Employers recognize that health insurance is a benefit that helps attract and retain quality employees. But the skyrocketing cost of healthcare premiums is forcing them to closely re-examine their plans, and many are investigating alternatives. One alternative to traditional fully-insured policies is self-funded plans. And while they're not right for every business, they are proving a good alternative for many.
What's the difference?
In short, in a fully-insured health plan, a company contracts with an insurer and pays a fixed annual premium to cover employees and their dependents. The premium is based on the number of employees enrolled in the plan and the plan's features, and changes during the year only if the number of employees enrolled in the program changes. The insurer pays the costs of the enrollees' medical claims based on the health plan's benefits, with employees responsible for paying any deductibles or co-payments.
With a self funded (also referred to as a self-insured) plan, the employer assumes the direct risk for payment of claims, using its own dollars to provide health or disability benefits. The employer pays the claims costs incurred by the covered employees based on their actual healthcare use - not services they might or might not use, as with a fully-insured plan.
Self-funded employers, especially large employers, typically contract with a third-party administrator (TPA) - which could be a health insurance company - to provide administrative services for the plan.
In most cases, a self-funded firm also buys stop-loss coverage from a reinsurer to help protect the employer against large unanticipated or catastrophic claims that exceed the self-insured's policy. Stop-loss insurance offers "terminal liability." This option ensures that claims incurred during the policy period will still be reimbursed during a subsequent "run-out" period. For example, with a 12/15 policy, an expense might be incurred during the 12 month contract period, but is still paid over 15 months - a potentially wise investment, since most bills need to be processed before they are paid, which can run over the contract period. A 12/12 policy doesn't provide that cushion.
These two fixed fees - administration and stop-loss insurance - are a self-funded firm's only direct monthly plan expenses. Other than that, the dollars spent for healthcare differ month-to-month based on claims.
Both fully-insured and self-funded plans typically provide medical coverage, whether a PPO (preferred provider organization), POS (point-of-service) or HMO (health maintenance organization), and in- and out-of-network options that determine the plan's cost. But they also might include dental, prescription drugs, vision and short-term disability benefits, depending on a company's and its employees' needs.
A major distinction between the plans is that self-funded plans are governed by the Employee Retirement Income Security Act (ERISA), the federal law regulating employee benefit plans, while fully-insured plans are regulated by state laws. As such, "New Jersey insurance laws mandate coverage for a variety of conditions that would not be required under a self-insured plan - and might not be required by or benefit the particular employee group," notes Ward Sanders, president of the NJ Association of Healthcare Plans. Not having to pay for mandates "might enable employers to allocate those dollars to services that would better serve its employees, such as wellness programs - which might also help minimize the company's risk and expenses."
Sanders points out that state-regulated plans also are subject to "premium taxes," which can amount to 2-4 percent on insurance premiums. Since self-funded plans "technically don't have any 'premiums,' they save on that expense."
Also, as a result of being free of state requirements, self-insureds have more flexibility and control over the contents of their plans than fully-insured, which are restricted to the plans they file with the state. The self-insured employer can duplicate a fully-insured plan or customize a plan to meet the needs of its employee base, as well as add and change coverage and services offered to best serve employees' needs.
Additionally, self-insuring eliminates the risk small employers in fully-insured plans face of being "pooled" with other small companies that might have less stellar healthcare claims histories. The bad claims experiences an insurer has with other companies in the "pool" can result in increased premiums for all the "pooled" employers, despite their individual performance. Fully-insured carriers also might increase rates based on "trend" - increases based on claim "trends" at other companies.
What's Right for My Company? Determining whether a company can benefit from self-funding first requires an analysis of the company's existing plan and recent claims experience. How much money is it spending on its current plan? What is the employees' healthcare history?
"There are risks and rewards to both self-funded and fully-insured funding methods," proffers Raymond Bascio, director of large group sales at Horizon Blue Cross Blue Shield of New Jersey, which sells both self funded and fully-insured health insurance in New Jersey. "Horizon counsels its business clients to fully examine the pros and cons to determine what course is best for their operations and employees. These decisions are especially sensitive and consequential to businesses with 500 or fewer employees - whose success is often tied to day-to-day cash flow."
"Self-funded plans are not as complicated as they often are made out to be," asserts Joseph Berardo, CEO and president of MagnaCare, a health management company which offers self funded healthcare programs to New Jersey companies with as few as 15 employees. The key, Berardo says, is for employers to make an "apples to apples" comparison of their existing fully-insured plan with a self-insured plan "to see if it makes sense, based on their employee base and the drivers that impact their healthcare costs."
Mike Munoz, vice president of sales and marketing at AmeriHealth New Jersey, which offers both self-funded and fully-insured plans, as well as reinsurance and TPA services, urges employers to consider their preference for predictability (i.e., set and regular premium payments), if fully-insured, as opposed to their tolerance for risk and the "potential reward" of paying only for healthcare services used (in addition to administrative and stop-loss costs), if self-insured.
"When considering a self funded program, a company is betting that its employees will be healthy, so they will have better-than-average and lower out-of-pocket healthcare expenses," Munoz says. "They need to do that in order to benefit from a self-funded
But, he adds, "No one can predict with 100 percent certainty how much a self-insured's expenses will be, even experienced underwriters." That is why most self-funded companies purchase stop-loss coverage.
