“It wouldn't be the insurance company's plan, but it would be the employer's plan, and the employer has to take responsibility for it,” explains Ronald Dewsnup, president and general manager of Allegiance Benefit Plan Management Inc. in Missoula, Montana.

To adequately determine that, brokers should have a long-term relationship with clients, “not a year-to-year one-off transactional arrangement with them,” says Mike Ferguson, president and chief executive of the Self-Insurance Institute of America Inc. in Simpsonville, South Carolina.

Brokers should know that the size of the employer is not always the best determinant, Ferguson says. While the rule of thumb is that the bigger the employer, the more likely they are to be a viable candidate for self-insurance, that's not always the case if they do not have enough cash flow to pay claims and wait for reimbursement from stop-loss carriers.

“Sometimes a large company is just barely getting by and does not have a strong cash position, whereas sometimes a small law firm or accounting firm is cash rich,” he says.

Before working with clients, brokers should take the time to educate themselves about self-funding, Ferguson says. The Self-Insurance Educational Foundation recently launched a website, siefonline.org, which has sections for various interested parties, including brokers, to learn about self-funding “on a very granular level.”

Andrew Cavenagh, founder and managing director of Pareto Captive Services LLC in Philadelphia, says brokers should learn about their clients' turnover rates and wage rates, as health management programs and accompanying employee incentives to make self-funding more successful would be very different for long-term, high-wage earners than it would for low-paying workers who do not stay for long.

“Brokers also need to learn what tradeoffs the client is willing to make between costs and the types of benefits they want to offer,” Cavenagh says. “Do they value reduced costs over reduced volatility? Do they value ease of administration over cost? Brokers need to put on their thinking cap and develop the right strategy that is specific for that client.”

Brokers need to determine what the client can do or is willing to do to control costs, and for Cavenagh's firm, that means requiring its clients to have wellness programs, which can vary widely depending on the specific population and the culture of the company.

“For example, a college that employs tenured professors might take a very holistic life approach to chronic disease management, as the employees will be there for a long time,” he says. “Contrast this with a fast-food company with short tenure. This employer might forgo efforts on long-term disease management and instead focus on creating a narrow network of providers to reduce the cost of procedures.”

Ken Gumbiner, executive vice president, sales, at IHC Risk Solutions in Fort Wayne, Indiana, says brokers should review administrative service options in their market.

Insurance carriers offer ASO as a turnkey solution, which in most cases is packaged with the carrier's stop-loss coverage, provider network and prescription benefits management, as well as its in-house utilization review management and large claim management.

“If the employer group is currently covered by a fully insured plan with a carrier that offers ASO this can be a simpler, but perhaps not as cost-effective transition,” Gumbiner says. “Some ASO carriers will allow the broker to place the stop-loss with another commercial stop-loss carrier.”

Independent third-party administrators provide the same administration services as insurance carriers but may offer a greater degree of flexibility, he says. One advantage of using a TPA is if the employer becomes dissatisfied with a specific vendor's services, the employer can change it without disrupting the plan completely.

Some TPAs also offer “reference-based pricing” with no provider network, an option not typically available from ASO carriers. Another advantage of using an independent TPA is that employers can buy a stop-loss policy from a variety of stop-loss carriers.

Choosing the right stop-loss carrier

Brokers should work with third-party administrators to find the right stop-loss insurance policy, Dewsnup says.

“Making sure the stop-loss policy covers everything the plan does is very important.”

Brokers should evaluate several stop-loss policies from different carriers, which have different exclusions and terms, says Horace Garfield, vice president, medical stop loss at Transamerica Employee Benefits in Louisville, Kentucky.

Brokers should review stop-loss policies for language that may allow the carrier the right to determine stop-loss benefits based on what is “reasonable and customary,” Garfield says.

“For example, an employer's third-party administrator could make a determination that the price billed for an implant device is reasonable and customary and pay the claim,” he says. “Upon submission to the stop-loss carrier for reimbursement, the carrier may determine that a lower price is reasonable, if the policy includes reasonable and customary language. The employer would then be responsible for the difference.”

Brokers should also review stop-loss policies for language that allows carriers to independently assess a plan participant's eligibility for benefits, Garfield says. If the plan document differs from other company documents, such as employee handbooks, the stop-loss carrier may assess eligibility based solely on the plan document.

“For example, if the plan document states that coverage is terminated once an employee works less than 30 hours a week, but the employee handbook provides that the employee can continue to be covered for six months if the employee goes on disability, the stop-loss carrier may not pay a claim relating to the employee,” he says.

Brokers should analyze stop-loss policy features including run-in coverage for currently self-funded groups and run-out coverage for groups converting from fully insured plans, Gumbiner says. “It's incredibly important for a contract to be written on the correct benefit period contract basis.”

Employers with 50 to about 300 employees should have a “no laser on renewal feature” with a limit on the renewal premium increase.

He cited a scenario if lasers were permitted: “ABC Company buys a stop-loss policy from XYZ Insurance Company with a $75,000 specific deductible per plan member. Three months before the renewal an employee is diagnosed with a condition requiring a heart transplant. At renewal, the stop-loss carrier raises rates 15 percent but also increases the employer's specific deductible for that plan member to $500,000, creating a potential liability of $425,000 that the employer did not anticipate.”

Contracts should also include a maximum rate increase, specific advance, monthly aggregate accommodation and gapless renewal options, Gumbiner says. Some policies also offer an experience refund option that returns a portion of the premium if the group's stop-loss claims fall below a defined threshold.

“Employer group captives are becoming more a prominent means for employers that are currently fully-insured to self-fund with less potential financial volatility,” he says. “Once brokers become more experienced with self-funding, the next step would be to develop some expertise in employer group captive programs.”

Brokers need to determine which strategy is best for a client, Cavenagh explains.

Should they be fully insured with an health reimbursement account, or self-insured with no stop-loss policy, or some stop-loss coverage, or should they form a captive?

“If it's a small employer with little or no data on employee utilization rates, it might be best to start them on a fully-insured plan with a high deductible and an HRA, so they can start gathering data,” he says. “It could be an interim step to self-insuring.”

Monitoring success

Successful employers that have self-funded typically have executive teams that have “made a decision that they are going to take control of health,” Ferguson says. They'll take time to structure and manage a plan in a way that leverages all of the advantages of self-insurance—from plan design to embellishing wellness programs to forming stop-loss arrangements.

“Given a good amount of thought and energy, they can generally good results,” he says. “Employers need to be willing to take the time to explore six or seven different wellness programs to determine which one fits bests with their plan and their organization.”

After a client has implemented a self-funding program with a corresponding health management program, brokers need to make sure they monitor with metrics and assessments using an outcomes-based wellness program, Cavenagh says. Each client must decide which program works best for their culture.

However, brokers must let their clients know ahead of time that the most appropriate analysis for self-funding initiatives takes into account multiple years, he says.

“One of the most important things that is probably missing in the discussion of self-insurance is the time continuum,” Cavenagh says. “Our industry is mired at looking at the next 12 months, which is sort of its Achilles' heel.”

Instead, brokers should advise clients to measure success over a longer period, say five years.

“They may have a bad claims year in their first year, but then four good years, but if they had been fully insured, their premiums may have spiked after the first year,” Cavenagh says. “So the idea that self-insurers have more risk evaporates pretty quickly when analyzed on a multi-year basis.”