Employers

The rising costs of employee health care make it difficult for employers to remain competitive. Self-insured health plans offer more control, cost transparency, and flexibility compared to fully-insured plans.

Employers can allocate funds to pay claims directly, often with a TPA and stop-loss insurance. This provides control over plan design, administration, and costs.

Access to claims data helps employers identify high-cost conditions, implement wellness programs, and improve participant health.

Overall, self-insured plans can deliver cost-effective, tailored benefits, but require informed management and participant engagement.

Employers who can project future claims with some degree of accuracy, and have the ability and willingness to assume some risk, stable and sufficient cash flow, access to reliable service providers such as third party administrators (TPA) and can interpret and manage reports. Private and public employers and labor unions– more limited ability for small employers, but now viable for many companies in the small group market.

82.1% of employers with 500 or more employees self-insure their health benefits; 25.7% of firms with 100 to 499 employees; and 13.5% of those with less than 100 employees self-fund (US Department of Health & Human Services study as quoted in Business Insurance Magazine, 10/30/11). Enrollment in self-funded plans now constitutes more than 54% of the total commercial (non-governmental) market, compared to 48.5% in 2009 (HealthLeaders-InterStudy, Summer 2011).

The number of covered lives in self-funded plans (managed care organizations and TPAs combined) was 90.3 million in 2011 (HealthLeaders-InterStudy, Summer 2011).

Self-Funding By Industry Type

Transportation/Communications/Utilities – 80%

Manufacturing – 68%

State/Local Government – 67%

Finance – 64%

Retail – 63%

Healthcare – 60%

Wholesale – 51%

Agriculture/Mining/Construction – 43%

(Source: Kaiser/HRET Survey of Employer-Sponsored Benefits 2011)

Companies considering self-funding should conduct a feasibility study. This study should include a risk analysis and a cash flow analysis to determine if the level of risk associated with self-funding is acceptable and if the company has monetary resources to set aside to compensate for potential future losses and management resources to implement a self-funded plan.

The analysis should consider the following factors:

Historical Medical Claims Costs

3 to 5 years of past utilization rate, if available. This information may not be available, especially for smaller employers. When historical utilization is unavailable, employers can use health risk assessments and biometric screening to assist in gauging their likely health risks.

Workplace Demographics

Age, gender, and other demographic factors such as smoking and obesity should be considered. Older employees are more likely to have costlier conditions such as heart disease and cancer. Disproportionately overweight people are more likely to become diabetic and have other serious health issues.

Funding Considerations / Cash Flow

Adequate reserves must be available to handle the expected claims payment load as well as monthly payment requirements, which are unpredictable and can vary widely month to month. Additionally, financial resources should be available to take advantage of discounts that can be negotiated with providers for timely payment.

Employee Value / Cost Control

• The plan must be of real and perceived value to the employee while simultaneously controlling employer costs.
• Administrative Costs – There will be up-front costs for consultants, legal and accounting advice, and for plan development. Ongoing administrative costs apply whether the employer self-administers or contracts with a TPA or ASO.

Administrative Time Requirements

The employer will have to allocate management time to oversee the administration of the plan, even if they employ a TPA or ASO.

Medical Management Services Costs

These include costs for utilization review, case management, disease management, wellness programs, etc., which can theoretically reduce claims expenditures over time.

Stop-Loss Insurance Options

The cost of specific and aggregate coverage to limit employer liability will depend on the number of employees, demographics, and claims history.

Plan Benefit Coverage Options

Costs vary depending on what the plan covers and how much of the burden will be placed on employees through co-payments and deductibles. A plan must be created to project costs and cash flow requirements.

Potential Claims-Related Cost Savings

Unspent claims funding is retained by the self-funding employer. For fully insured plans, those funds remain with the insurance company.

Greater Control of Plan Design

Self-funded employers can customize plans to meet the specific needs of their employees. Employers decide what benefits to offer (consistent with federal law), employee financial responsibilities, and the amount of risk assumed. ERISA-governed plans are not subject to state benefit mandates.

Ability to Manage Risk

Employers can control expenses through their claim payment and claim negotiation policies.

Risk Transfer

Employers can limit risk through stop-loss insurance, captive formation, or other risk management strategies.

