As employee healthcare costs continue their relentless upward march, businesses today face intense pressure to balance attracting top talent through employee health benefits with managing spiraling medical insurance expenses.
Employer-sponsored health benefits have become a pivotal component in recruiting and retaining workers in a competitive labor market. However, rising premiums force many companies into difficult tradeoffs between coverage adequacy and affordability. This emerging crisis requires private sector employers to pioneer innovative solutions enabling the provision of affordable, sustainable employer-sponsored health benefits.
Self-funded health insurance plans present a compelling option for employers seeking superior flexibility and cost control over their employee medical benefits spending.
What is Self-Funded Health Insurance?
With a self-funded health plan, instead of buying a predefined policy from an insurance provider, a company sets aside funds that will directly pay for employees’ healthcare expenses. The company essentially acts as its own insurer, ensuring that any money left over at the end of the year can be reinvested into the business.
In this type of arrangement, companies directly assume the financial risk of paying for their workers’ health expenses as claims are incurred. This contrasts with fully insured plans where companies pay fixed premiums to a health insurance provider that covers all claims costs and assumes the underwriting risk.
As opposed to relinquishing control over their plans and being subject to restrictive insurer rules, self-insuring enables companies to redesign benefits, control vendor choices, and access transparent claims data to reveal cost drivers. Self-funding can lead to considerable cost savings by avoiding insurer overhead and profit margins that typically range from 10-25% of premiums.
Though historically self-insurance was only feasible for large corporations, the emergence of group captive arrangements now opens the advantages of self-funding to small and mid-sized businesses. By banding together under an ERISA-regulated plan, group medical captives allow smaller companies to achieve the scale necessary for stable financial performance, which is often out of reach for individual self-insured firms.
Most businesses with more than 200 employees now choose to self-fund health benefits. As the small group captive model gains traction, medium and small companies are increasingly adopting this strategy to secure talent advantages by offering affordable medical coverage through self-insurance.
While self-funding does transfer greater governance duties and potential liability risk over plan administration onto employer sponsors, captives effectively mitigate financial risks. Employers, however, must embrace oversight duties, including ensuring meaningful communication regarding claims or appeals decisions.
Benefits of Self-Funded Plans
Why should your company consider self-funding your employee health plans? There are several compelling advantages to adopting this approach for managing healthcare benefits.
- Lower Costs: By cutting out insurer fees and profits, self-funded plans create significant cost savings, to the tune of 25-40%. Companies have more control over how dollars are spent.
- Customization: Businesses can tailor health benefits to the specific needs of their workforce, unlike “one-size-fits-all” insurance policies. This flexibility boosts employee satisfaction.
- Transparency & Control: Access to claims data provides valuable insights for monitoring costs and designing targeted wellness initiatives. Employers regain control over their plans.
- Regulatory Freedom: Self-funded plans are regulated under ERISA, freeing them from state mandates and premium taxes that drive up the costs of insured plans.
Despite the growth in self-funding, some small and mid-sized companies hesitate due to perceived financial risks or lack of expertise. Self-funded group captives like Roundstone address these concerns by pooling small businesses together under an ERISA plan, allowing them to enjoy the scale benefits of self-funding while limiting their risk exposure.
Fiduciary Responsibility: Communicating with Employees
While self-funding can save companies substantially on healthcare benefits costs, it also imposes fiduciary responsibilities under ERISA regulations, which are designed to protect plan participants.
As one recent court case underscored, maintaining open communication channels between plan sponsors and participants is a central fiduciary duty.
In the court case K.D. vs Anthem Blue Cross and Blue Shield Group Health Plan of United Technologies Corporation, the plaintiff challenged the denial of coverage for continued inpatient treatment deemed medically necessary for mental illness by the plaintiff’s doctors, by Anthem, the third-party administrator for the self-funded group health plan.
United Technologies’ health plan mandated preauthorization for residential mental health treatment, adhering to medical necessity criteria such as the risk of the patient’s condition worsening without extended care or the inability to receive adequate treatment in less intensive settings. The company’s filings revealed that Anthem had initially sanctioned coverage for a robust treatment program lasting 9-12 months but later refused to cover additional treatment days beyond the first term and allegedly neglected to preauthorize transitional living expenses post-discharge from the residential facility.
In addressing the plaintiff’s assertion that United Technologies breached its fiduciary duty under ERISA regulations as the plan administrator, the court highlighted that although sponsors may engage Third Party Administrators (TPAs) for claims administration, they cannot abdicate their legal obligation for plan oversight. United Technologies did not convincingly show that it had engaged with the treating providers in a manner that justified the denial of the plaintiff’s appeals for supplemental treatment authorization.
While plan sponsors must collaborate with proficient TPAs known for their high standards in benefits determinations, as health plan administrators they must also be proactive in adjudicating appeals or grievances that suggest participant distress due to claim rejections. By acting as an impartial judge aiming for fair outcomes, companies can exhibit good faith in their communication of coverage decisions and prevent accusations of fiduciary negligence.
The Future of Employee Benefits
Adopting a self-funded model entails embracing greater responsibilities in plan governance, administration, and financial liability, yet the potential cost savings and flexibility benefits can yield a significant ROI, particularly for your most valuable asset—your workforce. Partnering with a seasoned advisor to craft and oversee your self-funded health plans can alleviate much of the operational burden for your company.
With healthcare expenses on the rise, an increasing number of companies are expected to adopt the self-funding trend. Collaborating with skilled advisors and third-party administrators can ensure that your business captures the benefits of self-funding and maintains effective plan governance while sidestepping the common hazards associated with managing your own health plan.
Foa & Son