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The Pros and Cons of Self-Insuring

by John Romaska

Although the option of a self-insured health plan may seem daunting to some employers, we are seeing a steady shift in organizations leaving their insurers and adopting self-funded health plans. In fact, the percentage of U.S. employees covered under self-funded medical plans has increased 17 percent since 1999. With increased federal regulations under the Affordable Care Act, we are seeing more employers express interest in self-funded medical plans and we expect the number of employees on self-funded health plans to continue to rise. There are many factors to consider when choosing between a fully insured or self-funded arrangement for your organization.

Some of the perceived disadvantages of self-funded plans lie in the increased employer responsibility. Because self-funded plans do not use insurance carriers, both financial and administrative burdens fall on the employer. Employers must decide the amount of risk and responsibility they can comfortably assume. Under a self-funded arrangement, employers will be responsible for funding monthly claims, even when they experience a month with atypically high claims. Furthermore, the entire plan must be budgeted, for as self-funded employers will not have the luxury of simply factoring in a fixed monthly premium the way fully insured organizations can. Along with establishing a budget for the plan, self-funded organizations must establish banking arrangements to pay for claims. Oftentimes, organizations working with third-party administrators will deposit claim funds and the TPA or carrier will draw from it to pay them. Self-funded organizations must also establish reserves for claims that have been incurred but not yet reported and a separate contingency reserve to provide a cushion for the inherent fluctuation in claims. Administratively, the self-insurer becomes a fiduciary to the self-funded benefits plan and is responsible for interpreting and making all plan determinations regardless of whether the employer is using a TPA. Self-funded employers are also responsible for producing and distributing Summary Plan Descriptions that outline the covered plan of benefits and plan exclusions.

While the aforementioned responsibilities may seem overwhelming, there are many attractive benefits that come along with a self-funded health plan that have many employers taking the leap. While insurance plans are governed by individual states, self-insured plans are governed by the Employee Retirement Income Security Act. The upside to this is employers are not obligated to include state-mandated benefits, which are known to drive up administrative and/or claims costs. Self-funded plans are also not required to follow the essential health benefit rules through the Patient Protection and Affordable Care Act. Additionally, self-funded plans have reduced premium taxes as they are not being taxed on full premiums. These plans are only taxed on administration fees and stop loss insurance (should the employer secure it).

Perhaps the most enticing benefits of switching to a self-funded plan lie in breaking away from insurance carriers. In doing so, employers are afforded greater flexibility around their benefits program and not pigeonholed into a carrier’s “standard” plan design. This allows employers to structure their plan in a way that best suits their organization and employees. As a plan fiduciary, self-funded employers are also afforded the luxury of free access to experience data associated with their health care plan, which can ensure sound plan determinations. Insurance carriers are notoriously reluctant to provide data to policyholders and this can conceal hidden carrier profit margins. With self-funded plans, profit charges are only included in the administrative fee. By switching to a self-funded health plan, you can remove profits from insurance carriers and shift savings to your company’s bottom line.

New cost containment concerns regard the high cost of specialty drugs, which are trending 15 to 18 percent per year. Specialty spend growth in pharmacy is expected to account for 50 percent of total prescription spend by 2018 and by 2020, total prescription spend is projected to be 50 percent of total health plan claims. The reason for this large increase is due to many drug manufacturers losing patents on their brand name drugs, in addition to refocusing their pipeline drugs to more costly conditions. There is no better time for employers to ensure they are reviewing their pharmacy contracts to ensure they are receiving competitive Average Wholesale Price dis- counts with guarantees included, 85 to 100 percent rebate share on brand name medications and implementing control measures through auditing firms to ensure contract terms are being met by their pharmacy benefit manager. In order for an employer to better manage their pharmacy spend, the employer must first move to a self-funded arrangement to gain more transparency and access to programs to help drive down their overall cost.

John Romaska is director of benefits consulting for Innovative Benefit Planning, LLC in Moorestown.

Published (and copyrighted) in South Jersey Biz, Volume 6, Issue 11 (November, 2016).
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