Maintenance of Reserves / Improved Cash Flow

Self-funding employers no longer pre-pay insurers. Reserved funds can be used to generate additional income while covering claims.

Lower Plan Administration Cost

Typically, 15–20% of premium payments to insurers go for administration and profits. TPAs and large insurer ASO fees are lower.

Reduced Premium Taxes

State premium taxes (1.5–3.5%) generally apply only to excess-loss coverage premiums in self-funded plans, reducing total taxes.

Elimination of State-Mandated Benefits

Self-funded plans governed by ERISA are not required to offer state-mandated benefits, potentially lowering costs.

Ability to Contract with Providers and Networks

Employers can contract with providers and networks that best suit their employees’ needs instead of using insurer-assigned networks.

Access to Claims Data

Monthly reports detailing medical and pharmacy claims are provided, allowing better decision-making and planning.

Ability to Manage “Cost Drivers”

High-cost, high-risk chronic condition enrollees (“cost drivers”) can be identified and managed to reduce long-term claims.

Ability to Make Plan Changes / Flexibility

Employers can adjust benefits whenever necessary, adding essential coverage, eliminating non-essential services, or adjusting provider access.

Cost Stability

Year-to-year, employers are no longer affected by rising insurer rates, providing more predictable costs.

Financial Risk Assumption

Self-funding employers are responsible for the payment of claims for services covered in their plans. Employers purchasing stop-loss insurance are responsible for payment of these obligations up to the point when the specific or aggregate stop-loss coverage goes into effect.

Increased Management Involvement in Plan Design

Along with greater control of plan design comes the need for greater management involvement in plan design and modification.

Increased Administrative Responsibility / Legal Liability

A self-funded plan must be administered internally by the employer or by a TPA or ASO. Even employers retaining a TPA or ASO must provide oversight. The Department of Labor (DOL) interprets failure to implement an efficient administrative system as a breach of fiduciary duty.

Unpredictable Cash Flow

Claims and claim-dollar obligations may vary widely month to month. While funding based on historical claims experience and actuarial projections can increase predictability, monthly obligations may exceed predictions. ERISA requires all clean claims to be paid within 30 days of receipt.

Asset Exposure

Self-funding employers could bear any liability resulting from legal actions against the plan.

Potential for an Adverse Experience

Poor claims experience leads to increases in the cost of specific and aggregate stop-loss coverage. This can eventually make self-funding uneconomic for the employer.

Requires a Long-Term Commitment

Given up-front and ongoing costs, it may take 3–5 years for the employer to fully reap the benefits of self-funding.

PPO Discounts May Be Lower

Because the number of covered lives for the self-funding employer is far fewer than for an insurance company, less of a discount may be offered by a preferred provider organization (PPO).

Regulatory Structure Overview

Offering a self-funded group health plan to your employees can be highly rewarding, and the regulatory structure is not as complex as it might seem. Self-funded plans allow employers to design benefit programs that meet the specific needs of their organization.

Federal vs. State Regulation

While health insurance is usually regulated by the states, self-funded group health plans fall primarily under federal jurisdiction through the Employee Retirement Income Security Act (ERISA). ERISA preempts conflicting state laws, allowing employers to design benefit programs without regard to state insurance regulations or mandated benefits. This preemption is grounded in the Supremacy Clause of the U.S. Constitution.

ERISA Preemption Details

Section 514 of ERISA states that federal law supersedes state laws related to employee benefit plans. “State laws” include all state statutes, rules, and regulations affecting employee benefit plans. ERISA also includes a “savings clause” (ERISA § 514(b)(2)(A)) which allows state regulation of insurance, banking, or securities laws, but the “deemer clause” (ERISA § 514(b)(2)(B)) prevents self-funded plans from being treated as insurance companies for the purpose of state regulation.

Purpose of ERISA

Enacted in 1974, ERISA was designed to protect participants and beneficiaries in employee benefit plans. Over the years, it has been amended by legislation including COBRA, HIPAA, WHCRA, GINA, and the Patient Protection and Affordable Care Act (PPACA).

Enforcement and Administration

ERISA is enforced by the U.S. Department of Labor (DOL), which sets minimum standards for the administration of most self-funded group health plans. The Employee Benefits Security Administration (EBSA), part of the DOL, oversees fiduciary, reporting, and disclosure requirements. Administration is also shared with the IRS and the Pension Benefit Guaranty Corporation (PBGC).

