Fully Funded Traditional Insurance vs. Self-Funded Health Plans
Most Americans don’t know the difference between “traditional” fully funded insurance, and a self-funded benefit plan.Yet, more than 60% of people receiving health benefits from their employer are participating in a self-funded plan.When an employer pays a premium – a fixed amount – to an insurance carrier, and the insurance carrier pays more (if insured individuals are sick or hurt) or pays less (if insured individuals are healthy), that is “traditional” fully funded insurance.With “traditional” fully funded insurance, individuals and employers pay a fixed premium to an insurance carrier, and the carrier takes on the risk. With a self-funded health plan, an employer sets aside some of its funds to pay for employees’ medical expenses. Employees then contribute to the plan rather than pay traditional premiums.
A self-funded employer enjoys the following benefits:
Plan Control — Choose what to cover and exclude, customizing the plan to be generous where your particular membership needs it, and stingy where it doesn’t.
Interest and Cash Flow — Funds are in the employer’s hands until they’re needed, meaning interest on those assets belongs to the employer.
Federal Preemption and Lower Taxes — The Employee Retirement Income Security Act of 1974 states that a private, self-funded health plan is administered in accordance with its terms and federal rules. So, these plans aren’t subject to conflicting state health insurance regulations or benefit mandates.
- — Employers can examine the claims data, study trends, allocate resources and form partnerships to address their needs.
Risk Reduction — Reducing risk and costs directly impacts the employer and employees. Risk posed by other populations doesn’t impact the plan — so employees have lower single and family premiums than those with fully funded insurance.
Overall, a self-funded plan sees net savings over a three- to five-year span, compared to a similar fully funded insurance policy.
Yet, there are risks. Among them: the threat of catastrophic claims, inability to fund claims, and new fiduciary responsibilities to members of the plan.
Most self-funded health plans purchase “stop-loss” — a form of reinsurance that reimburses self-funded plans for claims they pay beyond a deductible. This means the self-funded plan is responsible for all medical bills, regardless of whether stop-loss reimburses or denies the plan’s request.
Finally, a self-funded employer acts as — or appoints — a plan administrator, who is a “fiduciary” of the plan and its members. Law dictates the fiduciary must act prudently, protect the plan and apply its terms judiciously. Failure to comply with these terms, mismanaging plan assets or doing something not in the plan’s best interest could expose the plan sponsor to claims of fiduciary breach — and steep penalties. Fortunately, third-party organizations exist to step in, aid in decision-making and act as a fiduciary — indemnifying the self-funded plan administrator.
Containing costs is important for all health plans – “traditional” fully funded insurance and self-funded – but employers who self-fund their plan in particular may have a fiduciary duty to pursue any-and-all cost containment opportunities, as they are obligated to prudently manage plan assets.
The State of Healthcare
Healthcare costs in the United States have been rising over the past decade and beyond for a number of reasons. As the cost of healthcare increases, so too does the cost of health benefit plans; the means by which most Americans pay for healthcare. Reduced payments made by Medicare and Medicaid, as well as other economic and political factors, have shrunk profit margins for doctors and other healthcare providers, in turn resulting in skyrocketing billed charges. Private payers are then on the hook to cover the balance, providing providers with profit Medicare and uninsured individuals cannot pay. The higher overall utilization of healthcare, and systematic knee-jerk use of health insurance to pay for all healthcare, and higher billed amounts, result in cost trickling down to insured plan participants. In turn, these costs get passed down to all members of society via wage changes and premium/contribution impacts.
For this reason, health insurance in all of its forms must look for and take advantage of cost containment opportunities whenever possible. One such opportunity comes in the form of subrogation.
What Is Subrogation?
When people get hurt or suffer a serious illness as a result of something outside their control, oftentimes a third party either caused the injury or illness, or, is responsible to pay for the subsequent care. In such instances, more often than not, the injured person’s health plan will still pay for the medical care, with an understanding that if a third party is responsible to pay the same bills, the health plan will be entitled to reimbursement. This can occur either by the health plan pursuing reimbursement directly from the liable third payer, or, reimbursement to the health plan from the patient, after the patient receives funds from the liable third party payer.
Health insurance subrogation is therefore a process that allows insurance and self-funded health plans to shift the liability associated with these expenses to the appropriate party, allowing health plans to maintain their premium levels.
Typical situations where health insurance subrogation may be used to coordinate payment with other payers includes car accidents (where automobile insurance may be primarily responsible for payment), work injuries (where workers’ compensation may be primarily responsible), slip and falls (where the property owner’s liability insurance may be responsible), toxic torts, product recalls, and other scenarios where a court has decided someone needs to pay damages, including amounts already paid by the health plan.
Surprisingly, healthcare subrogation is something that tends to be underutilized in the marketplace, but it is a critical tool to keep premiums (when dealing with traditional fully funded insurance) or contributions (when dealing with self-funded plans) low. Many insurance carriers (who manage their own fully funded policies of insurance) and third party administrators (who administer self-funded plans on behalf of the employer funding the plan), report recovering between $3 and $5 per plan member per year. Subrogation specialists, who are subcontracted by carriers and third party administrators, report recoveries of about $15 per member per year. The Phia Group, LLC reports recoveries of $25 per member per year. These funds are returned to the plan, to be used towards future medical expenses, and are amounts that won’t need to be collected from plan members or insureds in the future, via premium or contribution rate increases.