"Cash flow and not having adequate cash to cover major claims can be devastating to a small company," Munoz says, noting that some self-insured stop-loss plans require that a company pay the stop-loss claims before it can get reimbursed by its reinsurer. He therefore suggests small companies maintain a reserve to cover themselves in these instances.
"We ensure that companies understand the planning and fiduciary components inherent in self-funded plans," affirms Horizon's Bascio. "As a result, many companies decide that the fully-insured option is the way to go. They're seeking to insulate themselves from the financial risks and responsibilities and gain the peace of mind that comes with a fully-insured plan."
NJAHP's Sanders concurs. "The negatives to self-funding deal mostly with the ability to handle large claims. Smaller employers generally cannot tolerate risk as well [as large companies] and thus need to purchase fully-insured products."
Small employers tempted by the "risk/potential reward" of savings through a self-insured plan are advised not only to read the fine print - of services, including the network of healthcare providers, and co-pays or deductibles, but to be aware that some companies in the self-insured market promote "lowball" rates that might be increased as a company's healthcare history is developed, warns Munoz.
Self-funders also need to stay alert for "lasering" - the threshold at which an employee has a high level of claims and a re-insurance company increases the deductible on that one employee or won't cover them for a certain condition - or hides the higher costs in its premium calculations, Munoz admonishes.
And in October, the New Jersey Department of Banking and Insurance issued a bulletin advising companies that some writers of stop-loss policies have been selectively marketing coverage to small employers on the basis of their employees' health history. Calling this "cherry picking" an "unfair trade practice" that leaves the groups more likely to incur claims to the state's guaranteed issue insured market and drives up premiums for small employers purchasing insured plans, the Department urged carriers to refrain from this practice - until it issues regulations prohibiting such practice - and encouraged companies purchasing stop-loss insurance to do their homework in selecting an insurer.
To Wait or Act
Despite all the changes and options proposed and underway in the healthcare insurance marketplace, Berardo urges, "It's not worth waiting to see what happens before acting. Employers need to take control of their healthcare issues today."
"With their health insurance premiums up 10-20 percent this year, after a 20-30 percent increase last year - and in the fourth year of a recession- - small employers are being forced to take a serious look at providing healthcare benefits to their employees and are looking for alternatives to traditional health insurance plans," states Christine Stearns, NJBIA vice president, health and legal affairs. "If healthcare isn't made affordable, small companies will end up either dropping coverage altogether, or, at the very least, cutting benefits, if not headcount. Self-funding is one option that has attracted their attention. Despite this, self-funding is traditionally the choice of employers with several hundred employees who tend to have the financial resources and expertise to take on the additional risk."
Berardo acknowledges that since self-funded plans are a relatively new idea to the small employer marketplace, many employers are still "not comfortable" with them. But, he adds confidently, "It's a financial mechanism that's becoming more main stream and is here to stay. Companies should look at all the options available to them today. With reasonable cash flow upfront and risk analysis of a company's health costs and claims over the past several years, and a stop-loss policy in place, there is no downside to self-funding," he maintains.
Concludes AmeriHealth New Jersey's Munoz, "With the state and federal governments attempting to effect healthcare reform, it's important that every company understand what they're getting themselves into with new products that are emerging in the marketplace. What looks like the best value for a company might turn out to be its worst nightmare."
Outreach Program Targets Low-to-Middle Wage Workers
* Private/public partnership helps those in need
The departments of Human Services (DHS), Labor and Workforce Development (LWD) and Community Affairs (DCA) announce an informal partnership with the New Jersey Business and Industry Association (NJBIA) to promote information about state programs and services available to low-and-middle wage workers. The shared goal is to raise awareness of state support that can help working individuals and families make ends meet.
Called "Programs that work for people who work," the campaign makes available an English-Spanish flyer that includes information on mortgage assistance, energy assistance, children's health insurance, food assistance and subsidized child care. The departments are using social media, business trade associations, faith-based organizations and their respective stakeholder groups to get the message out to New Jersey's working residents.
"In this economy, it can be difficult to make ends meet, even if you're employed," says DHS Commissioner Jennifer Velez. "Many people are unaware of the wide-ranging supports available in New Jersey to help them through tough financial times."
Among the highlighted programs, eligibility ranges from 185 percent of the federal poverty level ($1,680 per month income for an individual/$3,447 per month for a family of four) to 350 percent of the federal poverty level ($3,177 per month for a family with one child/$6,519 per month for a family of four).
According to Nicole Brossoie, assistant commissioner, public affairs, DHS, "Services and programs for low- and middle-wage workers have been offered by state government for quite a while. But oftentimes, the public doesn't know what's available. There is also a misinterpretation that programs are only for the unemployed or very low income groups. We have several programs that have generous eligibility levels."
"This initiative presented us with a great opportunity to keep our members informed with a useful and timely resource," says Christine Stearns, vice president at NJBIA. "Three-quarters of our members are small companies with fewer than 25 employees, so they often don't have the human resource staffing to research and compile this type of information for their workers."
NJBIA sent its membership the flyer in an Employment and Labor policy e-mail update entitled, "Helping Employers and Employees in Difficult Economic Times." It also posted the flyer on the association's website at www.njbia.org.
The bi-lingual flyer is posted on the DHS, LWD and DCA websites and can be downloaded for use by interested groups at http://www.state.nj.us/humanservices/ news/publications/people%20who%20work%20flyer%20eng-spanish.pdf