SIEF | Participants

How do self-insured plans work and how are they different than traditional health insurance plans?

When an employer purchases health insurance (called “fully funded” insurance), an insurance carrier performs “underwriting,” where the insurance company decides how much it thinks the employer’s employees will cost to insure. If the employees are unhealthy, for instance, it will cost more to provide health benefits. The insurance carrier needs to perform this underwriting process, so that it can calculate how much the employer and employees need to pay in premiums. Premiums cover employees’ medical bills, add money to the insurance carrier’s own account (to be used to pay for other employers’ medical bills), as well as contributing towards the insurance company’s profits and administrative costs. As a result, more often than not, the premiums will end up being more than the cost of the employees’ actual medical care.

When an employer self-funds or self-insures its health plan, it typically receives participation contributions from employees. Those funds are put into a trust account, which, along with employer monies, are used to pay employees’ medical bills as they are incurred.

Who pays for what?

With fully-funded insurance, as long as the employer and employees pay their premium, any medical bills (beyond the deductible) are the responsibility of the insurance company. If the bills are suspicious, incorrect, or shouldn’t be paid for some other reason, the doctor or hospital will appeal to the insurance company, the insurance company decides what to do with the bills; the insurance company is responsible for making the decisions, and making the payments. Insurance companies pay medical bills using their own money.

With self-funded health plans, the self-funded plan pays the medical bills. That means the employer and employees pay their own medical bills with their own money. That also means the self-funded employer needs to decide how to pay the bills, deal with appeals, and manage the plan.

That sounds like a lot of work, and a big financial risk... So why would employers choose to deal with all of this added work as well as expose themselves to the risk of a catastrophically big medical bill? Because more often than not, the actual cost of medical care for the employees is less than the premiums charged by insurance companies.

Self-funding, however, is not always the less expensive option! If a member of the health plan suffers an unexpected, very expensive injury or illness, the self-funded plan is on the hook to pay the bills! If that employer had signed up for fully funded insurance and paid premiums instead, the insurance company would be the one on the hook for the bills.

To lessen this risk, often self-funded plans buy a form of reinsurance called stop-loss. This is financial insurance for the self-funded plan. When a self-funded plan has to pay medical bills above or beyond a certain amount, they can submit a claim to the stop-loss carrier, who reimburses the plan for the claims paid above that amount (called a deductible). Unlike fully funded health insurance, which pays medical bills directly to medical providers (like doctors and hospitals), stop-loss is not responsible for paying medical bills. Stop-loss reimburses self-funded plans for amounts the plan already paid to providers for medical care.

Will we notice any difference in the way our claims are handled?

Generally, a member of a self-funded plan should see no difference in how their claims are handled. Most self-funded employers hire a third party administrator (TPA) or hire an insurance company to provide administrative services only (ASO). A TPA or ASO receives the medical bills from doctors and hospitals, just like an insurance company; they process the claims, just like an insurance company; and they pay the bills – using the self-funded plan’s money, instead of their own money. This last step (whose money is used to pay the claims) is the difference between a self-funded plan with a TPA or ASO, and a fully funded insurance policy.

Plan members, however, should see little change. They will make contributions to the plan instead of paying premiums to an insurance company; will receive a plan ID card (just like an insurance card); and will have their medical providers seek payment from the plan just like any other insurance policy. In fact, more than half of Americans receiving health benefits from their employer do so through a self-funded plan. Yet, most patients likely don’t even know that their health insurance is self-funded.

How confident can we be about our share of costs?

As for costs, statistics show that over the span of a few years, most self-funded plans cost as much or less than comparable fully funded insurance. That means the cost incurred by members of the plan will also be the same, or less, than if they purchased fully funded insurance.

How are self-insured plans designed and managed?

As for the structure of the plan, fully funded insurance companies provide their customers with a policy. Policies are like contracts: documents that set forth how the insurance works, what benefits are available, costs that are the responsibility of the insured are explained, and all the rules applicable to the program are explained.

Self-funded plans include “plan documents” and “summary plan descriptions.” These documents are just like policies, and function in the same way. These documents are required by federal law to contain lots of important, useful information.

In the meantime, just like an insurance company performing underwriting, a self-funded plan’s TPA or ASO will determine how much the plan needs to take from its members, how much it needs to set aside, and what it will need to pay for the employees’ medical expenses. The plan, and its trust account, will be set up before the program goes live. The sponsor of the plan will also identify a “plan administrator” who, according to federal law, is responsible for making sure the plan pays claims properly, prudently manages its assets, and the best interest of its members is the top priority.