Subrogation for Self-Funded vs. Fully-Insured Parties
Traditional fully funded insurance policies must comply with both State and Federal law. Self-funded health plans generally ignore State law, and comply solely with Federal law. As it relates to health insurance subrogation, Federal law generally states that the terms of the plan document (a document or “policy” distributed to plan members) controls, including how subrogation is handled, and thus – any State law that would limit that right, is preempted. State law often limits or prohibits subrogation, meaning traditional fully funded insurance carriers are not able to pursue subrogation as fully as their self-funded counterparts.
As mentioned, when looking at health plans provided by employers or unions, there is frequently a right of subrogation clause in the plan document or policy. Because self-funded plans need only comply with Federal law, and in particular, the Employee Retirement Income Security Act of 1974 (“ERISA”), they will assert rights in their plan document to recover 100% of the funds they paid, when a third party payer is responsible for the payment. In situations where this self-funded class of participant is injured, these provisions often allow the benefit plan to make payment contingent upon the plan member agreeing to cooperate with the plan in its effort to recoup funds.
This right on the part of a self-funded plan to collect full reimbursement is thanks due in part to ERISA, but also requires excellent plan document language. Indeed, the plan’s rights are only as good as its language. This system, while complex, aims to tackle the costs of providing robust health benefit plans, while allowing these plans to feel secure paying claims promptly when a third party may be available to pay, knowing that they will be able to recoup those funds later.
On the other hand, as previously mentioned, traditional insurance plans that are funded fully by insurance companies are subject to state laws that regulate the payment of health benefits, including subrogation. If a health plan is fully funded through insurance purchased by the employer or union, it will be treated as any normal group health insurance, regulated by State law, thus impacting whether a subrogation claim is enforceable. These fully insured plans are often looked at with careful scrutiny by State lawmakers and can have specific legal limits that cap options for subrogation on behalf of the insurer.
In addition, as previously mentioned, the overall recovery opportunity may be eliminated entirely depending on state laws. These state-based laws include the made-whole doctrine, common fund doctrine and other anti-subrogation statutes that can influence the insurance recovery process for health payouts. For such insurance carriers, the need to apply creative thinking, up-to-date legal expertise, and excellent negotiation skills is of the utmost importance.
What Is a Subrogation Clause?
As mentioned previously, a self-funded plan – thanks to ERISA – is able to enforce the terms of their plan document. As such, the quality of that plan document is the key to success when it comes to subrogation. Subrogation begins, therefore, when the plan document is being drafted. By the time a person is hurt, claims are paid, and a liable third party is being pursued for reimbursement, it’s too late to address weaknesses in the plan document. For instance, while a traditional fully funded insurance carrier’s right to subrogation may be limited by a State law rule – such as the Made Whole Doctrine (which states that the insurance carrier may recoup nothing unless and until the injured insured individual is fully compensated for their damages) – a self-funded plan is not required to comply with this doctrine, as long as it is explicitly disclaimed in the plan document. A failure to disclaim equates to a requirement to comply.
What Is a Subrogation Release?
A health insurance subrogation release is a form that is signed with the intent to release parties of any remaining liability in a legal situation. Typically they are signed after recovery has been fully completed. By its terms, the plan – in exchange for the funds paid to it – is agreeing to no longer pursue any entity for funds; it deems its right to reimbursement to be satisfied.
Claim Litigation Option
A common question after a medical accident is related to the involvement of a lawyer. Based on the process of subrogation, a person may not need to have a legal expert involved, however, depending on the type of injury, funds at stake, and willingness of a liable third party to work with the injured person, an attorney may be advisable. While an employer, and the entity representing it’s benefit plan for subrogation purposes cannot also represent the plan member, they may be able to help the plan member identify counsel.
Other Subrogation & Third Party Reimbursement Options
Employers, insurance carriers, and the entities that service them may be wondering what the best way is to deal with these issues. From preparing plan documents, to identifying instances where subrogation is a possibility. From placing relevant parties on notice, to recovering funds and fighting for the benefit plan’s rights, any entity that pays for healthcare or services such an entity, must reconsider how they handle subrogation. Companies like The Phia Group, LLC utilize case detection technology, multifaceted investigation, cross-referencing on multiple databases and more to ensure no opportunity is missed, and leverage a team of attorneys and specialists to ensure full recovery achieved on their clients’ behalves whenever possible.
Looking for unique opportunities related to the recovery of funds is critical in making sure benefit plans are fully reimbursed, and only ultimately pay claims for which they are actually responsible. Looking for methods to get the recovery amount that is justified, the option to work with specialists such as The Phia Group, LLC and others is a worthwhile venture.
Learn more about our subrogation and recovery services today.