Despite Changes in Health Care, Self-Funding May Be Answer By RICHARD REICH For many years, self-funding has been a popular way for medium and large employers to manage their health benefits in a cost-effective manner. With a self-funded benefits program, an employer becomes the primary risk-bearer and assumes what would typically be an insurance company’s role. Instead of paying for an insurance policy, the employer establishes cash reserves to cover the health care claims of its employees. Traditonally, employers have taken the self-funding route when faced with rapidly rising premiums. Managing the stability and predictability of health care costs then becomes critical. It is the unforeseen, catastrophic claim that poses the most risk to a self-funded program. We are now entering a new era in health care, with complex technologies, expensive new procedures and heavier utilization of services by an aging population. Does self-funding still make sense? The answer depends upon many factors, including the employer size, the employee population and the local regulatory environment. In general, self-funding has worked best for employers with at least 500 employees, since this creates a broader risk pool. However, companies with as few as 200 employees may find it makes sense, depending upon their circumstances. Employee demographics are an important consideration. Historically, one key advantage of self-funding has been their federal regulation. These plans are governed primarily by the federal Employee Retirement Income Security Act (ERISA), which includes far fewer mandates than are included under most state regulations. For companies choosing self-funding, the top priorities need to be maximizing predictability and keeping total expenses at or below budgeted levels. Fortunately, a number of tools such as stop-loss policies, carve-out disease coverage packages and disease management programs are available to manage risk. Basic stop-loss insurance protects employers from individual catastrophic claims and aggregate stop loss policies can protect against higher-than-expected overall claims. However, as a result of rapidly rising stop-loss rates and a shrinking employer reinsurance market, some companies have found it difficult to obtain the needed coverage. There are a number of new options for employer to ensure financial predictability carve-out insurance policies. They can be seen as either an alternative or complement to stop-loss insurance. A carve-out insurance program enables an employer to transfer financial obligations for a specific health care condition to a third party. Typically, these conditions are either high cost or unpredictable, or both. With a carve-out insurance program, risk is typically transferred on a “first-dollar,” or very low (i.e. $ 10,000), deductible basis as soon as a covered employee is identified as needing a specific service. Moreover, carve-out programs are available to help companies manage more than just catastrophic claims. For example, one less emergency room visit per year for an asthma sufferer can quickly add up to significant savings to an employer’s plan, especially when carried out over the variety of carve-out programs currently available. When purchasing a carve-out program, most companies hire an experienced health care consultant or broker to set up and select the best portions of a self-funded program. Richard Reich, based in Glendale, is a regional director for Evergreen Re, a provider of reinsurance and risk reduction products. He can be reached at [email protected].
