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Traditional Insurance to Self-Funded Plan | The Phia Group

By: Ron E. Peck, Esq.

As the cost of providing health benefits to employees and their families continues to increase, employers must face a difficult decision.  Do they reduce the quality of the plan they offer (increasing co-pays, deductibles, and premiums, while narrowing the scope of what is covered)?  Do they stop offering health benefits, pay a penalty if one applies, and hope their employees secure adequate coverage through a spouse, an exchange plan, Medicare or Medicaid?  Or, do they revisit the type of plan they offer – moving from a traditional fully insured model, to a self-funded plan?

For many, the decision was made to attempt self-funding.  Generally speaking, this is – in my opinion – a fine idea.  For those of us that service these plans, however, we must realize that the type of employer sponsoring a self-funded plan today is not the same as the type of employer that sponsored a self-funded plan ten or twenty years ago.  The “new” self-funded employer is not necessarily self-funding because they want to customize their plan terms or control how funds are used.  The “new” self-funded employer enjoyed the benefits of being fully insured.  They enjoyed having a third-party scapegoat (the carrier) to whom they could point the finger when an unpopular decision had to be made.  They enjoyed having someone else – someone, they felt, with more knowledge in the area of health benefits – dictate the terms of their plan to them.  These “new” self-funded employers don’t want to make all of the decisions, don’t want to control their plan, and don’t want to be a fiduciary of the plan – liable for their mistakes.  Recognizing this, we must approach these plans with a new mindset; focusing on a message of how we will walk them through the creation and management of a plan, rather than supply them with tools to “do it themselves.”

Another issue that we must keep in mind, when it comes to “new” self-funded employers is that – based on their experience with fully insured products – they expect things to run in the background, without their involvement, and without any financial risk aside from their up-front costs.  As alternative models of self-funding emerge – with an eye toward satisfying this new desire for a hands-off, turnkey approach to self-funding – employers are drawn to these warmer, safer “feeling” models.  From captives to level funded plans, employers can enjoy the savings of self-funding, but avoid the need to monitor and control their plan.  All they need to do is sign the contract, pay the fees and contributions, and everything else is handled; right?  Wrong.

Over the past few years, I have witnessed employers suffer terrible “buyer’s remorse” when things didn’t go exactly according to plan.  In one instance, for example, an employer was self-funding their health plan.  They had implemented a level-funded plan, and thus, they were under the belief that their financial liability was limited to their pre-calculated contributions.  A plan member was seriously injured in an accident that involved some questionable factors.  Indeed, it was unclear whether the injured participant had been in the wrong place at the wrong time, or, had instead instigated some illegal activities that gave rise to their injuries.  In any case, the injured participant suffered grievous injuries and incurred catastrophic medical expenses.  As the bills came in from the provider, the plan assumed the stop-loss carrier that had not only underwritten their plan, but had helped sell the program to the employer, would handle payment of the claims in excess of the plan sponsor’s fixed, pre-paid liability.  Unfortunately, the carrier determined that – at best, not enough was known about the incident to say that a plan exclusion didn’t apply… and at worst, that a plan exclusion did appear to apply.  The plan sponsor felt strongly that the claims should be paid; the carrier advised that the employer – as a self-funded plan sponsor – was welcome to pay the claims, but that the protections afforded to them by level funding and stop-loss were not available.  The employer, who entirely lacked the sophistication to analyze the facts, make a payment determination, and – if they decided to pay – dispute the carrier’s decision to withhold funding, was suddenly being asked to make an impossible decision.  Bankrupt your employee, or pay claims you can’t afford.

If employers are going to be invited to self-fund, we must ensure that they not only understand the benefits of doing so, but also the risks.  In our industry, asking permission is far more preferable – and less costly – than begging forgiveness.  In the aforementioned example, that employer sued the carrier, their broker, and their TPA.  They never self-funded again, and became staunch advocates for elimination of employer based health insurance.  Their voice, and contributions, have since gone towards politicians looking to eliminate our industry.