Benefits Costs Eroding
Your Bottom Line?
Investigate Partial Self-Funding for Group Medical Plans

Sharply increasing benefits costs are having the same sort of effect on earnings that they did several years ago. With annual medical inflation being touted as 10-14 percent and pharmaceutical inflation at nearly 20 percent, employers and employees alike are feeling the dramatic effects that this sort of compounded inflation wreaks over time.

One way to combat the increases is through risk assumption. A product commonly used is called self-funding, an unfortunate misnomer since it implies total assumption of risk. In reality, the program’s catastrophic risk is transferred through specific reinsurance, and overall risk is transferred through aggregate reinsurance. Widely used by larger employers, and appropriate for employee groups whose participants number at least 100, this concept may prove to be 10-20 percent more cost effective than traditionally structured plans.

Why self fund?
First, medical claims are by and large high in frequency and low in relative severity. Self-funding simply allows an employer to assume a portion of that risk itself, instead of transferring the risk, at a profit, to an insurance carrier.

Secondly, self-funding allows for an employer to unbundle all of a medical program’s component parts, separately purchasing only the most appropriate and cost effective. These items include managed care, claim payment, reinsurance, pharmaceutical management, large case management, utilization review and subrogation. Here, the sum of the parts may be much greater than the “whole” of buying from a single-source carrier.

Thirdly, a self-funded plan allows flexibility with regard to plan design. Whatever is most in keeping with an organization’s benefits philosophies and demographics can be created—subject to reinsurance availability.

Finally self-funding allows for cash-flow benefits to inure to an employer’s benefit, not a carrier’s—although this can work negatively in some cases, too.

All of these items contribute to an efficient and cost-effective funding of group medical benefits.

How does it work?
A third party and/or broker (TPA) manages the program on an employer’s behalf. The TPA adjudicates all claims, in accordance with a Summary Plan Description (SPD). Claims batches, or runs, are approved by the employer for payment, and medical providers are paid through the TPA, by the employer. To effectively manage claim costs, managed care organizations, usually Preferred Provider Organizations (PPO’s) are “leased.” In the event catastrophic single or “in-the-aggregate” claims occur, reinsurance is coordinated by the TPA. The TPA also usually manages the relationships with large-case coordinators, litigation specialists and pharmacy managers.

Where to start?
As always, choose your professional to investigate this concept wisely. These plans are governed by ERISA, carry fiduciary liability (which can be transferred through fiduciary liability insurance), often have more inherent total risk than traditionally funded programs, and require a plan designers’ knowledge of technical minutia.

Additionally, there are variants of risk-assumptive programs called Administrative Services Only (ASO), and minimum premium plans which have some, but not all of the elements described above. It should also be noted that groups that embrace Health Maintenance Organizations (HMOs) might not be strong candidates for this type of program.

Whatever your approach, be proactive and begin investigating the alternatives at least 120 days in advance of your program’s expiration. Remember, if changes are made, a good enrollment period requires significant upfront communication of several types and time!

Joe Piatczyc is the president of American Sterling Insurance Services. He may be reached by phone at 913.498.9090, ext. 7201, or by e-mail at jpiatczyc@americansterling.com