Self-Funding - An Overview & Explanation of Misconceptions
by Frederick D. Hunt, Jr. - SPBA President
What is self-funding?
Perhaps its other name "self-insurance" is more
descriptive. Instead of paying an insurance company or Blue Cross & Blue
Shield money to pay the claims (and keep any profits), a self-funded (self-insured)
employer, or plan, puts the money into a trust fund that is overseen by
strict Federal government regulation, and that trust fund pays the claims
(and keeps any profits on behalf of the workers to offset future expenses).
To avoid catastrophic losses, both commercial insurance companies as well
as self-funded plans usually buy re-insurance. In self-funding, the re-insurance
has the descriptive name "stop-loss". It allows a plan to set in advance
the maximum loss levels it is willing to sustain on any specific situation
or on the aggregate of claims on the whole group. Thus, even a one-person
employer can budget to meet his pre-designated stop-loss trigger points
and can self-fund successfully.
Technical note #1:
Within the benefits business, we occasionally use
the term "partially self-funded" to differentiate between "bare" and self-funding
with stop-loss. However, it is very important to remember that legally
& technically, there is no such subset or term as "partially self-funded".
A self-funded plan is simply and legally a self-funded ERISA plan whether
it has stop-loss or not (just as a barbershop is a barbershop whether
it has fire insurance or not.) So, a self-funded plan with stop-loss is
subject to the same tough Federal ERISA fiduciary standards and all aspects
of the plan (including the stop-loss) are preempted from state intervention.
This "partial" term and role of stop-loss has caused confusion for many
state Insurance Commissioners. The law is clear, however. It is preempted.
Technical note #2:
Too much of the health reform rhetoric is ignorant
of the existence & role of stop-loss, and assumes all self-funding is
"bare" (with no stop-loss). Only the largest plans usually find it prudent
to go without stop-loss, and that's why there has been misplaced talk
about floors and caps of what small employers may use self-funding. Any
employer of any size should be allowed to self-fund. The size limits are
not only senseless & discriminatory, but also unnecessarily add to the
complexity of health reform proposals, which raises suspicion & opposition
to reform. It is viewed as forcing small employers into health ghettos.
Medical IRAs/MSAs: There has been significant support in Congress and
the public for Medical IRA or Medical Savings Accounts (MSAs). While it
is a great idea for people who are responsible savers and knowledgeable
medical consumers, it allows others to fall through the cracks. Self-funding
for tiny employers achieves the goals of MSAs (and thus attracts those
supporters)...while providing a safe structure that remedies the problems
of the less responsible or unfortunate. A small self-funded plan is like
the workers pooling the equivalent of their MSAs.
Reformers & state officials often make the misstatement that ERISA plans
"are not subject to regulation".
That could not be farther from the truth
(as the constant flow of new rules, enforcement cases, and specialists
attest). ERISA was carefully & specifically designed by Congress to be
the ultimate consumer protection law. ERISA fiduciary responsibility has
far stronger consumer protections than state insurance regulation or even
normal business customs. ERISA demands that the plan as a whole as well
as each transaction be viewed to assure that it was the "most prudent"
for the safety & efficiency of the plan assets and the plan participants
(covered individuals). Thus, for instance, various tie-ins, less-than-arm's-length
business arrangements, and administrative costs not fully disclosed in
advance can bring civil and/or criminal ERISA penalties...and the penalties
go to the person who made the judgment. They can't hide behind a corporate
veil. It's powerful incentive!
"Choice" and "efficiency" are big words
in the health reform debate...and self-insurance truly accomplishes that.
The choice is the flexibility of ERISA self-funded plans to design a plan
for the needs of that particular work force...rather than be subject to
the 1,100 state-mandated benefits, such as toupees in one state and hair
implants in another. It makes the greatest use of limited health dollars.
For instance, one plan of food workers includes lead testing for cannery
workers and testing for exposure to pesticides for the farm workers (required
of the workers by other government agencies) in the plan's benefits. Those,
of course, would not be in some government "standard" set of benefits.
Yes, state-mandated toupees probably aren't included, but isn't it better
for the workers to have these services in the plan rather than having
to pay out of pocket?
How big is self-funding, and who uses it most?
In truth, about 85% of
employer health plans currently use some form of self-funding, and are
subject to ERISA regulation. (The percent is also sometimes reported as
67%, depending on how certain plans are defined.) The point is that self-funding
is the major player and the normal mode of health benefits chosen by workers
& employers. Fully-insured is the minor player (9% of health plans, according
to Foster Higgins). This is the opposite of the assumptions on which most
health reformers are basing their proposals. This is especially ironic,
since most health reformers vilify the insurance companies...but would
end up forcing back to insurance companies the customers who had chosen
to leave.
Self-funding has grown many thousand percent in the past 15 years...and
most of that growth has been among small and very small employers (and
the stop-loss industry has matured and become more and more adept at tailoring
services for small plans). Why smalls? The answer is actually quite logical.
Big employers can exercise the clout of their size to demand special rates
& flexibility from insurers. Small employers tend to get inflexibility
at higher prices (or no insurance offered at all). As even tiny employers
found that they could safely custom-design a plan for the needs of their
particular workers...and save as much as 40% on the overall cost, the
choice became clear. Some have their own single-employer plans, and others
banded together in their trade association or other group or union to
create a large plan composed of small employers. It has been very cost-effective,
flexible, and successful. These small self-funded employers & plans are
furious at the thought that Congress & states feel financially sound small
employer plans should be abolished...but it's OK for large companies who
may be on the brink of bankruptcy to do as they please. Angering such
a huge portion of the workforce will have serious repercussions.