Self Funding Explained



The Self Funded Concept


In an effort to control rising costs in insured employee benefit plans, employers are examining ways to economize and improve cash flow without sacrificing coverage. Budget considerations, bargaining agreements, geography, and plan design each have an effect on the way a health program is funded.


For many employers with more than 50 employees, there is an alternative: Self-Funding Today, more than half of all U.S. employers self-insure their group medical plans.


Under a self-funded plan, it is usually possible for an employer to significantly reduce operating costs and maintain control of reserves, while providing the level of benefits desired for employees.


How Does Self-Funding Work?


1) The employer decides upon a plan of employee benefits with the assistance of an agent or broker and/or his third-party administrator, in this case IDA. A self-funded plan can be implemented matching existing coverage or modified to meet the employers needs. These programs can also be designed to include Preferred Provider and Managed Care Options.


2) Stop-Loss Insurance is arranged to protect the plan against extreme losses. The amount of risk to be insured will be a function of the employer's size, nature of business, location, plan of benefits, financial resources, and prior experience.


3) Benefits are determined via use of a plan document. The plan document contains all the provisions of the plan, including eligibility, levels of coverage, and termination procedures. Employee benefit descriptions and other materials necessary to operate the plan are also prepared by the thirdparty administrator.


4) The plan is supervised by a third-party administrator. Services include:

  • processing claims
  • preparing special reports
  • and other required data for the plan and the reinsurer
  • customer service
  • C.O.B.R.A. administration
  • integration of Preferred Provider networks
  • hospital bill audits
  • The thirdparty administrator also bills and collects any premiums and other administrative fees for the   plan.

Under a selffunded plan, the employer incurs direct responsibility for the payment of claims. In order to limit the potential liability, an element of insurance is introduced. IDA will procure this insurance (excess or stop-loss coverage) to minimize the impact of any large individual claims or, possibly excessive utilization of the plan by the employees. Upon reaching these stop-loss limits (which are determined by factors such as size of group, anticipated claims pool, nature of business, etc.), the reinsurer will reimburse the plan for amounts paid in excess.


The following diagrams illustrate the effect of the two types of stoploss coverage:


SPECIFIC STOPLOSS


Specific or individual reinsurance provides a ceiling on the dollar amount of paid claims that the employee benefit plan would pay on any one individual during a policy year. Upon reaching that ceiling, the reinsurance company will reimburse the employer for excess losses according to the plan of benefits.


AGGREGATE STOPLOSS


Aggregate reinsurance provides a ceiling on the total dollar amount of paid claims that the employee benefit plan would pay during a policy year. Upon reaching that ceiling, the reinsurance company will reimburse the employer for excess losses according to the plan of benefits.


In order to understand why selffunding is so attractive, one must understand the basic reasons for increasing costs in fully insured programs. All group insurance premiums consist of two basic elements:


1) cost of claims

2) cost of administering the plan (retention)


Most insurers base their charges for retention on the amount of claims paid. This means that an insurer has only a marginal reason to hold down the cost of claims. Also, retention costs vary among insurers and often reflect other factors in their costs of operation.


THE TRADITIONAL APPROACH


The employer loses control of premium dollars the moment they are remitted to the insurance company.


Selffunding in a group medical program means that the employer retains a portion of the medical, drug, or dental claims, rather than fully insuring against such claims with insurance companies. Now the employer is in control.


THE SELF FUNDED APPROACH


The timing, size, and frequency of payments to the claims account are now controlled and costs are immediately reduced or eliminated.


Budget for The Predictable, Protect Against The Unpredictable!!


As an alternative method of funding group employee benefits, selffunding on a reinsured basis, offers distinct advantages over traditional approaches. It allows an employer to budget for the small, predictable claims while protecting against the unpredictable catastrophic claims through the purchase of excess loss coverage.


Additional Features of Self Funding...


Additional features available through selffunded plans administered by IDA:


1) AGGREGATE ACCOMMODATION FEATURE. This feature enables each group to limit monthly claim costs.

2) IMMEDIATE PAY SPECIFIC. This feature limits the employer's claim costs for an individual. When claims exceed the specific limit, the reinsurer will provide advanced funding so that the employer's cash flow will not be adversely affected.

3) TERMINAL LIABILITY. If required, IDA can offer extended aggregate protection following termination for claims incurred during the plan year.

4) NO DEFICIT CARRY FORWARD. If a group should penetrate the aggregate, unlike insured or minimum premium contracts, our reinsurer will not carry forward any balance into the renewal year.