What are the different benefit funding strategies available to companies?

Fully Insured – this is the traditional insurance model where a company pays a premium to an insurance carrier (like Cigna, United, Aetna, Humana, etc.). The company has no control over costs, which can fluctuate based on the health of the employees. This is similar to property and casualty insurance – you have a policy and a set price, but no control over costs. The carrier then assumes the risk and responsibility of providing health coverage for the company’s employees. This is the most common type of health insurance for small businesses under 100 employees. 

Partially Self-Funded – in this model, companies assume some of the risk of providing health coverage for their employees. They pay for claims out-of-pocket up to a certain amount, with stop-loss insurance covering any claims that exceed this amount. This model also includes administrative services. The options include:

• Level Funded – this is a type of self-funded insurance that is accessible to smaller companies, sometimes even those with as few as two employees. However, it’s generally not recommended for companies with fewer than 25 employees. Companies pay a set amount each month to a carrier that includes the cost of administrative services and stop-loss insurance, which protects against high claims. This amount is used to cover expected claims based on the health of the employees and to purchase stop-loss insurance. If the actual claims are lower than expected, the company may receive a refund. Carriers like Cigna, United, Aetna, and Humana offer level-funded programs.
• Administrative Services Only (ASO) – in this model, a third-party administrator (TPA) manages the plan, including adjudicating claims. Companies can purchase stop-loss insurance through independent partners and can also get their Pharmacy Benefit Manager (PBM). This is often referred to as a “design-build self-insurance” model.

Self-Funded Insurance – this is typically an option for larger companies, as it involves the company directly paying for the healthcare claims of its employees. The company also purchases stop-loss insurance to cover unexpected high-cost claims. This model gives the company more control over healthcare costs. If the company has a good claims year, it can save money. If it has a bad claims year, the stop-loss insurance will kick in to cover the high costs. The options include: 

• Design-Build Self-Insurance – this is an unbundled model where companies work with independent TPAs, PBMs, and stop-loss providers. The company represents its own risk pool, meaning the risk is spread across its own employees only.
• Group Captive – this model is similar to the design-build self-insurance model, but the risk is spread across a larger group of employees from multiple companies. This allows companies to benefit from the risk-spreading advantages of larger numbers.

Note: the availability of these options can vary by state – for example, in New York, companies with fewer than 100 employees cannot opt for self-funded insurance.

Selecting Self-Funded Insurance

What kind of companies does self-funded insurance work well for? 

Companies with 500+ employees most often choose design-build with self-insure – companies with 500 or more employees on the plan may not see as many benefits from a group captive as smaller companies. Typically, larger companies (500+ employees) are standalone, self-insured entities. Companies with fewer than 500 employees on the plan could benefit from being in a captive. This is considered the break point in today’s market.

Companies switch to self-funded because CAGR of costs can be prohibitively expensive in fully insured companies – for instance, if you start with $1M in costs and get a 10% renewal, you’re now paying 1.1 million. If you get a 10% renewal on that 1.1 million the following year, the costs compound annually. 

Self-funding works best for companies with a risk appetite and healthy populations – If your company is not risk-averse and has a generally healthy population, self-funding could be a good fit. This is especially true if your company is willing to educate employees on how to be good consumers to help the self-funded plan. Certain populations with severe health conditions may not be the best fit for self-funding. These are typically conditions that result in ongoing high-cost claims, such as blood cancer or hemophilia. 

Self-funding may not be suitable for companies with known high-cost claims – because stop-loss insurance, which is often used in conjunction with self-funding, is in the business of insuring unknown risk, not known claims. Fully insured or level-funded carrier products may be a better fit for companies with high-cost known claims. These options can help offset some of your costs.

Some larger companies may choose to enter a “group captive” due to the peer-to-peer aspect – a group captive is a member-owned insurance company formed and controlled by multiple organizations. This allows CFOs and HR directors to reach out to their counterparts in other companies, either in their region or another, to learn about successful strategies or things that haven’t worked. For companies with 700+ employees, the conversation typically won’t revolve around the group captive aspect. This is due to credibility factors within your data that aid in predictive modeling. 

How much can you save? How does self-funded insurance set your benefits up to scale? 

Claims Costs Vary Widely – the cost of medical procedures can vary significantly from one facility to another. This creates potential for significant savings if employees choose facilities with lower costs.

Claim Cost Savings Example

Consider an employee who needs a knee replacement and the employer is responsible for paying up to $25,000 of the claim. If the employee chooses to have the procedure at Facility A, where it costs $50,000, the employer will pay the full $25,000 and the rest will be covered by stop-loss insurance. However, if the employee chooses Facility B, where the procedure costs $22,500, the employer saves $2,500 on the claim and also reduces the amount paid out by the stop-loss insurance. That savings can be passed on to employees.