How are self-insured group health plans regulated?

Most self-insured group health plans are regulated by the United States Department of Labor’s Employee Benefits Security Administration. This is due to the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that establishes uniform standards for most private-sector employee benefit plans including both pension plans and other benefit plans such as health and disability benefits. ERISA preempts state law and governs self-insured group health plans.

Self-insured group health plans must adhere to all applicable federal laws including ERISA, Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA).

The result is that self-insured group health plans are subject only to federal law, thereby allowing employers both the advantage of operating across many different states and not being controlled by state insurance coverage mandates.

How are my and my family's privacy protected in a plan where my employer basically pays for my health treatment?

Coming soon

What other consumer protections are available to self-insured plan participants?

Most self-insured health plans are regulated by the United States Department of Labor, Employee Benefits Security Administration (DOL-EBSA) under the federal Employment Retirement Income Security Act (ERISA).

ERISA law exempts self-funded plans from conflicting state health insurance regulations and benefit mandates. Although state mandates do not apply to self-insured health plans, Federal mandates must be followed.

Self-insured health plans governed by DOL-EBSA must follow ERISA claim procedures. ERISA sets standards of protection for individuals in most voluntarily established, private-sector retirement plans. ERISA requires plans to provide participants with plan information, including important facts about plan features and funding; sets minimum standards for participation, vesting, benefit accrual, and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a claims and appeals process for participants to get benefits from their plans and gives participants the right to sue for benefits and breaches of fiduciary duty.

The Centers for Medicare & Medicaid Services (CMS) has jurisdiction over self-insured plans that are sponsored through school districts, municipalities, and churches.

Members of self-insured plans that are not subject to DOL-EBSA jurisdiction should refer to their member handbook for appeal procedures or contact an attorney for assistance.

Patient Protection And Affordable Care Act

The Affordable Care Act (ACA) added new protections for employees covered under employment based group health plans.

Extension of Dependent Coverage to Age 26
Pre-existing Condition Exclusion Prohibition
Summary of benefits and coverage (SBC)
Coverage of Preventive Services
Essential Health Benefits
Internal Claims and Appeals and External Review
Medical Loss Ratio
Wellness Programs
Grandfathered Health Plans

The Act prohibits employers from retaliating against employees who report violations of the Act’s health insurance reforms, found in Title I of the Affordable Care Act. For more information visit www.whistleblowers.gov. For a full list of Affordable Care Act provisions, visit www.dol.gov/ebsa/healthreform/.

Other Federal Benefit Laws

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows certain employees and their family members to continue their employer-provided coverage that would otherwise have been lost due to specific events (COBRA continuation coverage). Qualifying events include the death of a covered employee, termination or reduction in the hours of a covered employee's employment for reasons other than gross misconduct, divorce, or legal separation from a covered employee, a covered employee's becoming entitled to Medicare benefits, and a child's loss of dependent status under the plan.

Those who are eligible may be required to pay for COBRA continuation coverage and are generally entitled to coverage for a limited period of time (from 18 months to 36 months), depending on certain circumstances.

GINA (Genetic Information Nondiscrimination Act)
GINA specifically prohibits plans from increasing the group premium or contribution amounts based on genetic information, requesting or requiring a person to undergo a genetic test, requesting, requiring or purchasing genetic information prior to, or in connection with, enrollment, or requesting, requiring or purchasing genetic information at any time for underwriting purposes.

HIPPA
The Health Insurance Portability and Accountability Act (HIPAA) contains significant protections that make it easier to change employers without losing health coverage for your (and your family's) medical conditions. These protections include limits on the exclusion period for coverage of preexisting conditions in a new employer's plan. (As discussed throughout this publication, the Affordable Care Act has expanded this protection by prohibiting preexisting condition exclusions for individuals under age 19 and for all individuals beginning in 2014.) HIPAA also provides additional opportunities to enroll in a group health plan (including when you lose other coverage or experience certain life events) and a prohibition on discrimination against participants and their dependent family members based on any health factors they may have, including prior medical conditions, previous claims experience, and genetic information. In addition, under HIPAA, birth, adoption, and placement for adoption may also trigger a special enrollment opportunity in your group health plan for you, your spouse, and your child, without regard to any open season for enrollment.

