“Once an employer reaches about 500 employees, that's about the size where historically, the employer would start thinking about self-funding,” she adds. “Below 500 employees, there's more risk because one significant claim, one significant incident—someone gets cancer, an infant in the newborn intensive-care unit, a multiple-birth situation—one incident like that, and you've got a $1 or $2 million swing in what you've budgeted for your expenses. That's why when actuaries are looking at the numbers; they're looking for bigger pools, which are better for spreading the risk.

“That's ultimately the difference between an insured plan and a self-funded plan—the risk,” she adds.

Stop-loss insurance hasn't typically been a consideration for the heavy-earning self-funding employer groups, though.

“The very big companies don't even bother with stop-loss insurance,” says Robert Lowe, partner at law firm Mitchell Silberberg & Knupp. “You obviously have to have very deep pockets to do that.”

And he says he doesn't see many insured clients who would save money by moving to a self-insured policy.

However, Lowe notes that “there is one big legal difference that sets self-insurance apart: State insurance laws tend to be much more onerous, and employers with self-insured plans have a lot more freedom to determine benefits because they're not subject to state insurance laws and state insurance mandates.”

That makes self-funding particularly attractive to employers with locations in different areas of the country.

“It's something they can take advantage of, because they can pretty much ignore state insurance mandates,” Lowe says. “I don't know of any client that became self-insured in order to escape state insurance mandates, but it does make things more flexible for those big plans or companies that do self-insure.”

“There are fewer regulations if employers self-fund, but of course, that way the employer is taking on all the risk,” says Julie Sanchez, owner of RN Audit Specialist, a consulting group. “But they do also have more leeway with making certain regulations and certain rules—for example, if there's an appeal on a denial for a claim at a self-funded company, the people who sit on the appropriate board at that company can make a decision to override it. If an employee has to go to an outside provider or an outside facility because they can't get a procedure in their preferred network, they can appeal that with their third-party administrator, who has the ability to override the denial.”

It's not just the lack of state mandates and plan flexibility that makes self-funding their health plans attractive to employers.

“There are definitely parts of the Patient Protection and Affordable Care Act that apply to insured plans that do not apply to self-insured plans,” Millar says. “And that's part of what makes self-funding more attractive at this point, because there are some additional obligations you don't have to comply with. For example, there's a fee on insurers that's written into PPACA, and that fee does not apply in the self-insured plan context. So there are definitely differences under PPACA, and more employers at the smaller employer level are thinking about and looking at the combination of self-insurance and stop-loss as a way to manage the bottom line.”

A numbers game

Travis Wall, an insurance attorney at law firm Barger & Wolen, says that one of the key requirements in PPACA that could influence an employer's decision to self-fund is the 3:1 ratio between the highest and lowest premiums that can be charged to any group.

“If you're a small employer and you don't have a lot of older employees, you're going to see your premiums go up more than other companies with a more diverse workforce,” he notes. “And that increase in premium can affect your bottom line.

“There's a difference between how insurance companies under PPACA charge premiums and the contributions of the individual employees,” he adds. “In the past, if you had an individual or family employee benefits plan, under the family plan, they would just assume you had a spouse and 2.3 children or whatever the average was and charge one rate for that. Now, the contributions of the individual employer are broken down. If you're an employee, you'll have your own rate and contribution; your spouse will have a separate one based on the spouse's age; and additional ones for each child younger than 19; and additional ones for children 19 to 26. Some of these employees might be seeing that their contributions are increasing considerably under PPACA, and with self-funding, there's more flexibility in terms of outlining employee contributions.”

States strike back

However, some states have been taking steps to limit the number of employers turning to self-funding as a solution to their health care woes by placing (or attempting to place) legal limits on stop-loss policy attachment points. California passed SB-161 in October of last year; that bill places limitations on attachment points in stop-loss policies for small employers (with fewer than 100 employees). Colorado, Utah and Rhode Island passed similar laws last year, and one was also under consideration in Minnesota in 2013, even though that state already has stop-loss policy restrictions in its books; North Carolina, New Hampshire, Vermont and New York also have passed legislation restricting stop-loss policies.

“I think the near-term is going to see additional debate on this issue,” Millar says. “There's a tension right now between the trend we're seeing with smaller employers moving more toward self-funding and using stop-loss policies, but in order to make that work for a small employer, the attachment point for the stop-loss has to be pretty low. Stop-loss kicks in when the total claims either for an individual or for the group reach a certain point. The issue right now is states that regulate insurance have seen these lower stop-loss insurance attachment points, and there has been a fair amount of legislative activity to increase at the state level what those attachment points can be.

“A lot of different states are looking at the issue of stop-loss coverage and saying, 'Is this really self-insurance, or is it insurance with a little bit of a different window dressing?” she adds. “There's a lot of debate about how to define an insured plan versus a self-insured plan, and one of the factors is shifting the risk and at what point the stop-loss insurance starts paying claims. In the near term, we're going to see additional state legislative and regulatory activity in terms of looking at the attachment points.”

Wall notes the regulation also typically applies specifically to smaller plans.

“From what I've heard, the rationale behind that is that states were concerned that a lot of these smaller employers, who have younger workforces, were looking at self-funding instead of going on the Small Business Health Option Program exchanges,” he says. “Some people are suggesting that the states wanted to make it a little more painful for small employers to self-fund so that they'll have an incentive to go to the SHOP exchanges as opposed to purchasing stop-loss insurance. That's one reason they've raised the minimum deductible: It's an indirect way in which states can regulate self-insured benefit plans; they can't do it directly because of ERISA.”