Self-Funded Employers have to pay claims – in a fully insured scenario, the insurance carrier sets the rate based on expected claims costs. However, in a self-funded scenario, employers pay claims up to a certain amount for each employee. This is known as the specific deductible. 

By reducing claims spend, employers can also achieve long-term savings – this can help to mitigate the impact of renewal increases in the future and control the compound annual growth rate of insurance costs.

What (known) administrative costs and (variable) insurance costs do you take on when self-funding?

There are three main cost components to consider 

• Claims – these typically make up the majority of your spend, usually around 80%. These are variable costs that can fluctuate based on the health and wellness of your employees.
• Insurance – this includes your specific stop loss premium and your aggregate stop loss premium. These are the costs you pay for insurance coverage.
• Administrative Fees – these are the fees you pay for the third-party administrator, such as Cigna or United. These fees can also include additional costs depending on the selected vendors, such as integration fees for TPA to PBM, TPA to stop loss carrier, and additional admin fees for third-party coordination vendors. 

In the self-funded arena, these costs are more transparent – you have a clearer view of where your money is going. This transparency allows for better management and understanding of your costs.

Fully insured and level-funded plans are more of a “set it and forget it” approach – while the self-insured plan offers more flexibility and control over the various components. The key parties involved in the self-insurance design and build process are the TPA, PBM, stop loss insurance providers, and point solutions.

What are the primary differences for your employees if you choose to offer self-funded benefits? What are the pros and cons?

Self funding has no direct impact on employees – whether a company opts for fully insured or self funded benefits, it doesn’t directly affect the employees. This decision is primarily a financial one made by the company. From an employee’s perspective, the main things they see are the logos, benefit design, and the amount deducted from their paycheck. Most employees are not aware of whether their benefits are fully insured or self-funded.

It can create increased attention to employee education – it’s beneficial to educate employees about the reasons behind the decision to switch to self-funding. Explain the concept of claims and why self-funding is important for the company’s financial health. Companies can use this opportunity to incentivize employees to be good consumers of their benefits. 

Setting up Self-Funded Insurance

What are the steps to transitioning from a fully insured to a self-funded benefits model? 

Ensure you understand the market before transitioning – many employers are unaware of the finance spectrum and the options available to them. If you’re considering self-funding, understand the market and the components of self-funding. A transition to self-funding requires careful planning and adherence to timelines.

Start with a transition to Level-Funded programs – if you’re fully insured, the best initial step is to transition to a level-funded program. These programs dispel the myth that self-funding has no cap on claims and can potentially bankrupt a company. In reality, aggregate stop-loss insurance sets a maximum limit on what you will pay. If your claims come in below that, you get a surplus refund. This is a low-risk way to transition to a self-funded product and start understanding its components.

Establish data ownership and control practices – in a fully insured setup, the carrier controls the data and contracts. You only get information based on company size, policy, and other factors. You don’t own your data or contracts. In self-funded models, you have more control over your contracts, rebates, and other components. 

Build a three-year strategy – Transitioning to self-funding is not an overnight process. It requires a three-year strategy:

• Year one: assessing options and educating employees 
• Year two: marketing your choice and executing your plan change 
• Year three: evaluating your choice and strategizing further tweaks

You can take a fluid approach to insurance programs –  companies can move in either direction along the spectrum. A company may move from being fully insured to self-funded through a captive, and vice versa. This flexibility allows companies to adapt their insurance programs to their specific needs and circumstances.

Who are your options for a third-party administrator? How should you select a third-party administrator?

Require TPAs to spell out their process in black and white: 

• Demand transparency – they should clearly outline their process. This includes how they adjudicate claims and the mechanisms they have in place to catch different error codes. 
• Test their problem-solving skills – present them with specific scenarios that you’ve encountered in the past and ask them to respond. Their answers will give you a glimpse into the performance you can expect from them.
• Evaluate network access – the network access a TPA provides is a critical factor to consider. It’s important to ensure that they can offer the access you need.
• Engage in a diligent selection process – undertake a meticulous selection process for TPAs, Pharmacy Benefit Managers (PBMs), stop-loss providers, and point solutions. 
• Leverage your broker – a broker’s role is to understand the market and educate clients. They can help broker point solutions, educate you on different TPAs, and get quotes from the market. A broker’s real value is their expert advice and ability to save you time, effort, and money.

What kind of benefits can you offer in a self-funded strategy? Are there any benefits that you can’t offer or are more difficult to offer with a self-funded model?

