As medical costs and insurance premiums continue to escalate, and health care reform poses new and additional cost pressures, employers are seeking innovative ways to reduce the costs associated with group insurance programs. The solution for many employers has been the implementation of some form of self-funding.
[IMPORTANT: A previous blog post listed the specific Affordable Care Act (ACA) provisions that DO NOT APPLY to self funded plans. Click here to access this blog – http://sstevenshealthcare.blogspot.com/2013/08/aca-compliance-understanding.html]
SELF-FUNDING ALLOWS THE EMPLOYER TO ASSUME ONLY AS MUCH RISK OR EXPOSURE AS THE COMPANY CAN WITHSTAND, WITHOUT CAUSING FINANCIAL DISTRESS.
SPECIFIC insurance protects the company from large individual catastrophic claims. The amount of the Specific Deductible depends on the size of the group, underwriting factors, financial strength of the employer, and the employer’s own risk management philosophy. The Specific Deductible is an annual deductible that applies per member, per policy year. Once the Specific Deductible limit is exceeded on an individual claim, the plan administrator, usually a Third Party Administrator (TPA) or an Administrative Services Only provider (ASO) requests reimbursement from the Stop Loss Carrier for the amount exceeding the Specific Deductible. The stop loss coverage can also be structured to provide immediate funding and payment of claims in excess of the specific deductible amount. This protects the self funded employer’s cash flow, and limits exposure.
Specific Stop Loss coverage can be purchased on any one of the following loss claim paid basis’:
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12/12 Contract
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12/15 Contract
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15/12 Contract
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This is generally the least costly, but most restrictive contract in the plan’s first year. To be eligible for specific reimbursement, a claim must be BOTH incurred AND paid during the 12-month policy period.
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This contract provides an extension for the amount of time required for claims to be submitted and processed, and is more costly than the 12/12 contract. To be eligible for Specific Reimbursement, a claim must be incurred during the 12-month policy year, AND paid within the policy period or the 3 months immediately following.
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This contract is usually purchased by groups that are currently self funded and would not have any protection for “run-out” claims for the prior plan year. To be eligible for Specific Reimbursement, a claim can be incurred up to 3 months prior to the Plan’s effective date AND paid during the 12-month policy period.
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AGGREGATE insurance limits the employer’s financial liability for the plan as a whole and protects against an overall increase in claim frequency or excessive plan utilization. Following the end of the plan year (or during the year at each plan month’s conclusion), the TPA or ASO provider would request reimbursement from the Aggregate Stop Loss carrier for the claims paid during the Plan year, which exceed a predetermined amount. Like the Specific stop loss coverage, the Aggregate stop loss coverage can be structured to limit an employer’s exposure to the year to date aggregate stop loss exposure. For example, if the aggregate was $1,000,000, an employer’s aggregate exposure would gradually increase each month of the year, but would be capped each month. (e.g., on a calendar year plan, on April 1st, the employer’s aggregate exposure could be capped at 3/12 (or 1/3) of the $1,000,000, or $300,000. Again, this coverage protects cash flow and limits exposure.
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12/12 Contract
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12/15 Contract
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15/12 Contract
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This is generally the least costly, but most restrictive contract in the plan’s first year. To be eligible for aggregate reimbursement, claims must not be eligible for Specific Reimbursement. Also, claims must be BOTH incurred AND paid during the 12-month policy period.
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To be eligible for Aggregate Reimbursement, claims must not be eligible for Specific Reimbursement. Claims can be paid during the 12-month policy period, or the 3 months immediately following, provided they were incurred after the policy effective date.
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Groups that are currently self-funded and would not have any protection for “run-out” claims for the prior plan year usually purchase this contract. To be eligible for Aggregate Reimbursement, claims must not be eligible for Specific Reimbursement. Claims can be incurred up to 3 months prior to the policy’s initial effective date AND paid during the 12 month policy period.
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Note: Variables of these contracts may also be available (e.g., 12/15,12/18,18/12, etc.)
A final thought relative to “how large a company must be” before they can consider partial self funding. The size of the group is not nearly as important as the following criteria, in deciding whether or not your organization is able to consider this funding strategy:
I recently assisted a client with 17 enrolled employees migrate from fully insured to partial self funding. The size of the organization matters less than the aforementioned three (3) criteria.