Plans Not Covered by ERISA

Some plans are exempt from ERISA, including those established by governmental entities, churches, plans sold directly to individuals, or plans maintained solely to comply with workers’ compensation, unemployment, or disability laws. Plans maintained outside the U.S. primarily for non-resident aliens or unfunded excess benefit plans are also not covered.

What is a Plan Fiduciary?

A plan fiduciary is a crucial role in plan administration, responsible for making informed decisions for the benefit of plan members and the preservation of plan assets. Failure to fulfill fiduciary duties can result in personal liability or reversal of claims determinations.

ERISA Definition

According to the U.S. Department of Labor, ERISA protects plan assets by requiring that individuals or entities who exercise discretionary control over plan management, assets, or provide investment advice for compensation are subject to fiduciary responsibilities. Examples include plan trustees, administrators, and members of an investment committee.

Key Fiduciary Responsibilities

• Act solely in the interest of plan participants and beneficiaries.
• Carry out duties prudently.
• Follow the plan documents, unless inconsistent with ERISA.
• Hold plan assets in trust (if applicable).
• Pay only reasonable plan expenses.

Prudent Decision-Making

Fiduciaries must act prudently, meaning decisions must be well-informed and documented. For example, when hiring a service provider, fiduciaries should survey multiple providers, request the same information, and document the comparison process to ensure prudent selection.

Following the Plan Document

The plan document serves as the foundation for plan operations. Fiduciaries should regularly review it to ensure accuracy, including updates for changes such as a new plan official.

Avoiding Conflicts of Interest

Fiduciaries must avoid transactions that benefit related parties, such as other fiduciaries, service providers, or the plan sponsor. Decisions should prioritize the plan’s and participants’ best interests, with clear documentation of the decision-making process.

Who is a Fiduciary?

Fiduciary status depends on the functions performed, not titles. Anyone exercising discretion or control over plan management or assets becomes a fiduciary, even unintentionally, by making decisions typically reserved for fiduciaries.

Non-Fiduciary Employer Decisions

Business decisions such as establishing, amending, or terminating a plan are employer actions and not fiduciary acts. However, steps taken to implement these decisions on behalf of the plan may involve fiduciary responsibilities.

Key Business Partners for Self-Funded Employer Groups

Employee benefits brokers or consultants with expertise in insurance and benefits are critical to a self-funded plan’s success. Choosing the right broker is essential to achieving your organization’s goals.

Selecting the Right Broker

• Decide on characteristics: large national firm for broad focus or small boutique firm for deep expertise.
• Understand the types of brokers and the services they offer.
• Brokers are often paid by commissions; consider negotiating a flat-fee arrangement.
• A well-selected broker is a significant asset when properly managed.

Role of the Broker

• Chief advisor and coordinator of the self-funded plan
• Contracting and vendor evaluation
• Service-level monitoring and compliance
• Plan design and regulatory updates
• Enrollment support and employee advising
• Stop-loss insurance placement (direct or through TPA)
• Vendor intermediary for PBM, UM/CM/DM, wellness programs, PPO networks

Third-Party Administrator (TPA)

A TPA is an organization that handles claims processing or other aspects of employee benefit plans on behalf of the employer. This “outsourcing” allows employers to act as the insurer, while the TPA performs the administrative tasks. The employer retains the risk of loss, not the TPA.

Administrative Services Only (ASO) Contracts

Insurance companies provide similar services through ASO arrangements, where they perform administrative tasks but do not assume risk for claims payment.

TPA or ASO Services

• Utilization review
• Disease management
• Claims review and pricing
• Transplant network management
• Pharmacy Benefit Manager (PBM) coordination
• Wellness program support
• Specialty care management (e.g., dialysis)
• Preferred provider networks, including centers of excellence
• Administrative support (billing, enrollment, stop-loss claim submission)
• Advanced reporting capabilities

Other Employee Benefit Administration

TPAs often handle retirement plans, flexible spending accounts, and other complex benefits, providing cost-effective administration compared to in-house processing.

Pharmacy Benefit Manager (PBM)

A PBM administers prescription drug programs, processes claims, develops formularies, contracts with pharmacies, and negotiates discounts and rebates with manufacturers.

