety of care-management programs are available for purchase on an a-la-carte basis. These programs help ensure that employees are receiving the appropriate care, at the appropriate level, in the most cost-effective manner, with appropriate outcomes. Some of these programs include utilization management, case management, pre-existing condition review, disease management, pharmacy management and health promotion. When all of these programs are integrated, employees who are at a higher risk to incur medical expenses can be identified for case-management or disease-management programs.

  •  Effective risk management. Employers may choose the amount of risk to retain and the amount of stop-loss insurance they want to purchase.
  •  Consumer-directed options. Self-funded plans can also be designed to integrate with health reimbursement arrangements (HRAs) and health savings accounts (HSAs) to promote greater employee responsibility in health care decision-making.

Likely candidates for self-funding

Self-funding isn’t right for every employer, but it can be a cost-effective solution for those who:

  • Have at least 100 or more employees
  •  Are financially solvent
  •  Are willing to take on risk
  •  Want increased cash flow
  •  Are willing to invest the time to understand the risks and rewards
  •  Have good claims experience
  •  Are looking for flexibility in benefit design

Jelka Petrovic is chief marketing officer for Care Choices, a Michigan-based health care organization that offers a variety of plan options, including HMO, PPO and consumer-directed plans. For more information visit www.carechoices.com.