Due to the economic recession and the potential for increased health insurance costs brought about by health care reform, many employers are beginning to view self-funded health care plans as a more attractive option than fully insured plans. These employers recognize the advantages of self-funding, which include cost savings, increased cash flow and more flexibility in benefit decisions, administration and funding. Self-funded plans will be favored under health care reform because, while many provisions of health care reform apply both to fully insured and self-funded plans, there are many provisions of health care reform from which only self-funded plans are exempt. For example, self-funded plans will not have to comply with the new marketing, internet portal, enrollment and provider network and quality accreditation rules. This will mean direct cost savings to the plan, which will pass through to the employer. There are also many state mandates from which self-funded plans are still exempt.
Flexibility of Plan Design
One major advantage of self-funding is the control and flexibility of plan design. Under a self-funded health plan, the employer has the option of either duplicating its current fully insured plan design or redesigning and tailoring the benefits to meet the specific needs of the employer. Of course, as mentioned, health care reform has put some limitations on the extent to which an employer can influence the plan design, but for the most part, the employer has the freedom to eliminate benefits that result in plan abuses or high utilization.
Exemption From State-Mandated Benefits
As previously noted, another benefit of opting for a self-funded arrangement is an employer’s ability to opt out of state mandated benefits, although this benefit has been somewhat limited by health care reform. Since self-funded health care plans are governed by ERISA, they follow federal law and are not required to provide state-mandated benefits, which can be both expensive and unnecessary. Likewise, these employers can set their own limits on benefits where states would otherwise set the limits.
Control of Reserves
Employers sponsoring self-funded plans also enjoy the advantages of controlling reserves. In a fully insured plan, a substantial portion of the premium is held by the carrier as a state-required reserve for claims and inflation. Under a self-funded arrangement, the employer maintains and controls the reserves and has the ability to invest these funds. Moreover, there are no restrictions on reserves, and the employer retains them when claims do not materialize. Under a fully insured arrangement, if an employer’s claims experience is better than expected, only the insurer benefits financially.
Claims Experience
Even where an individual employer has a history of good claims experience, the insurance companies pass on a renewal based upon the entire pool of insureds. Thus, an employer is rated, not based upon its individual claims experience but upon those of other companies that have no relationship to that employer’s company or industry. A self-funded arrangement eliminates this component of maintaining a plan.
Premium Tax
In most states, there is no premium tax for self-funded plans. This results in an immediate savings because approximately two to four percent of an employer’s fully insured health care costs fund this premium tax.
Advantages of Advanced Preparation
It seems clear that health care reform will increase the already high cost of health insurance. With greater flexibility, fewer mandated benefits and potentially lower costs, now is the time for both large and small employers to consider shifting their fully insured plans to self-funded plans. Through innovative ideas and strategic planning, employers can examine their workforce and prepare for the changes coming in 2014.
Based in Fox Rothchild’s Los Angeles office, Michelle M. Stimson, special counsel, can be reached at 310.598.4153 or
