Small Business Medical Self-Funding Is On The Rise

If you haven’t noticed, self-funding is popping up a lot now in the small business marketplace. A few years ago, self funding a group under 50 employees would have seemed very imprudent to say the least. Groups in this size segment don’t have the resources to withstand swings in health costs, nor the cash-flow or reserves to deal with the month to month volatility in reimbursements. Stop loss coverage varied from carrier to carrier, and many groups that had self-funded in the past were burnt by poorly designed, communicated, or implemented stop-loss strategies. Moving back to fully-insured, many vowed never to make those mistakes again.

Yet here we are in 2016, with a renewed emphasis on self-funding health insurance in the post-ACA world. While many large groups, are looking to self-fund in order to lower overall expenses, avoid premium taxes and the health insurer fee, in the smaller group space, products are being introduced in order to get out from under the pricing and benefit burden of the ACA compliant small group products.

The product we see the most in this space is the “fully funded” self insured plan. Basically the way a fully funded plan works is a group finds an administrator (or carrier) to administer the plan, provide a network, RX plan, etc., and then they buy stop-loss insurance, usually written on a 12/24 basis to catch all the run-out. You might see the aggregate stop loss level purchased at 110% of expected claims.

The stop-loss carrier provides protection that claims for the group will not exceed 110% of expected, and when you purchase this coverage, they put a number on that 110% usually expressed as a dollar figure per insured employee. If claims are expected to be $300 per month per employee, then if claims go over the stop loss level 110% or $330, they are on the hook for any other claims.

This strategy can be done with some TPA’s and stop-loss carriers, or some carriers like UnitedHealthcare have turnkey versions of this approach, where they provide the administration and the stop-loss coverage.

Rather than wait for claims to come in though, in a fully funded plan, the administrator/carrier collects the monthly premium for the Administration fees, the Stop-loss insurance, etc. They also collect enough money to “fully fund” claims for a month at the maximum employer liability under the stop loss contract.

In the example above, if I had 30 employees, I would pay Administration + Stop Loss Insurance + $9900 ($330 per employee x 30). The $9900 is the most the employer would have to pay before the stop loss carrier steps in. The monthly payments are set and predictable, and since the employer is “fully funding” the variable part of the equation (claims), there is not risk or volatility in the monthly payments. However, this is still a self-funded plan, and at the end of the year, if claims came in less than expected, (or less than 110% of expected) the group would receive a refund. The above group paid $9900 a month, or $118,800 annually to fully fund their claim liability, if the administrator/carrier paid out less than $118,800 the employer would receive the difference, although not all contracts are dollar-for-dollar. You will also find policies where terminal protection is included so that if the policy terminates the employer doesn’t have to fund run-out claims.

The downsides to this are that self-funded plans are required to report under Section 6055 and send the 1095B to employees and the IRS. Less than 50 employers would otherwise have no reporting duties under Section 6055–6056, so this puts an additional burden on the employer — although there are reporting solutions out there to help.

The upside is that they can continue to offer plans of benefits that are priced on a composite basis and avoid a lot of the taxes and surcharges that come with a fully insured plan. While they can have a good year and reap the rewards, I think that its a tall order to think that a small group has the spread of risk necessary to see a lot of benefit from taking on the risk in the long term. The benefits of this strategy are probably going to need to be realized with an assumption that the employer will not be receiving a refund. In other words, employers should consider this strategy, only if they are comfortable with the fully-funded total cost.

About 10 years or so ago, Consumer Directed Plans became very popular, and many employers changed to a high deductible plan, and then provided HRA’s or HSA’s to help fund the deductible, (many times funding it in full). Employers made the change because it was less expensive in many cases to fund the change in deductible with the savings, than pay for a low deducible plan.

The new breed of fully-funded self insured plans has strong parallels to that period of HRA growth. Back then we had to educate employees on why the change was not harmful to them and how they might benefit under the HRA/HSA arrangement. The difference now, is that it is the small business owner who need convinced that these plans might be appropriate.

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