Self-Funding
Cost relief to employers,
regardless of size.
A White Paper by Meritain Health
Table of contents
Cost relief to employers, regardless of size 3
Increased enrollment by small companies 3
Limited effects under ACA 4
Advantages of a self-funded health plan 4
Financial and administrative control 4
Improved cash flow 5
Plan flexibility 5
Considerations of self-funding to small and mid-sized employers 6
Alleviating risk through stop loss coverage 6
Alleviating risk through strategic plan design 6
Joining a group captive 7
Claims administration and plan management 7
Is self-funding a good fit? 7
Self-funding as a long-term solution 8
About Meritain Health 8
Meritain Health | Advocates for Healthier Living
Meritain Health | Advocates for Healthier Living 3
Cost relief to employers, regardless of size
The price of healthcare benefits continues to increase, through
the worst recession in the U.S. in twenty five years and despite
the most extensive changes to our healthcare system in half
a decade. According to recent projections by the Centers for
Medicare & Medicaid Services, healthcare spending is expected
to grow at an average annual rate of 5.7 percent from now
until 2023.
1
Self-funded plans continue to allow employers to keep short-
and long-term costs under control. This, as well as the other
advantages of self-funding—cash flow improvement, plan
design flexibility and now, increased benefits under healthcare
reform—are available to companies of all sizes and financial
circumstances. In fact, businesses having as few as 25 employees
can overcome the obstacles that formerly made it difficult for
them to self-fund.
For example:
Stop loss carriers are becoming adept at working with smaller
companies to mitigate financial risk.
Third Party Administrators (TPAs) provide a broad range of
services to supplement the human resources capabilities of
small and mid-sized companies.
Experienced health plan consultants help companies design
plans to meet the needs of diverse workforces.
These resources put the benefits of self-funding within the reach
of small, mid-sized and large companies alike.
Increased enrollment by small companies
More and more companies have begun to enroll in self-funded
plans. In 2013, more than half (61 percent) of all covered
employees were enrolled in a self-funded plan. This percentage
has remained stable over the past few years, but since 2000 is
up from 49 percent.
2
It’s true that covered workers in large companies were more
likely to be enrolled in a self-funded plan than workers in small
companies (83 percent vs. 16 percent). However, enrollment in
self-funded plans by smaller companies is increasing. Since 2006,
enrollment of small companies (3-199 workers) in a self-funded
health plan has increased from 13 percent to 16 percent.
3
As more companies realize the benefits, both financial and
otherwise, of self-funding, these percentages could increase.
With current reform regulations, it’s important for employers
to understand the advantages of different funding methods.
Self-funded and partially self-funded health plans put employers
in greater control and aren’t as likely to be influenced by
state mandates.
What is a self-funded
health plan?
A health plan under which an employer
assumes the responsibility and related
financial risk for paying plan participants’
healthcare expenses is known as a
self-funded health plan.
Stop loss coverage is often purchased
to protect self-funded companies from
high claims by putting a ceiling on
financial risk.
In contrast, under a fully insured plan,
an employer pays fixed monthly premiums
to an insurance carrier, and the carrier
assumes the responsibility and related
financial risk for paying plan
participants’ claims.
Percentage covered in self-funded
plans, small group
2006 2009 2013
Firm size
3–199 workers
13% 15% 16%
All firms 55% 57% 61%
Percentage covered in self-funded
plans by firm size, 2013
Firm size
200–999 workers
1,000–4,999 workers
5,000 or more workers
58%
79%
94%
All Small Firms
(3–199)
All Large Firms
(200 or More)
16%
83%
SOURCE: Kaiser/HRET Survey of Employer Health
Benefits, 1999–2013
1
“National Health Expenditure Projections
2013-2023;” Centers for Medicare
& Medicaid Services; 2013.
2
“Employer Health Benefits 2013 Annual
Survey,” The Kaiser Family Foundation
and Health Research & Educational
Trust, 2013.
3
Ibid
3
Meritain Health | Advocates for Healthier Living 4
Limited effects under ACA
Many provisions of the Affordable Care Act (ACA) affect both self-funded and fully insured plans. However, some
mandates that could result in higher health plan costs apply only to plans that are fully insured. These regulations
include:
Medical Loss Ratio (MLR). Insurers are generally required to spend a minimum of 80 percent of every premium
dollar on claims and quality improvement for the health plan. This percentage increases to 85 if the group has
more than 50 employees. If this percentage is not met, the insurer must rebate the difference to the members.
Rate Increase Review. Insurers charging rate increases of 10 percent or more must submit these to the
U.S. Department of Health and Human Services for review.
