As with most things, when talking about benefit plans, one size certainly does not fit all, but there are some very specific reasons why self-funding is gaining in popularity and appropriateness for employers.
The increase in self-funding during that time has occurred with larger employers. Those with 1,000 to 4,999 employees increased from 69% in 2000 to 78% in 2012, while those with 5,000 or more grew from 72% to 93%. By contrast, self-funding among employers with 3-199 and 200-999 employees has remained relatively constant; approximately 15% and 52% respectively.
So, what’s the appeal, and what’s happening now to spur increased adoption in the smaller employer market?
From a big picture perspective, self-funding enables two things:
- The ability to break your health program into its component pieces, enabling better understanding and cost-effectiveness for each, and;
- The opportunity to avoid many of the regulations imposed both by individual states, and now PPACA.
Let’s look at each of these in a bit more detail.
A typical health plan contains two primary elements – administration and claims. Self-funding, however, enables a level of transparency into each that can result in lower costs. Instead of administration being a lump sum catch-all for everything non-claims related, it becomes a measurably accountable source for claims processing, re-insurance, chronic care management, wellness services, pharmacy benefit management and network access. True to the old adage that what gets measured gets managed, shining an analytical light on each component enables layers of expense to be eliminated and greater cost-effectiveness to be achieved.
Once the best combination of administrative services is assembled, the same attention is given to medical claims. This is the largest expense within the plan (as it should be). Transparency, quality reporting and expert analysis of utilization then empowers employers with information necessary to create the most effective strategies for wellness, plan design and cost-containment.
Federal law (ERISA) exempts self-funded plans from state insurance laws, including reserve requirements, mandated benefits, premium taxes, and consumer protection regulations.
Health Care Reform is creating additional expense to fully-insured plans (as well as an increasingly “one size fits all” environment). The requirement for employer plans with less than 100 employees to include “Essential Health Benefits” is an example of both regulation and expense added by Reform. In addition, plan designs in this segment will be standardized and premiums will be community rated resulting in less choice, market competition and differentiation to serve employers.
Some of the additional advantages in self-funded plans created by Health Care Reform:
- Avoids the Health Insurance Industry Fee (estimated at 2½% of fully-insured premiums beginning in 2014)
- Escapes premium review by HHS
- Enables plans to be analyzed and rated on their claims experience, not aggregated into a larger unknown pool
In the end, the increasing appeal of self-funded plans is the promise of greater control over costs and less government regulation.
With all this in mind, however, it’s important to remember that insurance is essentially the practice of financing risk through the spreading of exposure. The more people covered, the less volatile the experience and the more premium available to provide for expenses. The fundamental challenge for employers with fewer employees is how to spread that risk, or provide the proper level of protection for the amount of exposure they do have. Self-funding is definitely not for everyone, but even when it is the right choice, careful analysis is essential to determine the proper balance between risk retained and transferred.
The bottom line is the cost and value of health insurance is great enough to warrant deep analysis and proactive control.