FREQUENTLY ASKED QUESTIONS ON SELF-FUNDED PLANS

What is a fully insured health plan?
What is a self-funded health plan?
Why do employers self fund their health plans?
With what laws must the self-funded plan comply?
Is self-funding for everybody?
What is excess-risk (or Stop-Loss) coverage?
Do I have to redesign my existing health plan?
What about payroll deductions?
Will my life insurance coverages be affected by self-funding my health plan?
Who will take the place of the insurance company to administer the plan?
What are the advantages in using a TPA?
Do TPAs do as good a job, or a better job, than insurance companies??
Why should I self-fund my health plan?

Why do employers self fund their health plans?

• An employer doesn't pay full state premium taxes, which usually range from 2 percent to 3 percent of the monthly insurance premium, if he's self-funded. Every state taxes insurance companies on the premiums collected. The insurance company in turn passes these costs back to the employer. In a self-funded plan, premiums are collected only on the excess loss coverage - a fraction of the regular insured premium; therefore premium taxes are substantially reduced.
• In a self-funded plan, you don't pay insurance company risk and retention charges. An insurance company charges several fees to insure and administer a health plan. Many of these, such as booklet printing costs or actuarial fees, must be paid no matter how the plan is funded or who administers it. However, some insurance company charges such as risk and retention charges aren't applicable to self-funded plans. They simply don't exist in a self-funded environment
• The employer retains control over the health plan reserves, enabling maximization of interest income. When the employer decides to self-fund and all claims have been paid under the old insurance contract, the employer recaptures any reserves that are left. Usually the employer then invests this money and receives the interest income. Insurance companies traditionally credit an employer much less than the actual interest/income received from that employer's reserves. The difference between what the insurance company credited an employer and what that employer can earn by his own investments is another advantage of self-funding.
• Insurance companies are subject to state regulation; self-funded plans only to federal regulation, thereby giving an employer almost total control of the plan design. Having no premium taxes and no insurance company risk and retention charges results in significant savings; however, it's the pre-emption of state regulation that saves the most money in self-funding.
• Most states have numerous laws requiring a myriad of coverages for an insured plan written in their jurisdiction. A self-funded plan doesn't have to comply with these state laws. Therefore, an employer can customize his health plan design focusing on his employees' actual needs and cost savings. For example, if the state mandates that chiropractic coverages can't have a lower cap than $10,000 a year, then every fully insured plan written in that state must abide by this law. A self-funded plan doesn't have to abide by this law, and if an employer wanted a lower annual maximum on chiropractic claims or even wanted to eliminate the coverage entirely, he could write the plan that way. Additionally, an employer can contract with the managed care system that saves the plan the most money, not just the managed care system owned by the insurance company.
• An employer doesn't have to pre-pay coverage, thereby improving his cash flow. Insurance premiums are due in advance. Self-funded plans pay claims as they're presented to the claims administrator, usually 60 to 90 days after medical services are received. Therefore, during the first year of self-funding, an employer pays for only nine to ten months of claims. This improved cash flow can be used to the employer's advantage.
• An employer only pays benefits based on his employees' histories, not someone else's employees. In all but the very largest of health plans, an insurance company pools the experience of its clients. Therefore, an employer often finds himself paying for the poor histories of someone else's employee population. In self-funding, each employer pays only for his own employees' benefits.

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