When small and mid-sized companies explore the potential benefits of self-funding, they may encounter challenges not faced by larger corporations. For instance, small and mid-sized companies may:
- Be wary of taking on the financial risk inherent in self-funding.
- Experience large cost fluctuations due to the unpredictability of the timing of claims.
- Lack internal resources (e.g., personnel and specialized expertise) to manage and administer self-funded plans.
Fortunately, these challenges can be met through appropriate risk management strategies, accurate claims administration and effective plan design.
Alleviating risk through stop loss coverage
Although companies with fewer than 100 individuals may feel that self-funding is a gamble, there are ways to mitigate risk and ease concerns. One approach is through stop loss coverage, which protects self-funded companies from high claims by putting a ceiling on financial risk. Practically speaking, stop loss coverage changes a fully self-funded plan into a partially self-funded plan that still offers the same cost control opportunities.
There are two types of stop loss coverage: specific and aggregate.
- Specific stop loss coverage protects a company against claims above a specified amount on a per-participant or per-family basis. An experienced consultant can work with a company to set the amount at a level that reflects the company’s risk tolerance.
- Aggregate stop loss coverage protects a company against accumulated claims that exceed a specified ceiling. The stop loss insurer is responsible for any claims above this ceiling.
Aggregate stop loss coverage is generally provided on an annual basis; however, it also can help protect a company from interim cash flow problems that arise when monthly claims fluctuate above projections. The difference is made up as claims in other months fluctuate below projections. At year end, an annual reconciliation is performed. At that time, an adjustment can be made if overall claims for the year were higher or lower than projected.
How much stop loss coverage does a company need and how much will the coverage cost? The answers to these questions depend on a number of interrelated factors. These factors include the company’s assessed level of risk, the size of its workforce and the amount of risk it is willing and able to assume. The majority of companies that self-fund typically obtain both specific and aggregate stop loss coverage.
Alleviating risk through strategic plan design
As discussed earlier, self-funded plans have a great deal of flexibility when it comes to plan design. As a result, companies that self-fund can custom design their health plans to drastically reduce risk. Effective strategies to reduce risk include excluding or limiting certain benefits and implementing strong wellness, disease and pharmacy management programs.
Joining a group captive
Self-funding with a group captive is an innovative way for small and mid-size employers to reap the benefits of self- funding. At the same time, they are able to minimize the potential risk associated with exposure to a large claim or series of claims. With a captive, employers with 50 to 500 employees cover their own small claims and purchase traditional stop loss insurance. Then, each employer contributes premiums to a group mechanism called a captive. The captive covers claims that fall between the small, self-funded layer and the catastrophic layer. In this way, claims are spread across a larger pool of employees, reducing risk and year-to-year volatility.
Claims administration and plan management
Frequently, a small or mid-sized company’s self-funded health plan is managed and administered by a TPA. Third party administration is not a new industry. Since the inception of self-funded health plans, TPAs have provided services such as claims administration and eligibility management.
Services offered by TPAs to administer self-funded plans include:
- Managing plan eligibility and enrollment.
- Issuing identification cards.
- Conducting enrollment meetings.
- Providing employee education.
- Responding to plan participants’ questions and resolving issues.
- Negotiating, obtaining and renewing stop loss coverage.
- Managing/monitoring stop loss administration.
- Providing (or contracting with vendors to provide) wellness programs, disease management, pharmacy benefit management and provider network management.
- Negotiating provider discounts.