Self-Funded Health Benefits, Stop-Loss Insurance Gaining Attraction

One could certainly see the attractiveness of fully insured health benefits—employers know their set costs each month and can budget for them, and responsibility for administration and paying claims is handed over to insurance carriers.

However, increasing health care costs and requirements of the Patient Protection and Affordable Care Act (ACA) are leading more employers to consider self-funding their health benefits. “In many, if not most, cases, a properly organized self-insurance program with appropriate stop-loss coverage will be cheaper than a fully insured program,” says Joseph Berardo, CEO of MagnaCare, a New York and New Jersey heath care network, based in Tinton Falls, New Jersey. There are administration and other types of fees built into premium costs, he notes. (See “Self-Funding Health Benefits Another Cost-Saving Strategy.”)

Michael S. Tesoriero, vice president and benefits consultant at The Segal Company in New York City, adds that Segal finds that health care trends for medical and hospital are still in the high single digits, and prescription cost trends are from 13% to 15%. In addition, the ACA is requiring fully ensured plans to pay more taxes and subsidies. According to a Sibson Consulting Perspectives article, co-written by Tesoriero, the ACA’s new federal tax—the Health Insurance Industry Fee—has made it more attractive for organizations to self-insure or remain self-insured as the tax only applies to insured plans. The Health Insurance Industry Fee has increased rates for insured plans by approximately 2.5% to 3% (in addition to existing state premium taxes that can be as high as 2% to 3% of premium).

He adds that the ACA requires certain plan design features be included in fully insured plans which do not have to be included in self-insured plans. Berardo explains that self-insured plans still have to adhere to the minimum essential value and affordability requirements of the ACA, but sponsors of self-insured plans are free to not cover certain things, such as infertility treatments, if they don’t want to.

According to Berardo, traditional thinking has been that self-insuring health benefits was only an option for large plans, and he says, in some states, smaller employers are not allowed to self-insure. However, there are now products from providers such as CIGNA and AETNA that offer level funded self-insured plans to the small employer marketplace. The plans are self-insured, but allow employers to pay equal monthly fees up to their liability amount, and if the plan doesn’t pay that amount in claims, employers get a refund.

Tesoriero adds that the thinking used to be that an employer needed to have a group of at least 300 to self-insure, because a small group may not be able to withstand claims fluctuation on monthly basis that a large group can. But, now that costs and requirements are increasing, funds with fewer than 300 lives are considering self-insuring. “I understand some plans in the 50-lives range are considering self-insuring, and there are solutions out there,” he tells PLANSPONSOR.

A key consideration for employers thinking of moving to self-insured health benefits is monthly cash flow and how they can handle monthly cost variations—claims may be higher in some months than others. “Different employers have different risk tolerances and they have to consider what they will be comfortable doing,” Tesoriero says.

For the risk that there will be a catastrophic claim, employers need to consider purchasing stop-loss insurance. Stop-loss protects the level of risk an employer will take on, Berardo tells PLANSPONSOR. Employers can calculate their maximum liability and insure against that.

Even employers that already self-insure health benefits are considering purchasing stop-loss insurance or changing their stop-loss coverage amount due to the ACA. According to the Sibson Perspectives article, annual and lifetime dollar limits on essential health benefits are no longer permitted. Annual and lifetime dollar limits acted as a plan’s internal “stop-loss insurance” by limiting coverage to individuals with high claim costs. Removing these limits increased a plan’s risk for exposure to these large claims.

Tesoriero explains there are two major forms of stop-loss insurance:

• Individual or specific – Specific stop-loss insurance sets a threshold per participant above which the stop-loss insurer will cover claims. For example, an employer can purchase stop-loss at a $100,000 threshold per participant for claims paid in a certain policy period. If an individual’s claims exceed $100,000, then the stop-loss carrier is responsible for the amount greater than $100,000.
• Aggregate– Aggregate stop-loss insurance protects the employer against total claims paid liability. The organization’s liability is expressed in terms of a percentage of its total expected claims, typically 120% to 125%. With this insurance, if an employer expects total annual claims of $10 million and insures up to 120%, the stop-loss carrier would reimburse the employer for claims exceeding $12 million, usually up to $1 million annually.

Tesoriero contends aggregate stop-loss insurance doesn’t really provide meaningful protections, and is usually only recommended to the smallest groups due to more cost fluctuation or for those in their first year of self-funding.

The Sibson article reviews the basics of stop-loss insurance and how organizations can use it to better manage the added risk and increased cost due to the ACA and rising health care costs in general. It also looks at best practices for purchasing stop-loss insurance and recent innovations. Berardo says an employee benefits broker should be able to guide employers, “and if they can’t, the plan sponsor should find a new employee benefits professional.”

There are reasons other than cost that employers may want to consider self-funding health benefits, Berardo and Tesoriero say. “If they are an employer committed to wellness, anything they don’t spend for health claims can be used to further wellness,” Berardo notes. However, employers also need to set up a reserve fund for claims incurred during the year that are paid after year-end, Tesoriero warns.

But, he points out that when benefits are fully insured it is difficult for employers to get a handle on plan data other than on an aggregate basis; when self-insured employers have more control of the data needed to inform plan and wellness program design. For example, if musculoskeletal issues are common among the workforce, the employer can design the plan to pay more benefits for treatment of those issues.

Having more data means employers have more understanding of the reasons why their costs are what they are and have better opportunities to manage costs, Tesoriero says. Wellness programs can be designed to make sure employees are getting the proper tests or screenings; employers can measure improvements over time. “These efforts will lower health costs in the future because the employer is taking a more active role,” he concludes.