Is Self-Funding Right for You? [Credit Union Management]

The financial risks of self-funded health plans can be daunting, but the upside could be lower long-term costs and better coverage.

If your credit union is interested in new health plan options, consider self-funding. It may not be as widely discussed as fully-insured plans, but that doesn't mean it isn't popular with employers. According to the Employee Benefit Research Institute, self-insured plans cover 55 percent of workers who have health insurance.

In a traditional plan, the employer pays a fixed premium to the insurance carrier, which then bears the financial risk of paying claims. Self-funded plans shift that risk to the employer in exchange for more customized plan design, tighter control over costs and elimination of the need to pre-pay for coverage.

But before a CU jumps into self-funding, it's important to determine if it's really the best solution. Administering a health plan is complicated. Some large employers may choose to self-administer a self-funded plan, but most will find it's easier to contract with a third-party administrator to handle claims adjudication and payment. Or an employer can hire a health insurance company to administer the program. These options provide employers the coveted cost control without having to navigate the complicated world of provider networks and the health insurance industry's "usual-customary-reasonable" fee structures all on their own.

Age is one factor many organizations use when evaluating the viability of self-funding, and even health insurance carriers look at it when determining risk. "If you have a young population, based on historical data the risks tend to be a lot lower," says Elizabeth Jimenez, SPHR, VP/human resources and organizational development at Tropical Financial Credit Union (www.tropicalfcu.org) in Miramar, Fla.

However, the average age of your employee base won't always indicate the kind of claims activity you'll actually face. As Jimenez points out, 2012 has been a year of high usage for the generally young team of 185 full-time equivalents at $562 million/54,000-member Tropical Financial CU. "Even if your workforce meets a certain criteria, it doesn't always happen the way you expect," she says.

The size of the workforce is also used to weigh self-funding against fully insured plans. It's one reason the Montana Credit Union Network (www.mcun.coop) was approached to create a multi-employer network that could offer self-insured plans to CUs that didn't have enough employees to go it alone.

"We had a group of credit unions that had come to us asking if we could put something together for them," says Tabitha Garvin, Ph.D., chief operating officer of the Helena, Mont.based organization and executive director of the Montana Credit Union League Group Benefits Trust. "Our target number was to insure a minimum of 200 employees off the bat."

She says pulling together enough employees was important, as it allowed the group to spread risk over a wider area. There are employers within the group that have only one or two employees, and unless they were part of a larger pool- like MCUN's- Garvin doesn't believe there would be any way they could self-fund. "It may be possible to do it with fewer than 200 employees, but in our experience that's the minimum threshold," she says.

Each credit union pays for their subscribers in the plan. But, the premiums vary from credit union to credit union for two reasons:

* One, because there are a number of choices as to health insurance plan that a CU can elect to provide its employees.

* And, two, the trust (like most health insurance companies do) employs underwriters and actuaries that look at each CU's plan and their past medical experience to derive an "experience rating." That rating is then figured into the premium equation. What the plan provides is protection from huge rate increases from one year to the next.

CUES member Byron Stout, IV, VP/human resources at Wichita, Kans.-based Meritrust Credit Union (www.meritrustcu.org), believes the size of a CU's workforce shouldn't be a sole determinant in whether or not to selffund. "There is a thought that you have to be larger, and have 100 people on your plan or more, but I disagree with that," he says.

Instead, he encourages CUs to look at their demographics while also considering how much effort they're really willing - and able- to invest. For example, will your organization commit to spending time and money on a robust wellness program? Stout says $825 million/70,000-member Meritrust CU plans to invest close to $60,000 in its wellness program, which supports 200 FTEs. Also, can you motivate your staff to control healthcare costs? "One of the milestones would be that you desire to be an active participant in your health plan, and not just be along for the ride," Stout says.

