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

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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 TaxHealth Ins.

Industry TaxTotal 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.

Questions?


Contact

Larry Grudzien

Attorney at Law

708-717-9638

[email protected]

larrygrudzien.com

Healthcare

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