Self-funded plans: Examining the pros, cons, and misconceptions 

  It is easy to understand why health insurance brokers and benefits advisors are desperate to reduce employer-sponsored health care costs for…

It is easy to understand why health insurance brokers and benefits advisors are desperate to reduce employer-sponsored health care costs for their clients. They have shouldered the unenviable task of sharing significant cost increases with their clients year after year and, as a result, have experienced anger and frustration.

According to the 2022 Kaiser Family Foundation Employer Health Benefits Survey, the average premium for single coverage in 2022 was $7,911 per year and the average premium for family coverage was $22,463 per year. Over the past decade, these costs have increased from $5,615 for single coverage and $15,745 for family coverage. That’s lots of bad news for advisors to communicate to clients.

In response to constant increases in costs and increasing despair, carriers, managing general agencies, third-party administrators and consultants are encouraging employers of all sizes to self-insure their health plan costs. For the right employer, self-insurance provides an opportunity to reduce costs. While self-insuring health care costs is not unwise for all employers, there are some factually untrue declarations made by many who are promoting self-insurance and putting employers, and perhaps their employees, at serious risk. 

First, it is important to understand that self-insurance plans have been packaged in marketing lingo that may obscure whether a plan is actually a self-insurance plan. There are only two categories of employer-sponsored health plans: fully insured and self-insured. Frequently, carriers and managing general agents market plans known as “level-funded.” Although the cash flow may be altered with these plans, they are still self-funded plans. 

So, fully insured plans are defined as when an employer buys a group health insurance policy from an insurer, the policy documents define the plan’s benefits, and the insurer assumes full responsibility for benefits to all covered individuals. Self-insured plans are when the employer is fully responsible for defining the plan’s benefits and for providing and paying for those benefits to covered individuals per the terms of the plan.

The most serious misstatement regarding self-funded plans is that they are “no riskier than a fully insured plan.” The primary reason offered to support this inaccuracy is that employers purchase a stop-loss policy to offset the risks that come with self-funded plans. 

However, stop-loss policies are not health insurance. They are a form of financial reinsurance that reimburses the employer according to the terms, conditions and exclusions of the policy.

Self-funded employers are frequently unaware that they remain legally responsible to pay the claims of their member employees and dependents according to the plan, even if the stop-loss policy does not reimburse. There are numerous situations where the plan commits to providing payment for the member’s medical care, but the stop-loss policy is not in alignment with the plan and will not reimburse the employer for those costs.

Brokers, agents and employers have often not developed the expertise to make certain that the plan and the stop-loss policy align and will perform as expected. One can only imagine the potential financial devastation that can occur when the plan dictates payment of the members’ medical expenses and the stop-loss policy has an exclusion or limitation that denies any monetary reimbursement to the employer. 

Lack of alignment between the plan and the stop-loss policy is not the only area of significant risk facing employers with self-funded health plans. The claims administration contract carries substantial financial risks, as well. To best understand the risks coming from the claims administration contract, we must first highlight the fiduciary responsibilities and liabilities arising from the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a federal law that sets minimum standards for most health plans in the private industry and provides protections for enrolled individuals.

Under ERISA, plan fiduciaries, or anyone who exercises discretion concerning the management or administration of the plan, have several mandated duties. Among them is the duty to pay only reasonable plan expenses. Thus, plan fiduciaries must identify fees and ensure they are reasonable. 

Frequently, claims administrators are charging fees that would be difficult to defend as “prudent and reasonable.” The most onerous and imprudent fees typically are due to the administrators’ charges for their cost containment programs. 

For example, since medical providers do not bill according to their network contract or other agreed-upon amounts, all medical bills have to be repriced by the administrator. There is no argument that it is a necessary service to adjust the “billed amount” to the “agreed amount” on all medical services invoices. The issue is how much the administrator charges for the service. 

Some administrators charge on what is called a “percentage of savings” basis for their bill repricing services instead of a “flat fee” per bill. With this arrangement, the cost containment fee is dependent on the medical provider’s original bill, which is irrelevant to what the medical provider will be paid. Under this fee arrangement, the charge to reprice a medical bill could run into tens of thousands of dollars. It is almost laughable, if it was not so serious, when the claims administrator chooses to establish a limit and agrees that no single bill repricing will cost more than $50,000. 

If the Department of Labor determines that the fees are not prudent and reasonable, then the fiduciaries will likely have to reimburse the plan for the excessive fees. Additional penalties may also be assessed. To add insult to injury, it is highly unlikely that the stop-loss policy reimburses for cost containment fees, so the employer could be on the hook for thousands, if not tens of thousands, of dollars in expenses for many of their plan’s claims. 

Also, it is common for claims administrators to fail to disclose all of their fees, and it is not possible to determine whether or not the fees are prudent and reasonable if they are not disclosed. The moment the employer signs such contracts, they are most likely already in violation of ERISA.

Ask yourself, how many employers are aware of the potentially catastrophic financial risks mentioned above? And how many of them would continue to self-insure their health plan costs if they were aware?

Actuaries assert that employers with 250 to 300 or more employees are more likely to understand the risks, once they are illuminated, and will have the actuarial credibility to conduct assessments to make effective data-driven decisions. One has to question how wise it is to sell these plans to employers with as few as 10 employees, as is becoming increasingly common. 

As the 18th-century author of “Common Sense” Thomas Paine, said, “It is the duty of every man, as far as his ability extends, to detect and expose delusion and error.” In the spirit of Thomas Paine, it is unequivocally false to assert that self-insured health care plans carry no greater risks and liabilities than fully insured plans. 

Substantial opportunities await agents and brokers who commit to pushing back against these falsehoods and assisting employers to understand these risks and make better decisions. The icing on the cake is we know where all the private self-funded employers with over 100 employees are located, as this information is public record. It’s long past time for a new breed of agents and brokers to step up and assist these employers. Those who do will be richly rewarded. 

Frank Pennachio is Practice Leader, Growth Solutions, U.S. at ReSource Pro