By Adam V. Russo, Esq.

(As published in Thompson Information Services’ Employer’s Guide to Self-Insuring Health Benefits)

What is the perfect size for a self-funded plan?  This is one of my favorite questions and I love to ask it at any conference at which I happen to have the pleasure of attending and speaking.

The answers I receive are pretty funny and actually typical, ranging anywhere from 200 lives to 1,000,000.  Yes, somebody actually stated that the perfect self-funded plan size is 1,000,000 lives.  I almost passed out when he said this as I realized right away that this gentleman is a broker and has clients who place their trust in him.  I started praying for those clients right after that session!  The right answer is surprising to most as it potentially can be just one person.  A self-employed person who happens to have a lot of money and is in great health could easily be self-insured.  It really isn’t the size that matters at all; it is the behavior of the employee population.  That one person can walk into any medical facility and negotiate his or her own bills.  We all know that cash is king!

Think this through…which is the better plan to self-fund?  (This is just a hypothetical, so please do not get upset at this example – I have plenty of friends and family who drive trucks for a living!)  The first plan is the 5,000 employee plan of truck drivers where the average employee is 75-lbs overweight.  The employee population has a major drug addiction issue, loves to drink, smoke, and do some very dangerous activities outside the workplace.  Or would you believe that the plan with 30 yoga instructors who don’t drink, don’t smoke, don’t do drugs, are in better shape than anyone could possibly be in and just overall make everyone else in the country look out of shape?  Who do you think is the better risk for self-funding their benefit plan?  If you are the stop-loss carrier, who would you rather insure?  Exactly.  The size of the employer doesn’t always matter.  The plan demographics, the plan language, the claims data, and potentially the wellness programs are what matter the most.

Making it Happen in Massachusetts

When I look at the self-funded industry as a whole and I attempt to make predictions as to what will occur in the near future, in my opinion, you have to look to Massachusetts as the bellwether state.  What happened in Massachusetts will probably happen everywhere else.  Why do I say it so confidently?  It is because my home state is the first to have a state wide exchange and has had one in existence since 2006.

So as we all know, people were freaked out when the ACA was coming to fruition, yet as I tried to explain to anyone that would listen, I believed it would be a great thing for the self-insured industry.  Look at what has happened to my state since we were the first to the exchange platform.  Overall, 73.8% of workers in Massachusetts were in self-insured plans in 2011, the highest rate in the nation.  Again, this is five years after the exchange was put in place.  Since 2006, when Massachusetts passed its healthcare reform law, the percentage of workers statewide in self-insured plans has increased tremendously.  In firms with 50-99 employees, the percentage that is in self-funded plans went from 54.4% in 2006 to 67.2% in 2011.  In firms with 100-999 employees, it increased from 16.6% to 29.2% and lastly, in firms with 1,000 or more employees, the rate went from 74.1% to 86.4%.  [1]

This is not some insignificant statistical anomaly.  We are talking about an increase of 15 to 25% depending on the size of the employer.  These are employers who had the alternative of not worrying about purchasing healthcare coverage and just allowing their employees to join the state exchange plan.  Why would this be any different for the rest of the country?  In my opinion, it will not be, and based on the proactive approach taken by the regulators to limit self-funding options, they are petrified that I am correct in this assessment.

Stop Loss Concerns

Speaking of the regulators, they are very concerned about the growing trend of self insurance since it potentially means less healthy lives in the exchanges.  The states and the federal government need healthy lives in the exchanges in order to keep the costs from blowing up.  In other words, they need the yoga instructors to leave self-funding opportunities and enter the exchanges.  The easiest way to make this happen is by limiting the availability of stop-loss, since if you reduce the ability to purchase stop-loss coverage; you reduce the ability for an employer to self-fund.  Period.  Plain and simple.

According to federal statistics, self-funded plans cover over 60% of the private sector workforce, totaling almost 90,000,000 workers and dependents. According to a 2012 Kaiser Family Foundation survey, those numbers include 15% of small companies with fewer than 200 workers and 52% of mid-sized companies (200 to 999 workers).[2]

One study finds that without further regulation of stop-loss policies, over 60% of small businesses will self-fund, leaving mainly older, more costly employees in the exchanges and the fully-funded small group market. This could increase premiums in the exchanges and small group market by up to 25%. A review of stop-loss policies marketed to small firms also indicates this potential shift.[3]

This trend was driven primarily by an increase in the number of self-funded large employers. In 2012, 93% of businesses with 5,000 or more employees were self-funded, and of the next largest employers, those with 1,000 employees to 4,999 employees, nearly 80% self-funded.  Based on the new Affordable Care Act requirements, the number of small employers that self-insure will continue to rise, especially if these employers are able to find ways to minimize their risk, such as the ability to purchase stop loss coverage.[4]

Department of Labor’s (DOL’s) Report to Congress

Section 1254 of the Affordable Care Act required the Department of Health and Human Services (HHS) and the DOL to provide an annual report to Congress that compares fully-insured and self-funded plans.  The main focus is on determining the extent to which the new market reforms are likely to encourage small and midsize employers to self-insure.