What Your CU Gets out of It

The benefits of self-funding generally revolve around control, most notably the ability to control costs (especially the yearover-year increases that are common in fully insured plans) and the ability to control plan design. "I think what being self-funded allows us to do is have a measure of control over premiums long term," says Eddie Black, president/CEO of Trico Community Federal Credit Union (www.tricocommunityfcu.com), Helena, Mont., an MCUN member. Black estimates the premiums for a comparable fully funded plan would run at least 25 percent more than the rates for Trico Community FCU's current plan, and also says he'd have little control over increases in future years. "I would have to shop around every year," he says, something that would cost his $22 million/3,765 -member organization time and money. Trico Community FCU may be particularly susceptible to a traditional insurer's pricing increases, because its seven full-time equivalents give it less bargaining power than a larger employer.

But wait. Don't expect immediate expense reductions with a self-funded plan. "If you're looking for savings, you probably won't see them until the third or fourth year," Stout says. Startup expenses will likely delay cost savings until your plan gets some time under its belt. Because Meritrust CU chose to include additional coverage and preventive care options in its plan, Stout says the CU's leadership knew costs would be higher in the beginning. "Because we're doing the right thing, it will pay off in the long term with lower expenses and lower claims," he says, adding that the CU is starting its third year of self-funding, and expects to see the fruits of these efforts in 2013 if not a little sooner.

When it comes to plan design, Dorothy M. Emig, VP/employee services at Pentagon Federal Credit Union (www.penfed.org), Alexandria, Va., says being self-insured has real value. "I have the flexibility to put specific features into the plan based on what we as an organization would like to see," she says.

For example, if $15 billion/ 1.1 millionmember Pentagon FCU wants to cover hearing aids for its 1,250 FTEs- a perk that might not be included in a fully-insured plan- the CU can do it. Self-funded employers aren't stuck with off-the-shelf plans. Emig says they can also promote things like wellness long before legislation makes it mandatory. "We can set up a plan that covers 100 percent of preventive services, because we want employees to take advantage of those as quickly as possible," she says.

Pentagon FCU's self-funded health plan is through CareFirst Blue Cross Blue Shield (www.carefirst.com). The CU also pays CareFirst a fee to administer the plan. CareFirst pays health providers using a checking account funded by the CU.

Know the Risks

Michael W. Ferguson, chief operating officer of the Self-Insurance Institute of America, Inc. (www.siia.org), Simpsonville, S.C., cautions that the risks of a self-funded health plan shouldn't be underestimated. "As a self-insured company, you are financially liable for all the claims that are incurred, as opposed to a traditionally insured arrangement where you're just paying a premium to the insurance company," he explains. Self-insurers also retain the legal liabilities associated with running a health plan. "In a traditional insurer arrangement, you transfer those legal liabilities to an insurance carrier," Ferguson says.

Just one high-dollar claim could throw off a CU's expenses for the entire year, Emig warns. "The risk of a large claim, something over $50,000, is out there." Something as simple as a premature or multiple birth could cost a lot of money, and it isn't just employees you need to worry about. "It could be a family member," Emig says. Factor in heart attacks, strokes, cancer, or anything that could land someone in the hospital for an extended period of time, and the financial risks come into focus. "I think there's real value to having large numbers, so the risk is spread over a larger population," Emig says.

More employees will help spread the risk because the CU (that doesn't pay 100 percent of premiums) will be collecting more premiums. So if one employee has an expensive claim, the other employees' premiums help keep the cash flow positive. This contrasts with a CU with very few employees, where each claim takes up a greater share of incoming premium dollars. If too much money goes out and not enough premium money comes in, the cash flow for the health plan will eventually become negative.

Each credit union needs to decide for itself if it will charge employees premiums, and how much those premiums will be. Meritrust CU originally targeted a 60/40 split with the CU paying the 60 percent. "However, this last enrollment, we cut employees' premiums in half," says Stout. The reason is twofold, he explains. "One is that our credit union is doing very well and we wanted to share the results of their efforts. And secondly, we've established a great base line of wellness participants vs. non-participants and shared overall claims trends that went down for wellness participants and up for nonparticipants. Therefore, we want to build on future premium impacts based on our overall plan performance."