Mental Health Parity and Addiction Equity Act (MHPAEA)
The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) is a federal law that generally prevents group health plans and health insurance issuers that provide mental health and substance use disorder (MH/SUD) benefits from imposing less favorable benefit limitations on those benefits than on medical/surgical coverage.

Newborns’ and Mothers’ Health Protection Act (NMHPA)
The Newborns' and Mothers' Health Protection Act of 1996 (NMHPA) is a federal law that affects the length of time a mother and newborn child are covered for a hospital stay in connection with childbirth.

Women’s Health and Cancer Rights Act (WHCRA)
The Women's Health and Cancer Rights Act of 1998 (WHCRA) is a federal law that provides protections to patients who choose to have breast reconstruction in connection with a mastectomy.

Note: A nonfederal government employer that provides self-funded group health plan coverage to its employees (coverage that is not provided through an insurer) may elect to exempt its plan (opt-out) from requirements of title XXVII of the PHS Act, with the exception of requirements pertaining to GINA, the certification and disclosure of an individual's creditable coverage under the plan, and notices to enrollees regarding the fact and consequences of an opt-out election. For more information go to http://www.cms.gov/SelfFundedNonfedGovPlans/ in the left hand column scroll down and select "Procedures and Requirements."

Does being part of an employee group help control costs compared to individually buying a conventional policy or joining a state exchange?

Being part of a self-insured employee group generally costs less than buying commercial insurance via a conventional policy and allows the employer more flexibility to tailor health care benefits compared to a state exchange policy.

The purpose of health insurance is to minimize the risk of a financial catastrophe that often results from unexpectedly large losses or expenditures by pooling the experiences of a large number of people. In general, large employer groups can predict with reasonable accuracy what their health care expenses will be during a particular year. Although it may be difficult to predict precisely how many people will incur significant healthcare costs and how much each person's illness will cost, a group can spread the resulting expenses among a large number of people, thereby creating an average expense that varies far less than an individual's expense. This concept, known as risk pooling, allows a large employer to estimate fairly accurately the cost of offering health care insurance to its employees. Similarly, insurance companies pool the risk of numerous small groups and individuals to predict their overall expenses.

State exchanges are designed to allow individuals to choose a plan that fits their medical needs and budget. The health plans on the exchange include the platinum, gold, silver and bronze plans with the platinum plan having the lowest out-of-pocket cost and highest premiums. The plans must cover a set of essential health benefits such as preventative and wellness services. Individuals should calculate what their maximum potential expenses would be under a particular plan to evaluate the benefits or downside of joining a state exchange.

How is the quality of my healthcare treatment maintained? What are my choices for professional service providers or facilities?

Employer self-insured health plans have huge advantages in structuring employee access to healthcare providers.

Many employers contract with specific facilities specializing in certain types of care to handle specific events such as transplants, cancer treatments and heart surgeries.
Preferred Provider Networks (PPO) can be city or region specific so employees in a particular city or region have access to the best hospitals and specialists in their area.
The service provider (doctor, hospital, clinic, rehab center, etc.) is credentialed to be part of the PPO network and paid on a fee for service basis so there is no incentive to ration care. At the same time, the care delivered is subject to independent evaluation and monitoring by a separate utilization review company under contract with the plan third-party administrator (TPA) to make sure the treatment protocols meet best practices.
The choice of provider is always up to the patient but there are cost incentives to use those who are affiliated with the PPO networks with whom the TPA has established relationships.
Since the employer pays your medical bills through a TPA that is independent of the service provider doctor or hospital, there is an independent third party reviewing your treatment that scrutinizes the services and questions the appropriateness of charges or treatments.

Quality of healthcare is maintained by peer review and by credentialing so the employee is not alone in seeking providers who meet and exceed community standards.

TPA contracts with various PPO organizations and provider groups are reviewed and outcomes as well as costs are part of that review process.

Quality care with good outcomes assures future long term medical care costs to be as low as possible for the employer’s workers and their dependents.

Unlike an insurance company selling an annual insurance policy, a self-insured employer has a long term interest in the health and welfare of its workforce. There is no incentive for the employer to ration care today and face more expensive and longer term treatment costs tomorrow.
Many employers who are self-insured have wellness programs to help identify any potential health issues and encourage lifestyle changes and early detection, diagnosis and treatment of illnesses and diseases.
Because self-insured health plans are funded by employers for the benefit of their employees and their dependents, employers who pay the actual medical bills incurred by their employees and their families (rather than an annual premium to an insurance company) have an economic interest in the long term good health of their employees and their employees’ dependents.