There's also the issue of managing both specific and aggregate stop-loss policies for a client—costs for administering a self-funded health policy can quickly grow beyond an employer's scope of vision.

“Most of my clients are willing to look at a larger specific stop-loss,” says Sam Brown, an insurance agent with Price & Ramey Insurance, “and what we're finding is that it's becoming more and more expensive —the specific is going up in cost more than the aggregate. So we have to find that break point where going up in the specific stop-loss doesn't have too big an adverse effect on the aggregate stop-loss, and at the same time, you need to hold your fixed costs as low as possible.

“What we're seeing right now is, if you're going outside for different carriers or different provider networks, then you're having to pay for your administration, your aggregate, your specific, processing, networking—and those costs are really $125, $130 per individual contract per month—well, it's almost to the point where some of those fixed charges are equal to what a bronze fully insured plan would be on the exchanges,” Brown adds.

“One of the biggest mistakes that most large employers make is overestimating their potential savings,” Brown notes. “Let's say they have a $500 individual rate, and they look at that rate and think, 'This is terrible—I want to look at self-insurance.' If their loss ratio is 120 percent from the fully insured carrier, and the fully insured carriers is losing money on them, why would they ever want to go self-insured?”

But there are clients for whom self-funded plans could be the solution to their problems, too.

“The key is to be able to analyze the data, look at a few years of history and say that the problem is a network problem, or a cost problem, or an acuity problem,” says Frank Bird, vice president of MDS consulting. “And analytics can also tell you what types of disease you need to focus on.”

“Self-funded insurance can be a solution,” agrees Chris DeNoia, vice president of business development at Amplify Health, a technology and process solution firm that works with brokers, employers, payers and providers to provide reporting, data analytics and patient management solutions. “The question for an employer is, what problem are you trying to solve? Before answering that, you need to look at the data. There are some cases where you would not want to self-fund and other cases where self-funded might be a really good option, particularly if you have employees with conditions that can be properly managed through direct contracting with high-performance primary care.”

And employer size won't necessarily limit self-funding options if the employer does business in a state that's friendly to multiple-employer welfare arrangements.

“What a MEWA allows you to do is take those small employers, group them together and put them in a self-insured program,” explains Dawn Wright, vice president of insurance operations at QualCare. “It's a unique program that allows much smaller employers to self-fund. You can take in a market of multiple employers and group them in a plan so that each employer is not solely responsible for their employees' claims—it's blended together as a group.”

Risky business

It remains to be seen whether the trend toward self-funding is a temporary flash-in-the-pan or indicative of a larger shift in the market—but whatever the case, employers considering self-funded health plans must be aware that, with or without stop-loss insurance, there's always the risk they could lose money.

“One of the things that I really try to stress to a new client, especially one looking at this, is if you're going to go into a partially self-funded arrangement, you don't look at this as a one- or two-year commitment,” Brown says. “You really have to be ready for five, six, seven-year commitments, because you're going to have ups and downs. You will have good years and bad years, and you really have to be ready to fund those bad years—but then take advantage of the good years.”

And brokers can prepare by understanding the range of options available to any given employer and the legal ramifications in their states.

“Employers who typically wouldn't look at these plans are going to look at them now because of the benefits,” Wall says, “and brokers need to know about the different plans that are out there. Insurers are coming up with a range of different products to serve this market, and you just need to know what they are, because there's a lot of variation out there.”

“Make sure you're keeping up with the latest in terms of the developing state legislative activity,” Millar advises. “And when you're advising your clients, make sure they understand what it means and what risks are involved when they make that move to self-insured.”

Evaluating self-funding as an option

If you've got clients who want to talk about setting up a self-funded plan, here are some of the factors they'll need to consider before making a decision:

• How many employees do they have? Self-funding tends to be a good economic decision when a company has at least 500 full-time employees on staff. Smaller groups will want to seriously consider becoming part of a MEWA or purchasing a stop-loss policy to protect their assets.

• What kind of claims has the employer had during the past ten years? Have there been any catastrophic illnesses? If the client's health insurer is already losing money on the policy, then there's no reason to believe they would experience better results through self-funding, and self-insuring – with or without stop-loss protection – isn't going to be a viable economic prospect for them.

• There are new requirements through PPACA that all insurance products are subject to, such as the cutoff age for dependent children, certain screenings now required to be fully covered and more. Employers considering self-funding must be aware of their legal responsibilities.

• How invested is the client in employee wellness? Employers that have wellness programs in place already might want to consider self-funded health insurance because they'll be directly reaping the benefits of programs in which they've already invested.

• Does the client want to consider tail coverage, and for what period of time? Perhaps some clients who feel more comfortable with risk (and have deeper pockets) might want to opt for a 12/12 contract as opposed for a 12/15 or 12/18. Whatever the client decides, they'll need to fully understand the potential consequences of their decision.

• Self-funding works best when employers are committed to the plan in both good years and bad. It's a long-term solution to a big problem, not a short-term strategy.

“Self-funded insurance can be a solution. The question for an employer is, what problem are you trying to solve? Before answering that, you need to look at the data.” – DeNoia