Over the past 20 years, there have been many changes in the group medical environment. Historically, only large companies could self-fund their medical plans due to the risk involved with catastrophic claims. However, reinsurance carriers have recently become creative in designing products to remove risk from the employer, the plan and the participants. These stop-loss products allow plans to be designed so that small and medium employers can also take advantage of good experience and limit exposure on high utilization or catastrophic claims.
As the cost of medical plans have continued to rise in recent years, employers and employees have become frustrated with spiraling costs, reduced benefits, increased deductibles and out-of-pocket expenses, and the complexity of the overall system.
There are many misconceptions regarding self-funded medical plans. Most self-funded medical plans are not self-funded at all. Large plans are primarily self-funded due to the large budget for assuming large claims or high utilizations. But the vast majority are partially self-funded, meaning the plan takes the risk for claims up to a certain level and then the stop-loss reinsurance assumes the risk.
What are the advantages of partially self-funding your medical plan?
- Employer can customize the plan to meet the specific health care needs of participants.
- Employer maintains control over the health plan reserves allowing for maximization of interest income, ability to set funding level goals and protection of cash flow.
- Employer is not subject to conflicting state health insurance regulations, benefit mandates and state health insurance premium taxes.
- Employer is free to contract with providers or provider networks.
- Fixed costs are generally significantly less than that of a fully-insured plan.
- Employer has the ability to select from a number of Third Party Administrators (TPA) to administer the plan.
- If claims are controlled, the difference between the maximum claims liability and the actual claims paid is retained by the employer/employee health plan. The remaining balance can be used to offset future premium increases, medical inflation or improvement of benefits.
A partial self-funded medical plan is not right for every organization. Employers with 25 or fewer employees, employers that anticipate significant reductions in headcount or employers with current ongoing catastrophic claims may not be good candidates for partial self-funding. The only way to determine if the employer is a good risk for partially self-funding its plan is to solicit stop-loss and administration quotes from a reputable TPA and compare scenarios.
According to the Society of Professional Benefit Administrators, approximately 85 percent of employer health plans utilize some form of self-funding. As changes continue to occur in the group medical environment, it may be beneficial for small and medium employers to consider a self-funding plan that reaps the benefits of dedicated experience and limits exposure.
For Texas pubs — Gary D. Baker is president of ResourceOne Administrators, a privately owned and operated employee benefits firm headquartered in Dallas. For more information, visit www.roatpa.com.
For Oklahoma pubs — Gary D. Baker is president of ResourceOne Administrators, a privately owned and operated employee benefits firm with primary offices in Tulsa. For more information, visit www.roatpa.com.