Top tips for employers that offer self-funded health benefit programs
Health reform in the United States has led to a significant increase in the number of employers that offer self-funded health benefit programs. As self-insured plans are generally free from state-governed insurance requirements, employers are able to provide more flexible and tailored coverage, which could result in cost savings. However, self-funding also comes with an increase in financial risk for employers. Those who go down this route should purchase employer stop loss insurance to hedge against a single catastrophic claim or an aggregate loss above and beyond the expected cost of their plan demographic.
The impetus for many employers opting to self-fund their health benefit programs was the introduction of the Affordable Care Act (ACA), which came into effect on January 01, 2014. When the ACA first came out, there was some uncertainty about what it would do to the fully insured group benefits market, which is the alternative to self-funding. A lot of people were infused into the fully insured market and premiums increased quite dramatically. As such, many employers decided it was a better financial play to manage and fund their plans internally, to avoid the overhead costs of fully insured plans and the cost of pooling with others who are potentially higher risk.
Employers who self-insure are responsible for all medical costs. For example, one virus that knocks out 30% of the workforce for 10 days, or two employees battling cancer and requiring novel $1 million drugs at the same time could result in medical costs that quickly surpass any financial backups or dedicated medical funds that the employer has set aside. This is where stop loss insurance – either on a specific loss or an aggregate loss basis – could come into play as a strong risk management tool.
“Risk managers need to make sure they have a really strong advocate for them in terms of how they’re constructing their self-insured plan design, and they need to work with a solid plan administrator,” said Theresa Galizia, chief underwriting officer, Ironshore Medical Stop Loss. “There are two core routes that plan sponsors can go down. They can work with a large ASO (Administrative Services Only) partner - that may or may not bundle the stop loss into the larger administrative offering - and those organizations are great, but they do have a tendency to pay claims very quickly, and not share much of their data.
“The alternative is the third-party administrator (TPA) market. TPAs will also administer the self-funded plan on behalf of the employer, but oftentimes they’re keener to work closer with the medical stop loss insurance carrier, viewing that carrier more as a partner and not just as a financial backstop. At Ironshore, when we have a good relationship with a TPA, they might pre-warn us that they’re about to pay a large claim for an employer so that we can look at opportunities to possibly negotiate a better discount or provide some form of cost containment services. We like the relationships that are more like partnerships, where we’re helping employers manage their financial risks.