Can Mid-size Employers Self-fund?

Groups of 50-500 employees often overlook the possibilities of “Level Funding” concepts, which is a hybrid of partial self-funding.   In the past, partial self-funding was only appropriate for larger groups.

But with the advent of the Affordable Care Act (ACA also known as Obama Care) new product designs have made this an avenue worth exploring for mid-size groups, particularly mature groups in the 50-100 size range. By mature, I mean they have at least a year of fully insured experience behind them.

Since this size group size has guaranteed issue privileges to re-enter the fully insured market, the loss of access to coverage is mitigated. Partial self-funding under this “level funding” concept essentially unbundles the insurance contract components as follows:

Administration: This includes the processing of claims, compliance documents, rental of Preferred Provider network or access fees, commissions, taxes and fees. Rental of networks is tricky, because there must be access to providers, but also appropriate discounts that are passed back to the plan!

Risk Cost: This is the premium for “stop loss” coverage.  This includes individual stop loss, which limits charges against the group to a specific dollar number per individual and aggregate stop loss which limits the total amount of claims that will be charged against the group’s experience for the plan year.

Note that the state of CA premium tax of 2.3% is not assessed against the entire premium as in a fully insured contract, but only the risk premium.  This can be a substantial savings, depending on the size of the group.

There are some benefit provisions that are mandated to fully insured groups that can be excluded from self-funded groups, which can reduce costs. Since many insurers do not allow an employer to provide different benefits by class , self-funding can provide the employer the required flexibility to do so.

What makes these new contracts attractive for employers is the approach to funding and premium.  The initial premiums are typically set to fully fund the entire cost of the maximum liability to the employer.  Then 3-9 months following the end of the plan year, when all reconciliations are complete, the group may receive a refund if the claims experience is favorable.

If the experience is poor, they are only limited to the amount paid in initial premium.

There are many variants of this partial self-funding or cash flow techniques for employers that have been around a long time: Minimum premium; “retro” premium funding as well as full or partial self-funding.  But many insurers only wanted to provide these options to larger groups of 250 employees or more.

This is changing and more vendors and insurance companies are offering hybrid options to smaller groups.

The downside to this approach is underwriting. The process is more lengthy, because each individual who is interested in coverage must answer health questions before final rates are set. Good vendors have this down to streamlined process that can take as little as 5 minutes per employee.

Of course, the employer has no access to the confidential health information of any employee.

Our most recent case of this nature was implemented in about 45 days, which is clearly record time for a group of 150 employees at multiple locations throughout the state.  Fortunately this employer has a good relationship with the employees and understood that the employer was looking out for their best interest.

He explained that they were facing a double digit rate increase that was unsustainable for the company.  He wanted to find a better option, but it would require cooperation from the employees.  Most were very complaint.  In addition, the group has their own HR staff that was “all over” these employees and their site managers to make sure the calls were made.

Final rates were not substantially different than the initial quoted rate which made the employer happy to give this approach the go ahead.

As the broker, I will have access to claims data that will help me to better advise the employer on future benefit designs and marketing efforts for the group’s benefit package.  If the group is healthy as expected, there is the potential for lower rate increases than those of the pool from the insurance company.

In addition, we used the online benefits enrollment portal that we provide at no cost to all of our groups. This made enrollment for all of the benefits at multiple locations cleaner and simpler for everyone.

This approach is not for everyone, but certainly worth considering for the right group with the right staff and broker/consultant.

Margaret R. Beck
Margaret Beck  CLU, ChFC, CEBS started her insurance practice in Redding in 1978. As an insurance broker/consultant,  she represents businesses and individuals as their advocate.  She assists in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed. All information in her column is provided to the best of her knowledge, subject to final regulation by the respective agencies. Questions to be answered in this column can be submitted to info@insuranceredding.com. Beck's column is also published in the Redding Record Searchlight.
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