What do other employees think about being part of a self-insured group health plan?

Coming Soon

Should you suggest self-insurance to your employer/union?

Absolutely. Many people believe that only large companies can self-fund their health plan. This is because large companies with lots of employees also have more people signed up for coverage... making contributions to the benefit plan and filling its trust account with funds. That means the pool of money the self-funded health plan can draw from to pay medical bills is bigger, and contains more funds. This, in turn, means it can better afford the occasional high-cost, expensive medical bill, better than a small plan, with a small account, and less money to draw from. The truth is, however, that even small or medium sized employers can self-fund their health plan. If the plan members are generally healthy, the cost of self-funding – even a small plan – will likely be less than the cost of buying health insurance. Each group of employees is different, and each will need to decide if self-funding health benefits is right for them. No employer should dismiss the option of self-funding, however, until they’ve researched all of the options available to them.

Remember that insurance companies are businesses, and the premiums they charge include a profit for them. A self-funded plan, however, is not built to create a profit; and is actually comprised of the employer and employees themselves – setting aside money to pay for only their own medical expenses, and not an insurance company’s profits.

Here are some of the reasons firms should consider self-funding:

Improved Cash Flow & Control

Unlike fully-funded insurance, which is paid for with premiums before medical bills are submitted, self-funded claims are only paid as they are incurred. That means the money used to pay for medical expenses is held until it is actually needed; and an insurance company isn’t making money off of the interest in the meantime.

Preemption of State Law & Taxes

Unlike fully-funded insurance, which needs to be changed on a state-by-state basis (to meet the requirements of each state’s unique laws), a private, self-funded plan is usually administered in accordance with federal law. As a result, the same plan can be offered to all employees, even if they live in different states. In addition, a self-funded plan is not subject to state health insurance premium taxes.

Flexibility

Unlike fully-funded insurance premiums (which are written by the insurance company), self-funded plans are written by the employer and employees. That means the plan is customized to cover the things its members care most about, and avoid the cost of covering things they don’t need.

Avoid Community Rating Mandates

PPACA or “ObamaCare” requires fully-funded insurance policies covering 50 or fewer employees to deal with community rating, which is expected to dramatically increase premium costs. Self-funded plans are not required by the law to deal with this added expense.

Access to Plan Data

Fully-funded insurance companies consider the claims data (the history of which claims were paid, by whom, how often, for how much, etc.) to be their private, proprietary property. That means they won’t share it with the employer or employees. A self-funded employer, however, can examine all of the data, and identify where the costs are. This in turn allows the plan to adjust its terms, and make sure it is covering the types of services people are actually using, pay for wellness programs meant to fix the actual problems, and revise itself to be as effective as possible for the specific self-funded plan member population.

Glossary of Terms

Summary Plan Description (SPD)

The written statement of a plan required by ERISA. It must be provided in an easy-to-read form, including a statement of eligibility, coverage, employee rights and appeal procedure.

Mandated Benefits

A specific coverage that an insurer or plan sponsor is required to offer by law. Mandated benefits in insurance contracts vary from state to state according to each state’s insurance laws.

Plan Year

The 12-month period in which deductible and co-insurance accumulates toward a plan participant's out of pocket maximums.

Reinsurance

Another term for stop-loss coverage.

ASO (Administrative Services Only)

An ASO plan is a contract with an insurer to provide a fully self-insured employer with certain administrative services only; no insurance protection is provided.

Benefit Booklet

A booklet for the employee that contains a general explanation of benefits and related provisions of the health plan.

Employee Retirement Income Security Act of 1974 (ERISA)

This federal legislation allows for and sets guidelines regarding a group’s ability to self-fund their benefits.

Fiduciary

Indicates the relationship of trust and confidence where one person (the fiduciary) holds or controls property for the benefit of another person. For example, the relationship between a trustee and the beneficiaries of the trust. Under ERISA any person who (a) exercises any discretionary authority or control over the management of a plan or the management or disposition of its assets, (b) renders investment advice for a fee with respect to the funds or property of a plan, or has the authority or responsibility in the administration of a plan.
One who acts in a capacity of trust and who is therefore accountable for whatever actions may be construed by the courts as breaching that trust. Under ERISA, fiduciaries must discharge their duties solely in the interest of the participants and beneficiaries of an employee benefit plan. In addition a fiduciary must act exclusively for the purpose of providing benefits to participants and beneficiaries in defraying reasonable expenses of the plan.

