Separating Fact from Fiction: Self-Funded Plan Designs with Stop-Loss Insurance

Separating Fact from Fiction: Self-Funded Plan Designs with Stop-Loss Insurance

Four out of five small businesses find it difficult to control the cost of health insurance while half struggle with offering employer-funded benefits.1

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With the increase in healthcare costs and the evolving marketplace, small businesses are faced with many challenges. They also encounter many different health plan options, such as self-funding, but may not know facts about how it works or whether it could meet their needs.

A self-funded plan can be a great option for some employers, allowing them flexibility to customize a plan tailored to their needs, a way to manage healthcare costs, and the potential to earn a refund at the end of their plan year. Although self-funding an employee benefit plan and purchasing stoploss insurance are not a fit for every employer, the following information will help debunk some key misconceptions brokers and small to mid-size employers have about self-funding:

Some brokers and employers may believe there is too much risk for employers if there are large claims or several claims that add up significantly over the plan year.

There are actually two types of stop-loss insurance that cover the employer. The first is aggregate stop-loss, which protects the employer from an unusually high volume of claims. If total covered claims during the contract period for all covered persons in the group are more than the annual aggregate attachment point, the stop-loss insurance protects the policyholder by covering such claims.

The second is specific stop-loss insurance. This protects the employer from unusually high claims from a covered person. If covered claims for a particular person are more than the specific deductible during the contract period, the stop-loss insurance protects the policyholder by covering such claims.

The aggregate attachment point represents the overall claim liability limit for the employer. All covered claims in excess of this amount are reimbursed by the aggregate stoploss insurance. A misconception about self-funding is that employers will receive a large penalty due at the end of the contract period if claims exceed the aggregate attachment point, or they will receive a high increase the next year to make up for the claims that were paid by aggregate stop-loss insurance.

Some employer’s suspect they will have to offer a self-funded health plan with benefits that are stripped down and do not meet the essential health benefits requirement of PPACA.

Self-funded plans are not required to cover EHBs; however, many of PPACA’s requirements apply to self-funded plans, such as the 100% preventive care coverage for non-grandfathered plans, maximum out-of-pocket limits for non-grandfathered plans and the no dollar-based lifetime benefit maximums.

Self-funded plan designs often have more flexibility to customize benefits than traditional fully insured plans and may offer other advantages like savings on mandated fees that apply to fully insured plans only.

Run-out is the period of time immediately following the plan year when covered claims incurred during the contract period continue to be processed by the third-party administrator or carrier. The run-out period is determined based on the contract chosen at the start of the contract year. A 12/15 contract, for example, includes three months of run-out after the 12-month contract is up. The first number is the contract period, which reflects the period for incurring claims, and the second number reflects the entire period for administering claims. Depending on the TPA or carrier, other contract options may include 12/18, 12/24.

New agreements are generated for the employer’s signature at the start of the new contract period. Covered claims for the current year are processed and paid according to the current year’s contract.

The number of smaller employer groups that self-fund continues to increase. According to a recent survey, from 2011 to 2013, the number of workers who are enrolled in small-group plans that are either partially or completely self-funded increased 23%.2 One common misconception is that there is too large of a financial risk to smaller employers that self-fund. However, when a small-employer group self-funds its employee benefit plan and purchases stop-loss insurance, its financial risk is limited with protection against large or catastrophic claims.

This is not true, and in fact costs and future spending are easier to predict with self-funded plans.  SEE NEXT FACT.

The utilization reports include information such as medical enrollment, summary of where claim dollars are distributed, claim payments by type of service, amount and percentages of total claims paid and distributed by diagnostic category, and prescription drug claims by tier and mail-order versus pharmacy usage.

This information provides great insight to potential cost-saving changes in the plan design, including encouraging employees to use services from in-network providers. Also, if brand-name prescription utilization is high, savings are available through the use of generic drugs. Transparency of costs also allows employers and their broker to forecast future trends and help plan future plan designs to best meet their needs and budget.

In addition, some self-funded plans have fixed monthly payments, regardless of medical claim activity, which goes toward the claim prefund account, aggregate and specific stop-loss insurance premium and administrative costs. This gives the employer peace of mind to have predictable payments and allows them to better manage their budget.

“Lasering” is the practice of either carving out severely ill employees from specific stop-loss insurance coverage or increasing the specific stop-loss deductible on the ill employees. This practice is used by some insurers to shift the costs of the sickest workers back onto employers.

Lasering offers an alternative to paying a higher stop-loss insurance premium and is often done at the request of an employer seeking to avoid a premium increase.

The fact is, self-funded plans and stop-loss insurance are commonly misunderstood. After dispelling some of the self-funded fictions and learning more about how it works, you may find there are cost-saving opportunities for your small to midsize clients with self-funding. Self-funded plan designs provide employers with flexible plan designs that feel similar to fully insured plans. Employers have the opportunity to receive a refund if claim expenses are lower than funded, and are protected by stop-loss insurance if medical claims are higher than the amount of money funded in the claim prefund account. In addition, with self-funding, employers can experience savings on state premium taxes and better manage costs with claim activity reporting.

Self-funding isn’t a fit for every employer, but it can be a viable option for some small to midsize employers in today’s changing marketplace.

1. LIMRA; “No Small Matter: How Small Businesses Make Decisions about Employee Benefits,” 2013
2. Kaiser; HRET Survey of Employer-Sponsored Health Benefits 2011-2013

CBA offers self-funded plan designs with stop-loss insurance uniquely designed for small to mid-size groups. For more information or a quote, e-mail fred.joyner@cbainsure.com or call (800) 537-6614.