From the February 2011 issue of Benefits Selling Magazine • Subscribe!

Self-funding and stop-loss in a post-PPACA world

It's no understatement that the Patient Protection and Affordable Care Act is transforming the health care marketplace. As provisions of the new law take effect, employers and medical benefits providers alike are closely watching what PPACA means for their plan offerings and bottom lines.

Escalating costs represent one of the most anticipated outcomes of health care reform for employers. In a recent Towers Watson survey, 90 percent of employers predicted health care reform will increase their organization's medical benefits costs. Despite this negative outlook, nearly three-quarters of large U.S. employers expect to continue to provide subsidized health care coverage for active employees.

As employers face potentially higher costs and expanded requirements under the new law, many are looking for ways to meet their obligations to employees while shielding themselves from catastrophic risk. Enter the self-funded medical plan with stop-loss insurance protection.

How does it work?
With self-funding, an employer sets aside dollars to pay the medical expenses of its workers and their families. Or, the employer pays employee medical expenses out of current cash flow as claims arise. Stop-loss insurance mitigates risk by insuring the self-funded employer against unexpected increases in overall plan utilization or the impact of a single catastrophic claim.

Embraced by larger organizations for years, self-funding is becoming an increasingly popular option for small- and mid-sized companies as well. According to PricewaterhouseCoopers data, the percentage of self-insured employers with fewer than 1,000 people in their health care programs has almost doubled -- from 29 percent in 2008 to 48 percent in 2010.

In the new PPACA environment, those numbers could climb even higher. Benefits brokers have a prime opportunity to serve as a trusted advisor by proposing viable solutions to rising health care costs -- whether for clients considering self-funding as an alternative to fully insured coverage, or for employers with self-funded plans and stop-loss policies already in place.

Why self-funding?
Self-funding is an efficient way for many employers to deliver health benefits. Here's why:

  • Employers with self-funded plans are not subject to state health insurance premium taxes, which are typically 2 percent to 3 percent of premium.
  • Self-funded plans typically offer employers greater flexibility in plan design compared with fully insured plans, including the ability to tailor benefits to specific group preferences and change coverage as needed.
  • Small-sized companies with self-funded plans can access loss and trend data generally not made available by carriers offering fully insured plans. With this data, employers -- working with their broker and stop-loss provider -- can design benefits that meet targeted needs.

In sum, self-funding offers employers flexibility, enhanced control over benefits design, and potential cost savings over conventional fully insured health plans. These attributes are sure to be increasingly attractive as PPACA implementation unfolds.

What to look for
Some PPACA mandates began rolling out on Sept. 23, 2010. Here's a look at some of the new requirements under the new law:

  • Unlimited annual and lifetime benefits -- Stop-loss policies should include options for unlimited annual and lifetime benefit maximums. While the cost associated with this level of reimbursement will vary by plan design, it should be a nominal increase for most employers.
  • Dependent eligibility extension -- With the extension of dependent eligibility up to age 26, stop-loss policies should reflect this expanded coverage and keep related premium increases to a minimum.
  • Early retiree reinsurance program -- PPACA established a program allowing employers to request reimbursement from the U.S. government for the cost of covering retired employees (age 55 and older) who are not eligible for Medicare. Employers who wish to cover these individuals should ensure their stop-loss policy can accommodate this request.

For medical benefits providers and benefits brokers, the shifting health care landscape presents both obstacles and opportunities. Those that adapt to and can successfully support the changes for self-funded employers -- or effectively guide those considering self-funding -- have the best chance to win in this post-PPACA world.

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