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Understanding Stop Loss and Self-Funded Health Plans

There are many factors that administrators of group health plans consider when evaluating different programs or benefit packages. Each organization – a school, a municipality, a private sector employer or a not-for-profit organization – has different needs. An employer needs to consider the number of employees and dependents on the plan; types of benefits being offered; state and federal laws; whether the plan is subject to ERISA (the Employee Retirement Income Security Act of 1974); terms of any bargaining unit agreements and available provider networks, typically based on where participants live.

Budgeting for health care can be frustrating and time consuming. Constructing an all-inclusive plan that considers employer cost, risk, and employee out-of-pocket expenses is difficult. Of course, each organization wants to find the right balance of making coverage affordable for participants and robust enough to cover the health care expenses and needs of their employees without breaking the bank. These are among the many reasons why self-funded health plans are increasing in popularity, offering greater flexibility while still protecting the plan through stop loss insurance, which provides the umbrella coverage for unexpected high-dollar claim costs. A self-funded plan and stop loss coverage could be right for your organization.

What Is a Self-Funded Health Plan?

Under a self-funded health plan, the responsibility – and the related financial risk – for participants’ health care costs moves from an insurance carrier to the organization itself. That means that instead of paying an insurance company a predefined rate, the employer and employees pay a “premium equivalent” into a dedicated health care expense fund maintained and managed by the employer. This account is then used only to pay for billed expenses from eligible health claims.

While it may sound like a riskier alternative on the surface, self-funded health plans offer a number of benefits for employers. For example, under a self-funded plan, administrative costs are a fixed per employee per month cost and are not impacted by annual rate increases, meaning the employer avoids non-negotiable premium increases and risk charges by an insurance carrier. Organizations also have a greater control over the design of self-funded health plans, which can provide health plan options that are more adaptable to the employer’s workforce.

At a legislative level, self-funded plans are not subject to many state health premium taxes that can drive up insurance costs. In addition, these health plans offer exemptions from many state insurance regulations. Alone, these two factors can provide a significant reduction in overall coverage costs without impacting the quality of the coverage being provided.

Umbrella in StreetHow Does Stop Loss Insurance Work?

Most employers with self-funded insurance plans purchase stop loss insurance that protects the self-funded plan administrator from any high or excessive claims that could expose the organization to financial risk. The nature of health care claims can be inherently unpredictable, and an employer is able to protect itself from unforeseen financial losses through purchasing insurance coverage on the back end of their self-funded program. Stop loss coverage protects the organization by reimbursing the plan for claims that exceed a predetermined threshold.

There are two main types of stop loss coverage – specific (individual) stop loss and aggregate (cumulative) stop loss. With specific stop loss, organizations have a limit on claim liability for any single plan participant, with the stop loss insurance reimbursing the plan if any plan participant’s claims exceed a specified per-individual deductible amount. Under aggregate stop loss coverage, organizations are protected from costs that exceed a threshold for the whole group of plan participants. That means that all claims for all participants that are under the specific deductible are pooled. When the total of these claims reaches a set dollar amount – usually set at 125 percent of expected annual claims – the stop loss carrier begins to pay for claims over this aggregate.

Additional stop loss options are also available that can further mitigate risks. These can include aggregating specific, advance funding and terminal liability coverages. Learn more about these on our stop loss insurance page or by calling Premier Consulting Associates.

What Are the Benefits of Self-Funding?

If your organization assumes the risk, why would you want to switch to a self-funded health plan? It’s a common question. While on the surface, self-funding may sound like a riskier option than paying an insurance company to assume the risk for all claims, in practice, it offers a number of benefits for both employers and employees.

For example, self-funded plans which have access to data warehousing and analytics also have an improved ability to analyze claims data. Having access to data and reporting allows self-funded plans a better opportunity to drill down into member utilization of medical and pharmacy services. A group health plan can better understand the drivers of plan costs – preventable conditions, high-cost claimants and out-of-network utilization. Understanding how plan benefits are used and where members need more education about their plan gives the employer better insight into implementing plans and programs that monitor high-cost claimants, target disease management opportunities and create wellness programs.

Data can help employers work with wellness vendors or establish wellness campaigns that proactively educate employees about preventable conditions and take more control over their health and wellness. The data can also inform the plan about the potential opportunities for increased generic drug utilization and oversight on specialty drug costs, both of which can provide significant overall annual plan savings.

A self-funded plan also benefits from an improved cash flow as claims reimbursements to providers are paid only when claims are incurred and paid. This is unlike an insured health plan, where premiums are set a flat annual rate regardless of claims incurred and paid on a monthly basis.

What Types of Organizations Can Benefit from Self-Funding?

Self-funded health plans have surged in popularity among employers in recent years because they offer improved cost control, greater flexibility and more stability in overall expenses. Not surprisingly, most employers can benefit from self-funding one or more of their employee benefit plans. For many mid-sized and larger organizations, self-funding offers a great deal of versatility and flexibility in structuring their medical, prescription drug and ancillary plans. In fact, 61 percent of all covered workers today are enrolled in a health plan that is either wholly or partially self-funded.

Self-funded health plans provide employers with a way to take more control over the direction of their health plan designs and dollars. They can implement cost management programs, can select different claims administrators for both medical and prescription drugs and can model their benefit designs to make the most of their health care spend and maximize their cash flow by holding reserves and claims dollars until payments are needed.

Through self-funding, organizations have seen dramatic savings – as much as 10 to 15 percent in reduced costs – on an annual basis. These plans immediately have the ability to better analyze claims data and proactively direct employees to healthier habits and preventative care, as well as eliminate premium taxes and reduce administrative costs. Self-funded plans also maximize pharmacy rebates, contracts and specialty drug negotiations. And for public entities, these cost savings can reduce the burden on local taxpayers.

Is Self-Funding Right for Your Organization?

Looking for ways to cut benefits costs? Premier Consulting Associates can help you decide on the right options for you. Speak with our team and learn more about self-funded health plans and see if they can be the right choice for your organization. Call us today at 716.688.5600 or contact us online now to learn more.

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Society for Human Resource Management
Society of Professional Benefit Administrators
Self-Insurance Institute of America, Inc.
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