Self-funded health care
Encyclopedia
Self-funded health care is a self insurance
arrangement whereby an employer provides health
or disability
benefits to employees with its own funds. This is different from fully insured plans where the employer contracts an insurance company to cover the employees and dependents. In self-funded health care, the employer assumes the direct risk
for payment of the claims
for benefits. The terms of eligibility
and coverage
are set forth in a plan document which includes provisions similar to those found in a typical group health insurance
policy. Unless exempted, such plans create rights and obligations under the Employee Retirement Income Security Act of 1974
("ERISA").
Many employers seek to mitigate the financial risk
of self funding claims under the plan by purchasing stop loss insurance from an insurance carrier. These policies typically provide for risk retention limitations both on a specific claim and aggregate claims basis. An important aspect of self funded group health plans lies in the requirement that the employer remain liable for funding of plan claims regardless of the purchase of stop loss insurance. What this means, in turn is a fund or company's own bank account creates a pool of their employees and is managed & distributed to claim pay outs. In other words, only the employer has a contractual relationship with plan participants and beneficiaries. The stop loss policy runs solely between the employer and the stop loss carrier and creates no direct liability to those individuals covered under the plan. This feature provides the critical distinction between fully insured plans (subject to State law insurance regulations) and self funded health plans which, under the provisions of Section 514 of ERISA, are exempt from State insurance regulations.
Stop loss policies are effective for large corporations with large losses. The stop loss feature is most cost effective for large companies, typically Fortune 500 companies with over 10,000 employees.
Stop loss policies should be distinguished from "reinsurance
" arrangements. Under reinsurance arrangements, one insurance carrier cedes risk to another carrier to lessen its risk. Reinsurance arrangements fall under specific State insurance regulations designed to assure the financial integrity such arrangements. Stop loss policies are also sometimes referred to as Associated Services Only.
While some large employers self-administer their self funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment. Third Party Administrators
provide these and other services, such as access to preferred provider networks, prescription drug card programs, utilization review and the stop loss insurance market. Insurance companies offer similar services under what is frequently described as "administrative services only" or "ASO" contracts. In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.
benefits, a stop loss program reimburses healthcare expenses differently than when non eligible.
For instance, a 65 year old employee will have their stop loss policy primary, Medicare secondary. The instant the employee retires, Medicare becomes primary, the stop loss policy secondary.
When the individual is 65 and working, the aggregate deductible (ex. $1,100) of a stop loss plan is the patient's initial responsibility after Medicare A pays. When an individual is retired & 65 & over, the aggregate deductible (ex. $1,100) is over looked & superseded by the stop loss (ex. $10,000.) A stop loss (ex. $10,000,) in turn, becomes the new larger deductible—a savings for large corporations.
Self insurance
Self insurance is a risk management method in which a calculated amount of money is set aside to compensate for the potential future loss.If self insurance is approached as a serious risk management technique, money is set aside using actuarial and insurance information and the law of large numbers...
arrangement whereby an employer provides health
Health
Health is the level of functional or metabolic efficiency of a living being. In humans, it is the general condition of a person's mind, body and spirit, usually meaning to be free from illness, injury or pain...
or disability
Disability
A disability may be physical, cognitive, mental, sensory, emotional, developmental or some combination of these.Many people would rather be referred to as a person with a disability instead of handicapped...
benefits to employees with its own funds. This is different from fully insured plans where the employer contracts an insurance company to cover the employees and dependents. In self-funded health care, the employer assumes the direct risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
for payment of the claims
Cause of action
In the law, a cause of action is a set of facts sufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party. The term also refers to the legal theory upon which a plaintiff brings suit...
for benefits. The terms of eligibility
Eligibility
Eligibility may refer to:* The right to run for office , sometimes called passive suffrage or voting eligibility* Desirability as a marriage partner, as in the term eligible bachelor...
and coverage
Coverage
-Filmmaking:* Coverage , the size of the image a lens can produce* Camera coverage, the amount of footage shot and different camera setups used in filming a scene...
are set forth in a plan document which includes provisions similar to those found in a typical group health insurance
Health insurance
Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...
policy. Unless exempted, such plans create rights and obligations under the Employee Retirement Income Security Act of 1974
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
("ERISA").
Many employers seek to mitigate the financial risk
Financial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
of self funding claims under the plan by purchasing stop loss insurance from an insurance carrier. These policies typically provide for risk retention limitations both on a specific claim and aggregate claims basis. An important aspect of self funded group health plans lies in the requirement that the employer remain liable for funding of plan claims regardless of the purchase of stop loss insurance. What this means, in turn is a fund or company's own bank account creates a pool of their employees and is managed & distributed to claim pay outs. In other words, only the employer has a contractual relationship with plan participants and beneficiaries. The stop loss policy runs solely between the employer and the stop loss carrier and creates no direct liability to those individuals covered under the plan. This feature provides the critical distinction between fully insured plans (subject to State law insurance regulations) and self funded health plans which, under the provisions of Section 514 of ERISA, are exempt from State insurance regulations.
Stop loss policies are effective for large corporations with large losses. The stop loss feature is most cost effective for large companies, typically Fortune 500 companies with over 10,000 employees.
Stop loss policies should be distinguished from "reinsurance
Reinsurance
Reinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...
" arrangements. Under reinsurance arrangements, one insurance carrier cedes risk to another carrier to lessen its risk. Reinsurance arrangements fall under specific State insurance regulations designed to assure the financial integrity such arrangements. Stop loss policies are also sometimes referred to as Associated Services Only.
While some large employers self-administer their self funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment. Third Party Administrators
Third party administrator
A Third Party Administrator is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. This can be viewed as "outsourcing" the administration of the claims processing, since the TPA is performing a task traditionally handled by the...
provide these and other services, such as access to preferred provider networks, prescription drug card programs, utilization review and the stop loss insurance market. Insurance companies offer similar services under what is frequently described as "administrative services only" or "ASO" contracts. In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.
Confusion of coordination of benefits with Medicare Primary
Stop loss policies have been a work of confusion. When an individual is 65 years old, retired & is eligible for MedicareMedicare (United States)
Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...
benefits, a stop loss program reimburses healthcare expenses differently than when non eligible.
For instance, a 65 year old employee will have their stop loss policy primary, Medicare secondary. The instant the employee retires, Medicare becomes primary, the stop loss policy secondary.
When the individual is 65 and working, the aggregate deductible (ex. $1,100) of a stop loss plan is the patient's initial responsibility after Medicare A pays. When an individual is retired & 65 & over, the aggregate deductible (ex. $1,100) is over looked & superseded by the stop loss (ex. $10,000.) A stop loss (ex. $10,000,) in turn, becomes the new larger deductible—a savings for large corporations.
Further reading
- Self-Funded Health Care Could Lower Costs - Milwaukee Biz Journal http://www.bizjournals.com/milwaukee/stories/2006/02/27/focus4.html
- Is Self-Funded Health a Path for Small Firms? - HR Magazine http://www.shrm.org/hrmagazine/articles/0806/0806SRwoodward.asp
- Self-Funding of Health Care Benefits http://www.ifebp.org/books.asp?5670 by Carlton Harker
- ERISA Group Health Plan Administration, Health Plan Law http://www.healthplanlaw.com,
- Partially Self Funded Group Health Plans - High Deductible Health Plans http://www.highdeductiblehealthplanstoday.com