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Ever since Congress passed the Employee Retirement Income Security Act of 1974 (“ERISA”), employers have been moving steadily toward self-funding of their sponsored health insurance plans. In fact, a recent survey of employers with 100 or more employees indicated that nearly two-thirds of them currently have a self-funded employee benefit program in place. Why all the interest in this unique method of alternative risk financing? The advantages for companies are control, cost-efficiency, continuity and value.
Control:
In a self-funded program, the sponsoring employer controls every aspect of the plan of benefits from the types and levels of coverages being offered to the parties responsible for its administration to the level of risk to be retained. This increased level of control manifests itself in a plan which is tailored to the specific needs of the employer, thereby eliminating the cost of undesired benefits. Moreover, since the providers of services to the plan (e.g. insurance carriers, claims payors, managed care network vendors, etc..) typically have their services and/or products contracted independently of each other, the employer can arrange for their individual removal/replacement at will, if the quality level being provided is deemed insufficient. The result is a more efficient utilization of employer (and employee) assets.
Cost Efficiency:
As mentioned above self-funding presents a more cost-efficient means of providing a given plan of benefits. Not only are cost factors better controlled, they are typically more carefully isolated and accounted for, thereby giving the employer higher quality information to use in deciding which benefits are being under- or over-utilized and how best to go about correcting the situation. Cost data for a self-funded plan can be customized to better meet the information needs of the sponsoring employer, and it is most often provided in a much more timely manner, allowing for quick reaction and fine-tuning of the plan design. Regarding the plan’s administration costs, which for a small group can represent up to 40% of the premiums paid, a self-funded plan is able to exercise a higher degree of control over these expenses, since the costs are separately negotiated and isolated. Again, if a service provider is not cost-competitive in its pricing structure, they won’t last long in the self-funded world!
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Continuity:
Since the vast majority of self-funded health care plans qualify as a “welfare benefit plan” under ERISA, they are subject to federal, rather than state, jurisdictional control. This fact is important to the sponsoring employer in that it affords them the luxury of having to comply with only one set of rules insofar as plan design and qualification are concerned, and permits the application of one set of benefits for all employees, regardless of their worksite location or state of residence. This avoidance of conformity with multiple state jurisdictions leads to better plan communication, lower cost of administration and more continuity of benefits when workers live and work in different states or are subject to frequent transfers or travel. Furthermore, this immunity allows a self-funded plan to avoid having to comply with the myriad of benefit laws which serve a limited group of special interests, and which are so easily passed by state legislatures.
In summary, self-funding has gained in popularity not because it guarantees a lower cost, but because it provides a better value. Both the employer and the employee gain from improved cost controls and attention to claims, and they are the direct beneficiaries when expenses are lowered. The service is more personalized and attentive, the costs are better understood, and the benefits are more efficiently utilized. In these days of rapid change and escalating costs for health care insurance, it would appear that the time couldn’t be better to give self-funding a try
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