By: Doug Ramsthel, Vice President, Burnham Benefits Insurance Services

Anxiety surrounding health care reform compliance has driven a fresh batch of employers toward exploring self-funding. It is a viable choice for those who are concerned about increasing health care costs and expanding health care coverage requirements with Health Care Reform legislation.
 
Employers opt for self-funded insurance plans with two things in mind: control and potential savings. Self-funding offers them more focused control over their plan’s design, components, administration—even regulation, since there are fewer state insurance laws with which to comply. That helps to explain why over 72 percent of firms with more than 500 employees and 55 percent of firms with 200 to 500 employees were self-funded in 2010.
 
Advantages of Self-Funding Under Health Care Reform
Clearly there is real founded concern about the financial costs of the health care reform legislation (PPACA) due to richer benefits required and coverage requirements (to all eligible employees).  Self-funding is an effective cost control strategy for avoiding these requirements:  (1.) Benefit requirements – self-funded plans are not included in requirements imposed on fully-insured plans such as essential health benefits, comprehensive coverage for health benefits package, annual limitations on deductibles, and guaranteed issue of coverage. (2.)  Administrative requirements — jurisdiction of state ombudsmen, application of state law to prevent fraud and abuse, and administrative simplification rules will not apply to self insured plans.  Not having to comply with these requirements will reduce costs.
 
Health care reform also imposes significant taxation on carriers beginning Dec. 31, 2013 that will undoubtedly be passed onto employers in the form of higher premiums if fully insured. These costs can be significantly reduced through a self-funded arrangement.  
 
Most significantly, it is expected that employers will save money when they are required to enroll all of their eligible employees or potentially face a monetary penalty.  Currently any given employer group health plan has about 25 percent or more of eligible employees waiving off their plan.  Claims data demonstrates that those who are likely to waive coverage have significantly lower claims than those who enroll in their employer’s plan, which makes sense. The most cost-effective way to pay for these low claimants is to pay only for their claims costs, and an administrative fee; versus a fully-insured premium based on the higher claims employees who have already enrolled in the plan.  A self-funded arrangement is the most cost-effective platform to provide coverage for healthier than average employees, as low claims equate to low costs.  With fully-insured premiums being built on decades of actuarial data from current insured (excludes the healthier employees who are waiving), it could take years for a full-insured carrier to recognize this influx of healthier employees in their rate development and premiums they offer to employers in the market.

The ABCs of Self-funding

When contemplating a self-insured arrangement, it is important to make a realistic assessment of employee health and insurance utilization patterns in order to make the best decision for the current reality. Factors like average age and employee health determine which option is likely to provide the optimum cost benefit. Relatively young workforces, for example, tend to yield fewer doctor visits.
 
It is not surprising that larger companies are more likely to appreciate the self-funding option, sometimes called an administrative services only (ASO) plan. Ideal candidates for self-insurance have at least 100 employees as larger numbers provide better predictability of future claims costs.  And with the plan costs varying with claims costs, predictability and stability become important.