By David L. Fear
In order to address issues about self-funding of large groups, we need to go back to the basics about self-funding and then see how they are impacted by group size.
There are three parts to self-funding: A) The purchase of “stop loss” insurance coverage; B) The use of a “third-party administrator” to process claims and manage the plan, and; C) The plan design which directly impacts the payment of claims from the self-funded plan. Let’s take it from the top…
The two major risks that need to be addressed are specific or individual catastrophic claims and the overall total or aggregate claims for the group. In a day and age where catastrophic claims are becoming more common, the need for affordable “specific stop loss” coverage has never been greater. In the past, the rule of thumb was that the amount of specific risk should be limited to about 10 percent of the total plan funding. For example, if an employer had a self-funded medical fund of $1,000,000 annually, they would consider purchasing “specific stop loss” coverage that had a $100,000 deductible (or retention). Over time, advisors might recommend that this be lowered to 1/12th of annual claims (or one month’s worth of funding) – thus that number might be lowered to $85,000 instead of $100,000. Then as the employer began to establish a better track record on claims history, they might increase those deductible/retention amounts as they set up a reserve fund.
Obviously, the lower the “specific stop loss” deductible/retention level, the higher the premium. Again, in a day and age where a catastrophic claim can quickly exceed $50,000 per person (i.e week stay in a hospital, or an expensive “specialty” drug), the need for specific claim coverage has never been greater.
Conversely, the use of “aggregate stop loss” coverage is less common among larger employer self-funded arrangements. A smaller employer coming off of a traditional fully insured plan should consider purchasing “aggregate stop loss” insurance for the first few years under their self-funded program. Eventually they can establish a more predictable claims pattern. Keep in mind that most “aggregate stop loss” coverages assume that the employer takes some risk too. It is typical that an “aggregate attachment point” (the total aggregate claims deductible for the plan year) will be set at 110 percent to 150 percent of expected paid claims. So, a smaller employer might have a $500,000 claims fund in which the “aggregate stop loss” coverage kicks in when total aggregate claims exceed $625,000 for the year ($500,000 x 1.25 = $625,000). If an employer has credible claims experience from their prior fully insured plan, then it is possible that the “aggregate stop loss” claim attachment point might be lower than 125 percent, whereas employers with little or no prior claims experience are going to see “aggregate stop loss” attachment points higher than 125 percent (if they can purchase the coverage at all).
There are many related issues to purchasing the right kind of stop loss insurance for employers including the “incurred and paid” policy provisions (allowing for claim run-off protection at year-end), “advance funding” of specific claims and monthly accommodation features of the aggregate stop loss coverage. Of course, the more bells and whistles included, the higher the premium that is charged, so in general a larger employer will pay less for stop loss insurance coverage than a small or mid-sized employer – which makes sense when you consider that larger employers have credible claims experience and are more predictable in terms of expected paid claims.
ASO or TPA
The second consideration for large employer self-funding is that of choosing an administrative services company. It is rare to see employers “self-administer” their self-funded health plan. Most now use the services of either an insurance company through an “ASO” (Administrative Services Only) program or contract with a “TPA” (Third Party Administrator). In either case, employers will pay to have their self-funded plan administered in a way that produces efficiency and accuracy of claim payments, follows regulations imposed on such plans and generates credible information about their plan so they can make informed decisions.
There are thousands of licensed ASO/TPA firms throughout the United States and each company can vary greatly in terms of size, experience, expertise and ability. The selection of an ASO/TPA is not something to take lightly: They are handling the employer’s money and dealing with employees and members who need top-notch service. The typical TPA will charge a bit less than a carrier ASO, but may also lack the sophisticated administrative and claims system that an insurer or health plan offer. At the same time, most TPAs have invested in or created their own claim and administrative platform that can actually outperform some of the legacy systems used by insurers and health plans.
Large employers typically will enlist the services of a consultant or attorney to vet out the services of an ASO/TPA firm – making sure they deliver on all of their promises to provide efficient claim and administration services at a competitive price. Even though the cost of ASO/TPA services is the least part of the overall self-funded plan, it may not pay to always go with the “low bidder” because you get what you pay for.
Most large employers tend to choose a carrier ASO over a TPA because they want something that appears to have the security and stability of a carrier name – especially when dealing with employees in multiple locations. At the same time, we now see a trend for some insurers or health plans to set up strategic relationships with regional and national TPA firms who are consistently outperforming traditional carrier ASO arrangements. Nearly every TPA in the U.S. now has relationships with carrier provider networks or reference based pricing arrangements and offer that to clients on a “cost-plus” basis.
Finally, large employers who self-fund have to look at plan design and claim costs much more intensely than in the past. Of particular importance in this is the plan design that goes a long way toward how claim utilization shakes out over time. A good consultant will review the employer’s claims data, and work with an outside actuary to develop plan features that will help bend the cost curve of health care services.
The development of “consumer directed” health plans has made an impact on some aspects of individual utilization. The establishment of Health Savings Accounts, Flexible Spending Accounts and Health Reimbursement Arrangements are now common in most self-funded plans offered by large employers. They have seen an impact in utilization of services when an employee has some “skin in the game” with regard to where and how they obtain health care. This is a direct result of a plan design strategy that has been years in the making.
Large employers are very aware of the cost of health care and while many offer choices to their employees which impact the bottom-line cost, these choices don’t just pop out of nowhere. Larger employers gather into “business groups on health” or more formal associations such as the Self-Insurance Institute of America, to discuss their health care challenges and seek out solutions to stem the rising cost of health care. Their leadership in these programs is vital so that smaller and mid-sized employers who are considering alternative funding can learn from the experiences of the largest employers who pay a substantial amount for U.S. worker health care services.
In conclusion, there is no question that the needs of large employers differ from those of small and mid-sized employers when it comes to self-funding their group health benefits. Large employers are in a position to make more risk in providing health benefits to their workers and as risk takers they require much more data and expertise to evaluate that risk and not just buy the first thing proposed to them from their broker. For this reason, large employers will contract with consultants and attorneys to advise them on legal, regulatory and risk-management issues related to their plan.
Brokers who desire to get into the large employer market should consider establishing a relationship with an experienced consultant or employee benefits attorney to feature a “team” that the large employer will come to respect and rely on going forward.
Cal Broker editorial advisory board member David L. Fear, Sr. RHU is managing partner of Shepler & Fear General Agency and a 40-year veteran of the employee benefits industry. He is a past-President of CAHU and NAHU and 2015 recipient of the NAHU Harold R. Gordon Memorial Award as ‘Health Insurance Person of the Year’.