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Is Self Funding The Answer?

As employers fight today's spiraling health care costs, many have undertaken to self-fund their health benefit plans so that they may take control of their financial contributions to the plan and take advantage of ERISA protection from a burdensome and complex array of state insurance laws.

The most popular form of self-funded health plans are Partially Self-Funded plans. Through this process, the employer is provided with reinsurance coverage that protects against large claims and catastrophic losses.

If you are contemplating self-funding for your company, you shouldconsider long-range planning, plan design, administration, investment of funds, plan documentation, etc.

There are two types of self-funded health plans.

Partially self-funded health plan: The employer assumes a portion of the risk for providing health care benefits to his or her employees and usually contracts with a third party administrator to provide services.

Fully self-funded health plan: The employer assumes all of the risk for providing health care benefits to his or her employees and usually contracts with a third party administrator to provide services.

FAQ's about Self-Funded health plans

Why should I self-fund my health plan?
What are the disadvantages of self-funding?
How does self-funded plans work?
Where do my premium dollars go?
Do I have to redesign my existing health plan?
What is stop-loss-risk coverage?
How do payroll deductions work?
What is a 12/12 contract?
What is a 12/15 contract?
To what laws must a self-funded plan comply?
Will my life insurance coverage be affected by self-funding my health plan?
Who will take the place of the insurance company to administer the plan?
What is a TPA?
What is an ASO?
What are the advantages in using a TPA as opposed to an ASO arrangement with an insurance company?
What services are offered by a TPA or an ASO?


Why should I self-fund my health plan?
Employers have complete flexibility in customizing the health plan to meet their cost saving requirements and their employees' needs.
Excess-risk coverage is available to minimize the employers risk.
The plan is governed by federal legislation, and avoids most state mandated benefits ie. mental health.
Avoid state insurance premium taxes, thus again, lowering costs.
The employer's cost for the benefit plan is totally dictated by their claim experience, rather than the experience of a pool or insurance carrier's book of business.
The employer's cost for the benefit plan is totally dictated by their claim experience, rather than the experience of a pool or insurance carrier's book of business.
Self-funded plans pay claims as they occur.

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What are the disadvantages of self-funding?
Self-funded plans pose a much greater risk for small employers (fewer than 250 employees) because of the high cost of reinsurance for high risk claims .
Self-funded plans may exact a heavy toll in highly specialized administrative functions.
Self-funding exposes you to serious risk of catastrophic individual claims or unexpectedly high aggregate claims.

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How does self-funded plans work?

The employer opens a bank account that the insurer uses to pay claims. Each time a claim is paid the employer funds the account for the amount of the payment. Generally a company will bank a percentage of money per employee based on the amount they historically have paid out in monthly claims. They also normally add a little extra to pay for reinsurance, a policy that covers the company against catastrophic claims. If actual claims exceed the protected amount, the insurer pays for this excess.

During the first year of self-funding, an employer usually pays for only nine to ten months of claims. This improved cash flow can be used to the employer's advantage. Another advantage is that an employer only pays benefits based on his employees' histories, not someone else's employees. Companies can either manage their own plans internally, or hire a third party administrator to do it for them.

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Where do my premium dollars go?

Under self-funded plans, roughly 75 percent of an employer's premium goes toward paying claims and the remaining amount goes toward administering the plan and profits. In contrast, employers that have fully-funded plans see only 70 percent of their dollars go toward benefits, while the remaining 30 percent is claimed by the insurance company for administrative costs and profit.

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Do I have to redesign my existing health plan?

No, not at all. Self-funding does not require a change in the existing group coverages you offer your employees.

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What is stop-loss-risk coverage?

Stop-loss-risk coverage protects the employer against unforeseen catastrophic claims that would place undue financial burdens on the employer. There are two types of coverage:

Specific stop-loss: Places a cap on your liability for any single claim. This type of coverage insures against a single catastrophic claim that exceeds a dollar limit chosen by the employer and agreed to by the excess-risk carrier.

For example, specific coverage would come into play if one of the covered participants was in a catastrophic accident and had claims that exceeded the agreed upon dollar limit. In this case, the specific coverage would reimburse the employer for the covered expenses beyond that dollar limit.

Aggregate stop-loss: Sets a limit to your total monthly or annual exposure for all claims. Aggregate coverage insures against all the claims exceeding a specific dollar limit chosen by the employer and agreed to by the excess-risk carrier. If all the claims payable exceed the agreed upon dollar limit, aggregate coverage would reimburse the employer for the excess.

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How do payroll deductions work?

Any payments made by employees for their coverage or coverage for their dependents are still handled through the employer's payroll department. However, instead of being sent to the insurance company as premiums, they are held by the employer until such time as claims become due and payable.

 

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What is a 12/12 contract?

A 12/12 contract is a contract that states claims have to be incurred and paid within twelve months.

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What is a 12/15 contract?

A 12/15 contract is a contract that states claims had to be incurred within twelve months, but paid within fifteen months.

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To what laws must a self-funded plan comply?

The self-funded plan comes under all relevant federal laws:

Employee retirement Income Security Act (ERISA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA).

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Will my life insurance coverages be affected by self-funding my health plan?

No. Your life insurance and other benefit plans are completely separate from your health plan. Your life insurance coverages will not be affected.

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Who will take the place of the insurance company to administer the plan?

A self-funded employer can either administer the plan himself, convert his present "insured" arrangement to an Administrative Services Only (ASO) arrangement with his present insurance company, or have an independent Third-Party Administrator (TPA) administer the plan.

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What is a TPA?

A TPA (Third Party Administrator) is a company that specializes in administering self-funded plans.

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What is an ASO?

Administrative Services Only (ASO) arrangements are with the present insurance company. The insurance carrier administers the plan for the employer.

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What are the advantages in using a TPA as opposed to an ASO arrangement with an insurance company?

The only business of a TPA is the administration of benefit plans, not insuring groups. Insurance companies offer both arrangements. Insurers who offer ASO contracts may or may not provide the level of flexibility desired. Both should be considered however. Check price, service, staff, etc.

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What services are offered by a TPA or an ASO?
Plan Design consulting
Cafeteria Plan Design
Contracting for excess-risk coverage
Claims Administration
Contracting with utilization review/managed care companies
Assistance in completing government forms - 5500 series
Assistance in writing and printing of SPD booklets an plan documents for counsel review/approval
Employee communication programs
COBRA compliance assistance
Client reports
Record keeping 

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For more information about self-funding, please e-mail or contact PAI at (407) 422-6575. We value your ideas & suggestions.

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