Self-Funding Group Health Insurance

Self-funding is the most common form of health insurance financing and one of the most complicated.  

If you are exploring if a self-funded health plan is a good fit for your company, there is a great deal of information to consider. Below is a starting point of information.

If your plan is currently self-insured and you want to take that plan to market contact us about our consulting services.

Self- Funded Plans:

The employer does not pay premiums in advanced, but it pays administrative fees and stop loss insurance premium also know as fixed costs. When claims are incurred, then the employer is responsible for those costs also known as variable costs.  In the self-funded arrangement, the employer is assuming the risk.

In the past an employer an employer needs 200+ employees to be a good candidate for a self-funded plan.  Now companies with 100 or less employees are exploring self-funded options. The smaller companies would be wise to pay close attention to the stop loss insurance to offset risk.

When a self-funded plan performs well from a claim’s standpoint, that employer can experience a positive financial impact. When the plan performs poorly, the group will experience their cash reserves being depleted.

Stop-Loss Insurance:

One of the most important aspects of a self-funded plan is the stop-loss Insurance. Self-Funded plan will carry stop-loss insurance to limit the risk associated with medical claims on both Individual and on the entire group. The company will self-insure the medical claims up to the stop loss attachment point, which is the dollar amount where the stop-loss carrier will start to reimburse for claims.

Specific Stop-Loss Insurance:

This protect the employer against large claims on any individual covered under the plan. This limit the amount the employer would pay on any one member.  An example would a specific stop loss attachment point of $30,000, the employer would be responsible for the first $30,000 in medical claims on any individual covered by the plan.  Once that member incurred $30,000 in claims the stop loss insurance would all the claims after that.

Aggregate Stop-Loss Insurance:

Protects the employer against the total claims incurred from all the members of the health plan. If a company took out $500,000 in aggregate stop loss insurance, the employer would be responsible for the $500,000 but any medical claims after that would be the responsibility of the reinsurance.

Self- Funding Claims Administration:

When it comes to administering claims for a self-funded health plan there are really two options.  The first one would go through a third-party administrators (TPA). Independent TPAs that specializing in administering self-funded health plan typically have a streamlined process and procedures.  They typically can provide different networks, different pharmacy benefit managers, different plans design which allows this option to be more flexible.

The second option is called an Administration Services Only (ASO) where name brand health Insurance companies offer to administer self-funded health insurance plan.  An ASO may only offer options through their services partners. (PBM, Network, Stop Loss) From a member’s standpoint the plan looks like a traditional health plan.

If you are the owner or controller of a company that is looking at the option of self-funding a group health plan we should first start with terminology. It essential to understand these terms to understand the self-funded concept.

Self-Funded Terms:

Plan Sponsor: This is the employer that establishes a self-funded plan.

Stop-Loss Coverage: protects the employer against excess losses from each member or all the members.

Stop-Loss Carriers:  Allow a plan to set in advance the maximum loss levels the company is willing to sustain.

Specifically (Spec) Stop-Loss:  Set the specific loss on each member.

How does it work?  Stop Loss insurance would have a third party pay for claims that exceed level.  If the group had $50,000 specific and a member had incurred claims over $50,000 the reinsurance would step and pay.

Aggregate (Agg) Stop-Loss: Sets the aggregate loss on all the members.

Purpose? Limits the company’s (Plan sponsor) total liability of medical claims during a contract period.

Incurred claims: When medical services were received by the member.

Paid Date:  The date in which payment is sent to the medical provider for medical services received.

Contract Claims: Example 12/15 Contract means claims incurred during the plan year will be covered for an additional three months after the plan year.

Minimum Attachment Point: Required minimum amount of exposures for the plan and premium to be paid during the plan year.

Actual Attachment Point: The maximum exposures to the company.

Expected Claims: The amount that the underwriter actuarially projects the employee would spend in claims under normal situations.

Aggregate Maximum: Maximum dollar amount a plan sponsor (employer) liability for claims during the plan contract.    Typically, 125% of the expected claims.