Self-funded benefits can be applied across various areas:

• Disability benefits – these can be self-funded, but it’s typically more suitable for larger groups due to the associated risks and costs.
• Dental benefits – these are a practical choice because it’s a capitated benefit with a set annual maximum—dental plans are essentially an exchange of dollars, making it a predictable cost.

Consider risk tolerance and group size – these are key factors in determining which benefits can be self-funded. Larger groups with higher risk tolerance can afford to self-fund more types of benefits.

If you use an 831(b) captive to self-fund, you can insure a variety of risks – 831(b) captives allow you to insure health, dental, vision, property and casualty, auto, umbrella, and more. Your options with a single-parent captive are more limited. 

Administration of Self-Funded Insurance

Who are the parties involved?

Third-Party Administrators (TPA – they provide plan design and build support, claims adjudication, and network access to major health insurance networks such as Cigna, Aetna, United ICT, and others. There are many vendors and options available for companies of all sizes and locations.

Pharmacy Benefit Managers (PBM) – they’re involved in fully insured, level funded, and self-insured plans. They are responsible for dispensing drugs. In the self-insurance realm, you have more control over the PBM, which can be either owned by the insurance companies or the PBMs themselves.

Stop Loss Insurance Providers – Stop loss insurance is a component of all insurance types. In fully insured and level funded plans, the carrier provides stop-loss insurance. However, in self-insured plans, you can use stop-loss reinsure carriers such as Sun Life and Berkley.

Point Solutions – these are additional components that can be added to the plan based on the client’s specific goals and what they are trying to accomplish—they are designed to optimize the cost-effectiveness and efficiency of benefits for both member and employer. They’re not as critical as other providers, but they can enhance the plan’s effectiveness. Examples include: 

• Bundled Payment Providers – certain providers offer services at no cost to the member, reducing the overall cost for the employer. 
• Cash Pay Solutions – providers are paid cash upfront for services at a specific amount that is less than the market rate. This ensures cost-effectiveness and transparency in transactions.
• Alternate Funding and Prescription Drugs – taking advantage of patient assistant copay systems and potentially purchasing drugs internationally. This can significantly reduce the cost of prescription drugs.
• Concierge Service and Navigation – these services help members navigate the complex world of benefits, ensuring they get the most out of their plans and enhancing member experience.

What does the employer need to handle in a self-funded model? What does the administrator handle? 

Third-Party Administrators handle:

• Member Service – this includes customer service and inquiries to the phone number on the ID card.
• Network Access – it’s possible to access networks like Cigna and Aetna without directly working with TPAs. However, accessing UHC’s network usually requires working with their independent TPA, UMR.
• Prescription Drug Coverage – this can be handled through TPA contracts.

Independent solutions can replace the services provided by TPAs – they offer the same benefits and coverage. These solutions can be integrated into the TPA and the solution, providing a comprehensive approach to managing administrative and variable insurance costs.

Your business is responsible for: 

• Vendor management – you have to curate and monitor the effectiveness of your vendor ecosystem and how it’s meeting your benefit goals.
• Data and analytics – get access to data and analytics from your Third Party Administrator (TPA) or use a third party like Springbuk, Deerwalk, or Self-Insured Reporting to monitor costs and claims and look for efficiencies. 

You can customize TPA services to your needs – TPAs offer a range of services that you can activate or deactivate based on your requirements. Each comes with associated costs. When you receive quotes from TPAs, they provide a detailed breakdown of each service and its cost, giving you the flexibility to choose what suits your business best.

What kind of monthly or quarterly reporting do you need to institute? 

Conduct paid claims analysis monthly – this includes both medical and pharmacy claims. It’s important to monitor these to understand your spending and identify any trends or issues. Look at medical claims, pharmacy claims, and pay particular attention to large claims—which can significantly impact your budget. 

Analyze clinical reports – these reports provide insights into utilization management, inpatient and outpatient visits, and other clinical data. They can help you identify opportunities for cost savings or improved care. By looking for J-codes you can identify opportunities to steer claims into the pharmacy benefit or administer care outside of a hospital setting. 

Make adjustments and implement solutions to address claims risk – once you’ve identified an opportunity, you can implement a solution to address it. For example, if a member is diagnosed with a high-cost condition like end-stage renal disease, you might implement a solution that reduces the cost of their care and provides them with additional support, such as a dedicated nurse.

How are claims audited and processed in a self-funded model? 

Even if you have an administrator, scrutinize claims –  have an employee (typically in HR or Finance) scrutinize claims at the end of each month—review data and identify potential issues or areas of improvement. If you identify a cost-saving measure you can implement in real-time, working with the member and their provider, ensuring compliance and plan document control measures are adhered to. TPAs provide the opportunity to audit but in fully insured or level funded AFL markets, you may forfeit some of these rights. 

