Employers are continuously searching for ways to reduce employee benefit costs while still providing competitive plans. One option employers should consider is self-insurance. Traditionally self-insurance has been utilized by large employers with at least 1,000 employees. However, medium-sized employers with as few as 200 to 250 employees should also consider this funding alternative.
Self-insuring a medical plan differs from the traditional insured plans in a few key ways. In a self-insured plan, the employer pays an administration fee (usually a fixed fee per employee) to a TPA to adjudicate and pay claims to providers. The employer also pays the amount of the actual claims processed up to their reinsurance amount(s) as well as any reinsurance premiums. The employer is "the Plan," and the administrative and reporting requirements of the Plan are the responsibility of the employer, unless contracted to a third party. In a fully insured plan, an employers liability is limited to the premium rates multiplied by the enrollment and prior to the Patient Protections and Affordable Care Act (PPACA), the reporting and other administrative requirements were limited.
There are two types of reinsurance an employer can purchase to protect from catastrophic claims. Specific reinsurance offers per member protection. A specific reinsurance limit of $50,000 provides reimbursement or advancement for all covered claims paid over $50,000 per member in the policy/contract period. Aggregate reinsurance offers overall protection. An aggregate reinsurance limit of 125% provides reimbursement of all covered claims paid (after subtracting any specific claims reimbursements) over 125% of the total expected claims for the policy/contract period.
Some advantages and disadvantages of self-insurance are:
- Plan design flexibility and customization
- Availability of detailed claim data
- Lower administration fees
- 100% credible for good experience
- Avoidance of state-mandated benefits
- Avoids Medical Loss Ratio (MLR) and some other requirements of PPACA
- Potential cost savings
- Employer "owns" plan and fiduciary liability
- HIPAA privacy concerns/considerations
- Not a "fixed/known" premium cost every month
- Exposure to maximum liability points
- 100% credible for poor experience
- Section 105(h) non-discrimination rules apply
- Expanded claim appeals policies and procedures
The decision to self-insure is one that an employer should make carefully and thoughtfully. Professional advice from a broker or consultant should be utilized in order to ensure that the proposals from TPAs and reinsurers are evaluated properly and compared on the same basis.
There are many different terms and policy provisions in self-insurance. An understanding of contract terms like "15/12," "paid and incurred," "aggregating specific," "terminal liability" are all critical to the evaluation of the alternative funding arrangements. Additionally, provider discount analyses need to be performed on the different provider networks that are proposed to ensure adequate stop loss coverage is purchased. Similarly, the prescription drug list needs to be reviewed to ensure specialty drugs are covered either by the medical carrier or separate pharmacy benefit manager (PBM), and which drugs are not covered or require pre authorization or step therapies.
In the right circumstances, self-insurance can cut the cost of medical plans, benefitting the employers and employees, but a careful evaluation must be made before a wise decision can be made.
Patrick J. Haraden, CEBS, CLU, ChFC, REBC, RHU, MBA, LIA, is a principal of Longfellow Benefits, a Boston-based employee benefits consultant and brokerage.