Preferred Provider Organization (PPO)

A PPO is an entity providing health services through independent providers on a discounted fee-for-service basis, typically in exchange for faster claims processing and higher patient volume.

Stop-Loss Provider and Insurance

A stop-loss provider is an insurance company or reinsurer offering protection against catastrophic claims. Stop-loss insurance limits employer liability for self-funded plans, covering losses above specified deductibles.

Summary Plan Description (SPD): The written statement of a plan required by ERISA. It must be easy-to-read and include eligibility, coverage, employee rights, and appeal procedures.

Mandated Benefits: Coverage that an insurer or plan sponsor is legally required to offer. State laws determine which benefits are mandated.

Plan Year: The 12-month period in which deductible and co-insurance accumulate toward a participant’s out-of-pocket maximums.

Reinsurance: Another term for stop-loss coverage.

ASO (Administrative Services Only): A contract with an insurer to provide administrative services only; no insurance protection is provided.

Benefit Booklet: A booklet explaining plan benefits and related provisions for employees.

Employee Retirement Income Security Act of 1974 (ERISA): Federal law establishing rules for self-funded group health plans and protecting participants’ interests.

Fiduciary: A person who holds or controls property for the benefit of another. Under ERISA, fiduciaries must act solely in the interest of participants and beneficiaries, discharge duties prudently, and follow the plan document.

Plan Document: Explains the provisions of a plan, including benefits and participant rights.

Plan Participant: An employee or dependent covered by the health plan.

Plan Sponsor: The employer, employee organization, or association responsible for maintaining the plan.

Third Party Administrator (TPA): A firm that collects premiums, pays claims, and provides administrative services for the plan.

PPO or Managed Care Network: A network of hospitals and providers offering services at reduced rates. Includes regional/national PPOs and carrier networks like Blue Cross, Cigna, or United.

Medical Management: Services to manage plan assets, including routine claims, case management, and clinical interventions. Can reduce costs by focusing on prevention and wellness programs.

Aggregate Stop-Loss: Insurance limiting overall annual claims liability, reimbursing the employer when total claims exceed a preset level.

Attachment Point: The threshold at which aggregate stop-loss reimburses the employer based on cumulative claims.

Contract Period: The time frame in which a claim is incurred and must be paid to qualify for stop-loss reimbursement.

Run-In: Claims incurred before a plan year but reported after the end date. Paid under the current-year contract including the run-in period.

Run-Out: Claims incurred during a plan year but reported after the end date. Paid under the prior-year contract.

Binder Premium: The first month’s premium required to initiate stop-loss coverage.

Specific Stop-Loss: Reimbursement for claims exceeding the individual deductible during a contract period.

Specific Deductible: The amount of claims the plan is responsible for per individual in a contract period.

Expected Paid Claims: Estimated dollar value of claims to be paid during a plan year or contract period.

Exposure: The extent of risk, measured by participation, demographics, or amounts at risk.

IBNR: Incurred but not reported claims.

Incurred Claims: Claims for which a liability has arisen under the insurance contract.

Lag: Delay between occurrence of a claim and its payment, including IBNR and reported but unpaid claims.

Paid Claims: Total dollar value of claims paid during the plan year.

Policyholder: The employer.

Stop-Loss Carrier: Insurance company providing specific and aggregate stop-loss coverage for the plan sponsor.

Claim Cost Negotiation: Negotiation with providers for predetermined rates or reductions in charges.

Disclosure Statement: Form notifying stop-loss carriers of large or ongoing claims prior to binding coverage.

Reimbursement: Compensation to the employer for claims exceeding specific or aggregate deductibles.

Self-Funding: Paying claims directly instead of purchasing conventional insurance, typically using a TPA and stop-loss coverage.

Shock Loss: A large loss significantly impacting a group, usually claims exceeding 50% of the specific stop-loss deductible.

If, after reviewing the information on this website, you believe self-insurance may be a good option for your organization, it is recommended that you contact a third-party administrator (TPA) and/or consultant to begin the evaluation process.

A directory of TPAs and other self-insurance industry service providers can be accessed here.

As with any new business relationship, it is advisable to speak with multiple companies to determine which provider is the best fit for your organization.