Essential Health Benefits (EHB). This regulation requires that fully insured plans cover EHB and may not impose
lifetime or annual dollar limits on these benefits. Self-funded plans are not required to cover EHB; however, if they
do there are certain requirements that must be met.
Modified community rating. Per this rule, insurers may not consider health, industry or gender when
setting premiums.
Employers can benefit from exploring alternate funding arrangements. Continuing with the status quo could cause
employers to incur short- and long-term costs that could be prevented.
Advantages of a self-funded health plan
Companies gain significant advantages when they implement self-funded healthcare plans, regardless of company size:
Financial and administrative control
Improved cash flow
Plan flexibility
Financial and administrative control
Administration of a health plan is an invisible process to a company whose health plan is fully insured. Each month,
the company pays a premium, which includes charges for administration of the plan, as well as reasonably expected
claims, and the insurer performs all administrative tasks—outside the company’s vision or control.
When a company makes the change to self-funding, it assumes responsibility for administration of the health plan.
With this responsibility comes the ability to:
Operate efficiently and effectively.
Detect areas where modification of systems and processes may be desirable or necessary.
Make continual improvement in plan operations, with a goal of optimizing plan performance, improving employee
satisfaction and, ultimately, saving money.
Meritain Health | Advocates for Healthier Living 5
Improved cash flow
Companies that self-fund their health plans receive significant cash flow advantages.
First advantage—pay as you go
Under a fully insured health plan, a company pays premiums to pre-fund claims and other costs. The insurer uses
these pre-paid funds to pay plan participants’ claims. In addition, the insurer retains a portion of the premiums to
cover overhead costs and to compensate itself for the services it performs and the financial risk it assumes.
A company with a self-funded plan does not pre-fund its claims costs. Rather, the company pays claims as they
are incurred. This allows the company, not the insurer, to invest and receive returns on unused claims funds. Of
course, many small companies use TPAs for claims administration and plan management; however, TPA charges
typically are lower than those of traditional insurers.
Second advantage—claims liability
At the end of a plan year in which claims have been lower than anticipated, a traditional insurer keeps the
premiums and no savings are returned to the fully insured company. When claims paid by a company’s
self-funded plan are lower than anticipated, the savings belong to the company alone.
Third advantage—premium taxes
Self-funded health insurance plans are liable for state taxes only on stop loss premiums. Conversely, fully
insured plans are liable for state premium taxes on total plan cost. According to industry experts, this disparity
results in direct, automatic savings to a company that self-funds. These savings are estimated to be two to
three percent of the premiums’ dollar value.
All the cost-saving advantages of a self-funded health plan help employers beat ever-increasing healthcare trends
and leave more money to be invested back into the success of the company.
Plan flexibility
Traditional insurers offer one-size-fits-all health plans. As a result, a company with a fully insured health plan may
be forced to pay for benefits its employees will not use. Also, the company may be unable to offer other benefits its
employees particularly need.
The flexibility of self-funding allows a company to custom design a cost-effective health plan tailored to employees’
specific needs. For instance, high-cost benefits that employees do not value can be eliminated, and replaced by
benefits that employees want—often for a lower cost.
With the help of experienced plan design specialists, a company can identify additional cost-saving opportunities
while custom building a plan that supports corporate objectives and offers a range of options matching the needs
of a diverse workforce. For example, a company may:
Develop a more cost-effective plan by excluding or limiting non-applicable benefits, while still meeting
employees’ needs.
Implement a care management program to direct participants toward the most efficacious and cost-effective
medical care.
Offer alternative health plan options, such a Consumer-Directed Health Plans (CDHPs).
Provide coverage for alternative treatment procedures, such as chiropractic services and acupuncture.
Design prescription drug plans that provide cost-saving opportunities.
The flexibility of self-funded health plans offers another important advantage to companies with multiple locations.
Because self-funded plans are not bound by state law requirements, a multi-location company is not burdened with
managing multi-state plans. Instead, the company can design and manage a single self-funded plan that fits the
needs of employees in diverse locations.
Meritain Health | Advocates for Healthier Living 6
Considerations of self-funding to small and mid-sized employers
When small and mid-sized companies explore the potential benefits of self-funding, they may encounter challenges
not faced by larger corporations. For instance, small and mid-sized companies may:
Be wary of taking on the financial risk inherent in self-funding.
Experience large cost fluctuations due to the unpredictability of the timing of claims.
Lack internal resources (e.g., personnel and specialized expertise) to manage and administer self-funded plans.
Fortunately, these challenges can be met through appropriate risk management strategies, accurate claims
administration and effective plan design.
