A Guide to Making Informed Decisions
As the landscape of employee health care evolves, many employers are turning to self-funding as a way to manage their healthcare costs. According to the Kaiser Family Foundation, 60% of workers with group health insurance are now covered by self-funded plans, and that number has steadily increased over the years. Self-funding, though attractive for potential savings, comes with its own set of complexities that employers need to consider before making the leap.
Shaun Snyder, a health care analyst, outlines 10 critical considerations that employers should weigh when contemplating self-insuring their health plan. These points address both the financial and operational challenges involved with self-funded plans.
- Risk Tolerance
Self-funding can help reduce overall costs, but it comes with substantial financial risk. Beyond administrative fees and claims, there are several associated costs, including stop-loss insurance, disease management, and wellness programs. These investments help mitigate financial risk, but they do require upfront funding. Employers need to assess their risk tolerance carefully to determine whether they can manage the potential volatility of healthcare costs in the long term.
- Cash Flow
Self-funding isn’t just about paying claims; it’s about managing significant cash flow. Employers must ensure there’s enough capital to meet the obligations of claims, administrators, and health providers. Weekly claim funding can be especially taxing if corporate receivables are low, and stop-loss coverage doesn’t always ease this burden. If cash flow management isn’t handled properly, it can lead to financial strain on the company.
- Federal Compliance
While self-funded plans don’t have to comply with state insurance mandates, they still face numerous federal regulations, including ERISA (Employee Retirement Income Security Act) requirements. Employers, now known as plan sponsors, must comply with document and reporting obligations, such as 5500 filings. Additional laws, like Mental Health Parity, further complicate the plan’s administration. Employers need to be ready to shoulder these compliance responsibilities.
- Plan Management
A self-funded health plan requires constant oversight. Weekly funding requests, claims management, data file transmissions, and reporting demand immediate attention. Annually, the employer must ensure proper filings (like 5500) and report summaries. This level of management can be resource-intensive, so employers need to consider whether they have the capacity in-house to handle these tasks or if they’ll need to hire external help, such as a benefits consultant or broker.
- Separation of the Plan from the Company
Managing a self-funded health plan involves a fine balance between offering transparency and maintaining employee privacy. Employers regularly receive information about employees’ health, conditions, and claim amounts. It’s crucial to create a clear separation between the management of the plan and other departments (like HR), ensuring that only necessary information is shared and confidentiality is maintained. Proper safeguards, including redacting personal identifiers, should be in place to protect employees’ privacy.
- Exceptions
Even with the most thorough plan design, exceptions will arise. Employees may appeal denials, or unexpected treatment requests may challenge the established plan guidelines. While these exceptions should be managed within the parameters of the plan document, there’s a fine line between adhering to the rules and avoiding resentment or harm to employees. Employers must be prepared to make difficult decisions about when to override plan exclusions or deal with exceptions, and how to do so without escalating costs.
- Internal Plan Competition
Offering multiple health plan options to employees is a common strategy, but internal competition can create issues. A self-funded PPO with low premiums might end up detracting from a fully insured HMO option, for instance. It’s important to evaluate the potential impact on other plans or supplemental benefits, like vision or dental. For example, if the self-funded PPO covers vision services, the vision plan might lose all its members, leading to a significant loss for the provider.
- Education
When transitioning to a self-funded plan, education is key. Employees need to understand what’s covered, where to seek care, and how much they will pay. Internal HR staff should also be trained to handle questions and provide clear information. Unlike fully insured plans, employers cannot simply pass off questions to the insurance carrier. Employees will want more direct answers, and management will need to have clear, concise information about the plan’s performance and expected costs for the upcoming year.
- Plan Creation, Development, and Amendments
Self-funded plans require continuous review and updates. Changes in legal requirements, administrative amendments, or vendor contracts might necessitate revisions to the plan document. These updates are necessary but can require significant attention and resources. Employers should anticipate periodic amendments to the plan to stay compliant and ensure it aligns with the organization’s evolving needs.
- The Participants
Ultimately, the success of any benefits plan depends on the well-being and satisfaction of the participants—your employees. If the plan isn’t designed well, or if it becomes too expensive or burdensome, top talent may look elsewhere for employment opportunities. A well-crafted benefits and compensation package is a crucial part of attracting and retaining high-performing employees. Employers must consider the impact of a self-funded plan on their workforce, ensuring that the plan enhances overall employee satisfaction and retention.
Conclusion
Choosing to self-fund a health plan is not a decision that should be taken lightly. It offers potential cost savings, but it also comes with added responsibilities, risks, and complexities. Employers must carefully evaluate their capacity for risk, the administrative demands, and the financial resources required to manage such a plan effectively. By considering these 10 factors, companies can make an informed decision and set themselves up for success in managing employee health benefits.