Every self-funded employer is the named fiduciary – meaning they have a legal obligation to act in the best interests of their employees. This fiduciary responsibility requires attentive benefits management and should be taken into account when reviewing claims and implementing changes.

Understand the language in your contract with a TPA – the language in your contract can greatly impact your audit rights. Know the terms of your contract before signing to ensure you’re not inadvertently giving up important rights. 

How can you help employees navigate your benefits offering? 

Directing employees to lower-cost healthcare options entails:

• Education – educate employees about the healthcare options available to them. Most people are not aware that the pricing varies significantly for different providers and services. It should be ongoing throughout the year and well-coordinated on a long-term timeline.
• Change Management – guide employees through changes in their healthcare options and ensure they understand the benefits and potential drawbacks of each choice. 
• Concierge Services – services exist solely to navigate employees through solutions. These concierge services can guide employees to lower-cost healthcare options.
• Provide proactive options – get ahead of healthcare decisions and provide options to employees. By presenting employees with different scenarios and choices, they can make informed decisions about their healthcare that could potentially save them money. 

Employees can see their own benefits from responsible healthcare consumption: 

• Eliminate Cost Share – If an employee chooses a more cost-effective healthcare provider or service, employers can eliminate their share of the cost—they may not have to pay any deductibles, copay, or coinsurance. 
• Shared Savings – some employers go a step further and share a percentage of savings with the employees. This can be funded into a Health Savings Account (HSA) or given back to them in other ways. This creates alignment of incentives across the board.

What kind of education or practices can you implement to increase insurance uptake? 

Participation ensures cost savings – you want as many employees as possible to participate in your plan. This not only ensures wider coverage but also helps to balance the costs associated with the plan. 80 to 90% of your overall spend is going to be driven by 10 to 20% of your population. Therefore, you want to ensure that you have a good mix of employees on your plan, including those who are healthy and may not have major ongoing conditions.

Consider employee demographics in your benefits strategy and selection – when planning for a self-funded benefits plan, it’s important to consider the demographics of your workforce. This includes looking at how claims are running and the overall health of your employees.

Have a thoughtful funding strategy – a well-thought-out funding strategy that aligns with the company’s goals is crucial. How a company pays for benefits matters to employees and can impact their engagement with the plan. 

Offer and encourage preventative care – encouraging employees to take advantage of preventative care options can help to maintain the overall health of your workforce and potentially reduce the number of major claims.

When might you move away from self-funded benefits?

There are certain circumstances where it might be more beneficial for a company to revert back to a fully insured plan. 

• High-cost claims – if a company is faced with a high-cost claim that they cannot avoid, such as one that could cost a million dollars per year, it might be more beneficial to move back to a fully insured pool.
• Unknown ongoing costs – in the self-funded insurance realm, an insurer might put a laser on an individual with high-cost claims. This means that the company would be responsible for the first $500,000 in claims for that individual, knowing that they will likely spend a million dollars. 
• Premium increases – After a year of high-cost claims, the insurance carrier is likely to ask for a 100% premium increase. This can lead to compounded annual growth rates that are out of control and unsustainable for the company. 
• Unsustainable environment – if the company finds itself in a situation where it is constantly dealing with high-cost claims and premium increases, it might be more beneficial to move back to a fully insured plan. This can help the company avoid the financial strain and uncertainty of a self-funded plan. 

What are the most important things to get right?

Well-Planned Funding Strategy – your funding strategy must be carefully thought out. This involves understanding the risk profile and setting appropriate risk levels. 

Commit to employee education – being passive is no longer an option when it comes to self-funded benefits. You need to be proactive and committed to understanding the components of self-funded benefits. 

Work with knowledgeable consultants – work with consultants who can provide more than a 12-month outlook and educate you on all the components of self-funded benefits. You can only make sound decisions if you’re well-informed. 

Emphasize change management when transitioning between plans – any changes you make will be challenging if you try to implement them in a short period. Proactive planning is key to successfully managing self-funded benefits. 

What are common pitfalls?

Remember, healthcare is a significant expense for everyone –  as Warren Buffett once said, “Starbucks is in the business of healthcare,” as they spend more on healthcare than on beans. This is true for most businesses, making healthcare a top three or four expense. Therefore, understanding and managing self-funded benefits is crucial for every business.

Understanding and questioning contracts – it’s crucial to thoroughly read and understand contracts. This will enable you to ask pertinent questions to your vendors. Not all vendors can deliver on everything they claim, and no single vendor can cater to all needs.