Trico Community CU pays 100 percent of employee premiums. However, if employees don't participate in the wellness program, they pay the increase the CU gets on the health insurance premiums, which Black says can be high. It was approximately a 12 percent increase during the CU's most recent renewal.

(Read more about why wellness programs go hand in hand with self-funding at cumanagement.org/100512wellness.)

Beyond using a large participant base to help disperse the risk of high-dollar claims, CUs can leverage other tools to reduce their exposure. For example, Meritrust CU has stop loss coverage of $50,000. With this coverage, employers are still responsible for paying all eligible claims regardless of the attachment point (annual dollars of claims that the employer is totally responsible for paying during the policy year) levels. But the stop loss provides the employer with a financial reimbursement mechanism after those claims have been paid. The stop loss amount can vary from plan to plan, with some employers taking on more risk with $100,000 limits, and others opting for very little risk at $20,000.

"It varies, but then obviously the expense varies as well," Stout says. It all depends on how much risk your team can bear. "As an employer, we know what the worst- case scenario is all the time, and stop loss is kind of a safety net," Stout says. Meritrust CU is going into its third year of self-funding and, Stout says, "We're doing pretty good."

Credit unions can purchase stop loss coverage directly from the health insurer or through a broker.

Day-to-day administration of a self-funded plan doesn't have to be onerous, if your team is ready and has the right resources available. Emig says her organization is hands on, and manages much of the administration themselves rather than farming it out to a third-party administrator.

"A lot of the work has to do with appeals and questions about coverage," she says. The arrangement can lead to compliance challenges, though, with employees discussing personal medical information directly with the employer. Emig's team diligently ensures that exceptions aren't perceived as discriminatory, and appeals are handled carefully. To avoid potential conflicts, Pentagon FCU leverages a vendor health advocate when necessary.

Stout says daily administration tasks are a primary reason the CU uses a broker. "They do a lot of the leg work," he explains. Open enrollment meetings are led by the broker, but Meritrust CU's benefits person still fields questions regularly. "You get general questions about the plan, the provider network, etc.," Stout says. And though HR may get the program up and running, Stout says the broker handles many of the routine tasks after that. "Quite honestly, I'd say our wellness program takes more of my time administratively than the health plan does," he says.

Worried your self-funded plan will be a turnoff to prospective employees? "I don't think it even crosses the radar," Black says when asked if candidates care that Trico Community FCU's insurance plan is self-funded. Instead, their focus is typically on deductibles and co-pays. Once an employee comes on board, they're pleased their premiums are paid at 100 percent and premiums for family members are low. Black says the pricing control offered by self-funding allows the CU to maintain manageable premiums. "It's important to keep premiums down, so employees can afford to buy health insurance to cover their families," he says.

Emig agrees that self-funding doesn't matter to prospective employees, and says existing staff is quite happy with the plan. "We offer co -pays and deductibles that are competitive in the industry," she says. The preferred provider organization plan gives employees flexibility in their choice of provider, and also eliminates the need to select a primary care doctor or get referrals to see specialists. "The plan itself is pretty easy to use from a participant perspective," Emig says. She reports that participation rates are extremely high, adding, "I don't know that employees notice whether it's self-insured."

"I have the flexibility to put specific features into the plan based on what we as an organization would like to see."

Dorothy M. Emig

Resources

Read Web-only bonus coverage from this article about wellness, health care reform, the practice of "lasering" and more at cumanagement.org/W05l2wellness, cumanagement.org/WI2T2ppaca, cumanagement.org/WI5T2laser and cumanagement.org/WU12erisa.

Read another article aboutwellness programs at cumanagement.org/04l2br ingingwellnesstowork.

Julie Knudson isa freelance writer and owner of Olympic Bay Media, Inc., Arlington, Wash.