Alleviating risk through stop loss coverage
Although companies with fewer than 100 individuals may feel that self-funding is a gamble, there are ways to
mitigate risk and ease concerns. One approach is through stop loss coverage, which protects self-funded companies
from high claims by putting a ceiling on financial risk. Practically speaking, stop loss coverage changes a fully
self-funded plan into a partially self-funded plan that still offers the same cost control opportunities.
Two types of stop loss
There are two types of stop loss coverage: specific and aggregate.
Specific stop loss coverage protects a company against claims above a specified amount on a per-participant
or per-family basis. An experienced consultant can work with a company to set the amount at a level that reflects
the company’s risk tolerance.
Aggregate stop loss coverage protects a company against accumulated claims that exceed a specified ceiling.
The stop loss insurer is responsible for any claims above this ceiling.
Aggregate stop loss coverage is generally provided on an annual basis; however, it also can help protect a company
from interim cash flow problems that arise when monthly claims fluctuate above projections. The difference is made
up as claims in other months fluctuate below projections. At year end, an annual reconciliation is performed. At that
time, an adjustment can be made if overall claims for the year were higher or lower than projected.
How much stop loss coverage does a company need and how much will the coverage cost? The answers to these
questions depend on a number of interrelated factors. These factors include the company’s assessed level of risk,
the size of its workforce and the amount of risk it is willing and able to assume. The majority of companies that
self-fund typically obtain both specific and aggregate stop loss coverage.
Alleviating risk through strategic plan design
As discussed earlier, self-funded plans have a great deal of flexibility when it comes to plan design. As a result,
companies that self-fund can custom design their health plans to drastically reduce risk. Effective strategies to
reduce risk include excluding or limiting certain benefits and implementing strong wellness, disease and pharmacy
management programs.
Meritain Health | Advocates for Healthier Living 7
Joining a group captive
Self-funding with a group captive is an innovative way for small and mid-size employers to reap the benefits of self-
funding. At the same time, they are able to minimize the potential risk associated with exposure to a large claim
or series of claims. With a captive, employers with 50 to 500 employees cover their own small claims and purchase
traditional stop loss insurance. Then, each employer contributes premiums to a group mechanism called a captive.
The captive covers claims that fall between the small, self-funded layer and the catastrophic layer. In this way, claims
are spread across a larger pool of employees, reducing risk and year-to-year volatility.
Claims administration and plan management
Frequently, a small or mid-sized company’s self-funded health plan is managed and administered by a TPA. Third
party administration is not a new industry. Since the inception of self-funded health plans, TPAs have provided
services such as claims administration and eligibility management.
Services offered by TPAs to administer self-funded plans include:
Managing plan eligibility and enrollment.
Issuing identification cards.
Conducting enrollment meetings.
Providing employee education.
Responding to plan participants’ questions and resolving issues.
Negotiating, obtaining and renewing stop loss coverage.
Managing/monitoring stop loss administration.
Providing (or contracting with vendors to provide) wellness programs, disease management, pharmacy benefit
management and provider network management.
Negotiating provider discounts.
Is self-funding a good fit?
This question should be explored with the help of a specialist in health plan design. Factors to be considered in
evaluating whether a self-funded plan meets a specific company’s objectives and fulfills the needs of its employees
include the following:
Current and projected healthcare cost trends.
The company’s healthcare claims history.
The company’s projected future claims.
Makeup of the company’s workforce.
The projected cost of plan management and administration.
Availability of stop loss coverage.
Financial risk tolerance.
An experienced plan design specialist also can help a company explore the potential benefits of developing a health
benefits program with multiple plan options (including CDHPs and traditional provider network plans) and assist in
obtaining stop loss coverage.
About Meritain Health
At Meritain Health, an independent subsidiary of Aetna, we are advocates for healthier living. Your
Meritain Health employee benefits plan will consist of quality, affordable healthcare that is easy for your
employees to access and use. This, plus our self-funded expertise and advice, will help you support your
employees in healthy, productive lives.
A healthier tomorrow starts today.
110.4132015
www.meritain.com | © 2015–2016 Meritain Health, Inc. All rights reserved.
Self-funding as a long-term solution
Companies continue to experience annual increases in healthcare costs, with no end in sight. With upcoming
healthcare reform regulations and the impact ACA could have on the cost of insurance, now is the time to
consider a different method of funding.
Self-funding may be a lifeline, connecting small, mid-sized and large employers to valuable opportunities
for increased cost control and improved cash flow. Additionally, the flexibility of self-funding allows for the
development of comprehensive health benefit programs with options matching the needs of employees from
diverse backgrounds and lifestyles.