Plan Document

Explains the provisions of a plan, usually including the benefits provided by the plan and the rights of those who are covered under the plan.

Plan Participant

An employee or dependent covered by the health plan.

Plan Sponsor

The employer, in the case of an employee benefit plan maintained by a single employer.
The employee organization, in the case of a plan maintained by an employee organization.
The association, committee, joint board of trustees or other similar group of representatives of the parties involved, in the case of a plan maintained by one or more employers, and one or more employee organizations.

Third Party Administrator (TPA)

The party to an employee benefit plan that may collect premiums, pay claims and/or provides administrative services. Usually an out-of-house professional firm providing administrative services for employee benefit plans.

PPO or Managed Care Network

A network of hospitals and providers that have agreed to provide services at a reduced rate.
HMOs were an early form, regional or national PPOs and carrier networks (i.e. Blue Cross, Cigna, Aetna or United) are common today.

Medical Management

In its simplest form it is claims management and other services that work to manage plan assets. Medical management often goes on silently during routine claims, but can be seen in larger claims requiring more case management and/or clinical interventions.
Medical management can reduce medical costs by emphasizing prevention and maintenance of chronic diagnoses such as Health Risk Assessments, Prevention and Wellness Programs specifically tailored to employee demographics and needs.

Aggregate Stop-Loss

Aggregate stop-loss insurance limits the overall annual claims liability by reimbursing the company when the claims paid for the self-funded plan, as a whole, exceed a certain preset level.

Attachment Point

For aggregate stop-loss insurance it is the point at which the stop-loss insurance carrier reimburses the employer based upon the cumulative total of claims paid within a contract period.

Contract Period

The time covered under a contract designating when a claim is incurred and when the claim must be paid to qualify for reimbursement.

Run-In

Claims incurred prior to a plan year but reported after the end date of the plan year. These claims can be paid under the "current year" contract that includes the run-in period and the current plan year claims.

Run-Out

Claims incurred during a plan year but reported after the end date of the plan year. These claims can be paid under the "prior year" contract.

Binder Premium

The first month's premium required to initiate coverage with stop loss.

Specific Stop-Loss

Individual or specific stop-loss insurance provides reimbursement in the event an individual plan participant has claims that exceed the specific deductible during a contract period.

Specific Deductible

The amount of claims for which the plan is responsible for any one individual in a contract period.

Expected Paid Claims

An estimate of the dollar value of claims to be paid during a plan year or contract period.

Exposure

The state of being exposed to the chance of loss (risk). The extent of exposure as measured by participation, proportion of female or male lives in a group, amounts or units of insurance at risk, etc.

IBNR

Incurred but not reported. Claims that have been incurred but have not been reported to the administrator as of some specific date.

Incurred Claims

Those claims (paid or unpaid) for which a liability (the insurer’s) has arisen under provisions of an insurance contract.

Lag

The usual delay between the actual occurrence of a claim and its payment. Made up of both incurred but unreported claims, as well as reported but not yet paid claims. A function of benefit design, geographic location and administrative efficiency as well as human procrastination.

Paid Claims

The dollar value of all claims paid, i.e., hospital, medical, surgical, etc., during the plan year, regardless of the date that the services were performed.

Policyholder

The employer

Specific Stop-Loss

The form of excess risk coverage that provides protection for the employer against a high claim on any one individual. This is protection against abnormal severity of a single claim rather than abnormal frequency of claims in total. Specific stop-loss is also known as individual stop-loss.

Stop-Loss Carrier

The insurance company that provides specific and aggregate protection for the plan sponsor. This carrier can be changed without disrupting the health plan.

Claim Cost Negotiation

Negotiation with a provider (hospital/doctor) either for a pre-determined rate (prospective negotiation) or a reduction in charges incurred (retrospective negotiation).

Disclosure Statement

Form used to notify stop-loss carrier of all large and/or ongoing claims prior to the binding of coverage for all new and renewal stop-loss business groups.

Reimbursement

From a stop-loss perspective, compensation to the group for all eligible claims in excess of the specific or aggregate deductible.

Self-Funding

The method of providing employee benefits in which the group does not purchase conventional health insurance but rather elects to pay claims directly (generally through the services of a TPA) and purchase stop-loss insurance to cover abnormal risks and claim fluctuations.

Shock Loss

A large loss that significantly affects the experience of a group. Generally claims on a single claimant during a single contract period totaling more than 50% of the specific stop-loss deductible.