The sad news is that past reports have portrayed stop-loss as regular health insurance, except with a higher deductible. I have never seen a stop-loss policy insure individuals.  They do not cover employees or their dependants and do not pay claims on behalf of patients.   Seems like a rather big distinction to me.  Who are these people and from where do they get their facts?  They have never read a single column of mine, attended one of my webinars, or called me to ask any questions.  They just do not understand how the self-insured market works.

Past reports have also stated that in a typical stop-loss arrangement, the reinsurer agrees to pay a proportion of medical expenses.  Again, I have reviewed many stop-loss policies – almost all of them that are in existence today – and I have never come across this.  These statements indicate a fundamental misunderstanding of the nature of stop-loss and self-funding in general, which is especially unfortunate given that these are the very entities that are tasked with enforcement and regulation of our industry.  How can you be the police for the industry and not know the rules in place?

Self-funding 101 would tell you that stop-loss is not health insurance as stop-loss pays claims to the plan sponsor and not medical providers. Stop-loss reimburses the self-funded plan for claims that the sponsor has already paid to providers. The risk of loss and the responsibility for paying medical providers remain solely with the self-funded plan.  The actual plan member (the employee and dependants) are unaware of who the stop-loss carrier is or what they do.  I guarantee you if I polled all 150 employees at The Phia Group regarding who the stop-loss carrier is for our benefits plan, less than 5% of them would know.

The fact that the DOL and HHS believe that stop-loss is a form of health insurance, and that it pays all claims beyond the specific deductible is dangerous. That being said, efforts by associations such as the Self Insurance Institute of America (SIIA), have rallied against these misinterpretations, and courts have begun to acknowledge the true nature of stop-loss and the plan sponsor’s risk. However, the battle has just begun and we have a long way to go.

It’s Up to You, New York

In early May, SIIA met with New York legislators and staff and urged them to pass A.1154/S.2366, legislation that would allow companies with 51-100 employees, including those who participate in multiple employer plans, to continue to have access to stop- loss insurance after January 1, 2016.  If SIIA is unsuccessful, then many employers that have between 51 to 100 employees will not have access to stop-loss coverage in New York and basically have no chance to be self-insured.  This would be exactly what state regulators across the country want in order for them to have the control of what these employers can do when it comes to healthcare coverage.  Trust me, every state is watching New York closely as it can set a dangerous precedent in the nation and drastically halt the growth of self-insurance.  Many companies will have no choice other than being fully-insured or joining the exchange.  In either case, they will be under the control of the state insurance commissioner.  Not good.

The Profits Stay with the Plan and so Does the Tailoring

In an era where people are finally paying close attention to their healthcare spending, another major benefit of self-funding is that employees save money by not paying for the major insurance carrier’s CEO’s Ferrari.  A percentage of all insurance premiums in the fully-insured carrier world are allocated to pure profit but with self-funding, employees pay a nominal amount for health benefits coverage and in general, plan sponsors do not make a profit on self-funding.  Funds stay in the benefit plan to pay for future claims.

Another major draw for employers and probably the most significant benefit of self-funding is the ability to customize the plan to suit the employee base or the employer’s own preferences. If the employer has a certain sympathy for individuals in need of weight loss surgery, the employer can tailor its plan to cover that surgery.  If the employer has a very young, healthy employee base, the employer can offer a plan for a low cost to its employees that have a high deductible. In other words, the employer has the ability to structure its plan any way it wants.  The fact remains that the yoga instructors’ health benefit plan should not be the same as the truckers’ plan, yet in the fully-insured world, they are.

The Risks are Worth the Reward

The bottom line is that sponsoring a self-funded plan has its risks, but it also has its rewards.  While self-funding may not be the right fit for every employer, for those employers that want to be able to get creative with their employees’benefits, self-funding is an option that can be very beneficial. While the group may incur unexpectedly catastrophic claims amounts, stop-loss is designed to mitigate those claims.

Our industry is growing, innovation is on the rise and at the end of the day, employee benefit plans sponsored by self-funded employers are offering more benefits with fewer costs.  Let’s hope that the government entities don’t punish our employers for finding better ways to deal with our health insurance crisis.  It’s what America was built on – integrity and innovation.