When your health plan is fully insured, it’s easy for your finance department to budget for the cost — you just pass on the health insurer’s annual renewal premium amount to them and that becomes the annual budget number. But you and your broker may have come to suspect that you are leaving money on the table by continuing on a fully insured basis, and you may want to test the self-funded waters.
By now, you may already know there are significant benefits to self-funding, but actually making the switch is a scary prospect for HR directors.
Before you can transition to a self-funded plan, you need to be financially stable and willing to take a bit of a risk. As a safeguard you also need familiarize yourself with are two forms of stop loss insurance. One caps the impact on any one covered member’s claims (individual or specific stop loss), and the other caps your total annual claim liability (aggregate stop loss). Your broker can guide you on which stop loss levels and which stop loss coverage periods are right for your population when transitioning from fully insured to self-funding.
Beyond these stop loss safeguards, size will dictate how you pay. If you have fewer than 100 covered employees, you may be able to pay the same amount monthly, just as you do with your fully insured premium. This monthly payment equals projected claims plus an aggregate margin, a monthly administration fee and the stop loss charge. This eliminates unpredictable monthly payments for a small self-funded group.
However, for larger groups of over 100 employees, moving to self-funding will mean paying claims as they are processed (which means uneven claim payments), plus stop loss and administration.
To help you determine if you’re ready for self-funding, you may want to analyze your plan in a few different ways.
1. Look back: A look back analysis is just what it sounds like — a view of how your plan would have performed over the last couple years had you been self-funded, compared to how it did perform under a fully insured model. This should be an easy enough task for your broker to take on, especially if they have sought out self-funded quotes from claim administrators and stop loss carriers on your behalf. In addition, they should know what your actual claims costs were. The result is that you’ll know whether you would have saved money or not.
2. Look forward: You may already know what your upcoming fully insured renewal looks like. But even if you don’t have hard numbers yet, you can work with your broker to determine a strong estimate of what your proposed premiums will be. Then, your broker should get a self-funded quote, which includes the expected and maximum claims, plus the administrative fees and stop loss premiums. This is your expected self-funded costs for the upcoming policy period. Compare that estimate to your fully insured renewal costs. (Make sure the self-funded costs are on the same “incurred claims with runout” basis that the fully insured costs would be, for a fair apple-to-apples comparison.)
3. Probability. While the “look forward” analysis compares your fully insured costs to your expected self-funded costs, it is based on “expected” claims. The risky part of self-funding is that your actual claims will not ultimately materialize exactly as expected. There are some more sophisticated tools that combine group-specific data (such as your claims history, demographics and the proposed fixed costs) with a fairly large actuarial database to come up with thousands of possible outcomes.
By charting all of these outcomes, you can produce likelihood percentages of where your actual claims will come in at — versus the “expected” level, and versus the fully insured renewal rate. Not all brokers have this tool on hand, and as a result, there may be a cost associated with producing one. The output from this tool may appeal to your colleagues in the finance department.
Other considerations
During your analysis, you may want to set your self-funded policy year liability based on incurred claims (plus fixed costs), even though your actual paid claims within that policy year may be less due to the lag between when provider services occur and when you actually fund them. The lag is a cash-flow advantage but it does not represent a reduced claim liability.
Finally, don’t lose sight of the cost of high claimants, an important part of planning if you choose the self-funding route. Will your past high claimants continue into your renewal period? Are you aware of new high claimants on the horizon? Stop loss carriers generally insure only “unknown risks,” not “known risks.” If a plan member has an expensive chronic condition, such as kidney failure, a stop loss carrier may “laser” that individual and set a higher individual stop loss threshold. It’s important that you know what’s excluded and factor in any uncovered catastrophic claimants into your analysis.
In the end it may turn out that self-funding is not good fit, or possibly that this year is just not the year for it. But whether it is, or it isn’t, it is comforting to know that you’ve done your due diligence and have documentation supporting the decision you’ve reached.
