Take control of health care Featured

7:00pm EDT February 23, 2010

Many companies are looking for ways to save money on insurance costs. An increasingly popular option is a self-funded health plan.

With these plans, you pay the claim costs incurred by your employees. These plans offer tremendous flexibility and the ability to customize plan designs based on the specific needs of your business.

“In a self-funded environment, your health care costs are much more transparent,” says James Repp, vice president of sales with AvMed Health Plans. “You can use this information to better understand what medical conditions, procedures or pharmaceutical drugs are driving claim costs and then develop programs and benefit designs to positively impact these costs.”

Smart Business spoke with Repp about self-funded plans and how to make sure they are well managed.

What is the difference between fully insured and self-funded plans?

Fully insured plans provide a fixed premium that doesn’t change over the contract period, regardless of whether the claims are substantially more or less than projected. It’s essentially winner takes all. The insurance carrier benefits if claims are less than expected, and the employer benefits if they’re more than expected. Typically, fully insured plans provide a standard set of services that are included in the premium and the employer does not have the ability to customize these services.

In a self-funded plan, the employer contracts with a company to provide administrative services and the employer takes on all claim liability. Most groups that self-fund also purchase stop loss insurance to protect against claim liability that may be above acceptable levels. Self-funding, with the appropriate stop loss coverage, is generally appropriate for groups with at least 200 employees. One of the biggest challenges of self-funding is the fluctuating risk in a group. The smaller the group, the less predictable the future experience.

What is stop loss insurance?

There are two different categories of stop loss insurance — specific stop loss and aggregate stop loss. The specific stop loss limit is set at the individual member level. Amounts range based upon the size and risk tolerance of the employer, but commonly this amount is between $50,000 and $100,000 per contract period. The employer’s liability for any one member would be set at this limit. For example, if a member has a $1 million claim, the employer would only be liable for the first $50,000 of the claim, and anything above that would be covered under the insurance policy. The aggregate stop loss limit is set over the entire plan at a percentage of expected costs. For example, typical aggregate stop loss would be set at 125 percent of the expected cost level. You would pay everything up to 125 percent on an aggregate basis, and anything over that would be protected under insurance.

What are the cost differences between self-funded and fully insured plans?

There’s a lot of variability from an employer cost standpoint, but there are some standard differences in terms of the components included in the costs. Self-funded plans do not have risk margins, because you’re paying the claims regardless of the level. Fully insured plans have risk margins built in to the premium to cover claim fluctuations. Self-funded plans also typically have lower administrative costs, and provide greater flexibility around benefit design, which drives premium level. You’re also not subject to state mandates, but to ERISA rules at the federal level.

Depending on the group size, the premium development for fully insured plans is blended in with all of the other businesses in an insurer’s business book, so your premium could be subsidizing the premium of other employers with higher costs. In a self-funded plan, you pay the claims your group incurs.

What steps can you take to make sure the self-funded plan is well managed?

The first step is to select a claims administrator with a successful track record of paying claims accurately. You want to make sure your partner has a strong provider network, both from an access and a cost standpoint. Employees should be able to use broad networks and receive competitive discounts from providers. You also have to focus on the capabilities of an administrator around medical management. The administrator should have robust programs for complex case management and disease management and be able to identify employees that would benefit from these programs. Employees that better manage chronic diseases reduce claim costs for self-funded plans, which reduces overall plan costs. Administrators should also be able to assist employees and ensure that they are receiving the right care, in the right setting, at the right time.

How can you restructure your plan if you decide to switch to a fully funded plan?

This can get challenging. The decision to enter into a self-funded arrangement should not be looked at as a short-term solution. There can be many challenges when transitioning back into a fully ensured environment. When you self-fund, you’re liable for all claims incurred prior to moving back into a fully insured environment. This liability can continue for quite some time, and you’ll have to pay the fully insured premium, plus run out costs when you move back into the fully insured environment. You can substantially increase your monthly costs during this transition period.

There are many elements to consider when evaluating the viability of implementing a self-funded health plan, and it really needs to be part of an overall long-term benefits strategy. Many employers have discovered that implementing a self-funded arrangement has allowed them to take control of their health plan and, more importantly, take control of their health care costs.

James Repp is the vice president of sales for AvMed Health Plans. Reach him at (800) 592-8633 or jim.repp@avmed.org.