Ten years ago, benefits self-funding—and the stop-loss coveragethat typically accompanies it—was a world occupied mainly by largeemployers. Only those with more than 500 employees were typicallywilling take on the liability of providing employees with medicalcoverage, and only companies that size generally had cash flowadequate to the job.

Within the last year, however, the world of self-funded benefitsand stop-loss insurance has begun to change. Propelled in part byhealth care reform legislation, smaller companies are self-insuringmore often and buying more stop-loss coverage. The result is abigger stop-loss insurance market—and more flexibility andcustomization for a wider variety of employers and theirworkers.

A stable business model in a changingworld
In a self-funded insurance plan, an employerassumes the financial risk for providing employees with a healthcare benefit plan. Self-insured employers typically pay employeemedical claims out of pocket from a trust fund the employer sets upfor that purpose. Self-insured employers need substantial cash flowin order to make the benefit plan work.

They do, however, have an additional tool: stop-loss coverage,which reimburses them for medical claims that exceed a statedamount. Stop-loss insurance offers two different coverage types.Specific coverage sets a deductible amount for every employee;aggregate coverage sets a deductible amount for the entire employeegroup. Most self-funded employers buy both types of self-insuredcoverage, though most claims are made under specific coverage, saysMichael Fry, executive vice president of the group division forSymetra Financial Corp.'s insurance subsidiaries.

(Symetra is based in Bellevue, Wash.) According to a report doneby the Employee Benefit Research Institute and cited by theSelf-Insurance Institute of America, a trade group, approximately50 million people received benefits through self-insured grouphealth plans in 2000. These recipients made up 33 percent of the150 million people who got their health coverage from an employerthat year.

(The remaining 100 million workers have employers who sponsorfully funded health care plans.) Businesses have a variety ofreasons for choosing self-funded benefit plans, most of which boildown to lower costs and/or increased flexibility. Specificrationales might include the desire for a customized plan, ratherthan a one-size-fits-all policy; the possibility of interest incomefrom a trust fund; the improved cash flow that comes with payingfor claims as they occur; a chance to sidestep conflicting healthinsurance regulations and benefit mandates; and the opportunity toavoid paying state taxes on health insurance premiums.

Large businesses have long benefited from the lower costs andincreased flexibility that self-funded plans offer. Now smallercompanies are increasingly choosing self-funded benefit plans. “Forthe last solid year we have seen a tremendous interest fromsmall-group employers in the self-insurance concept,” says KurtRidder, president of Spectrum Underwriting Managers inIndianapolis, a managing general underwriter of specific,aggregate, and integrated medical stop-loss insurance for employerswith between 25 and 199 workers.

A surge in popularity
Health care reformis a force behind the change, industry experts agree. “The premiseof health care reform was to lower the cost of health care, andthat hasn't been accomplished,” Fry says. A May 2010 Towers Watsonstudy surveyed 650 senior benefits professionals. Only 14 percentof respondents think health care reform will help contain heathcare costs.

Just 25 percent think reform will promote healthier lifestyles,and a scant 20 percent believe reform will increase the quality ofmedical care. Most employers, the study concludes, plan to continueoffering medical benefits to their employees after health carereform rules take hold. At the same time, they want less expensive,more flexible, more effective health care. Many of them seeself-funded benefits as a tool that can help them achieve thosegoals.

Saving money with less-expensiveplans
“When you have an environment where costs aregoing up and employers still want to provide benefits, self-fundingis a very cost-efficient way of providing care,” Fry says.“Employers are trying to find every dollar they possibly can.” Whena company self-funds its medical benefits plan, it keeps whatevermoney employees don't spend on their health needs.

Firms that buy fully funded plans, by contrast, don't see thatmoney again, even if their workforces spend less than anticipatedon medical costs. Firms with self-funded benefit plans canadminister those plans themselves, which may be a money-saving andpractical option for very small firms. Larger firms often hirethird-party administrators, and many find that the combination of aself-funded plan and a third-party administrator is less expensivethan a fully funded plan.

That's particularly true in the current environment, Riddersays, because fully insured carriers are requesting (and oftengetting regulatory approval for) larger and larger rate increases.“In the past, pushback helped keep price increases lower,” Riddersays. “Now they're not backing off rate increases as much as theyhad in the past.” Employers whose carriers impose stiff rateincreases can always investigate moving their business to anotherinsurance company.

That's also becoming less of an option. “We're seeing some fullyinsured carriers getting out of the business. They don't like whatthey see coming under health care reform,” Ridder says, adding thatsuch firms might be put off by complying with reform legislation'sminimum medical loss ratios, which they see as limiting profits ingood years but not limiting losses in bad ones, as well as byunlimited lifetime benefit maximums. Less competition, again, meanshigher prices for fully funded benefit plans. Legislative quirkscan also help self-funded plans save employers money.

A fully funded plan must comply with regulations in each statewhere the company has workers. What's more, companies with fullyfunded plans pay state taxes, generally between 2 and 3 percent, ontheir premium dollars. Self-funded plans, by contrast, arefederally regulated, so they don't need to comply with individualstate rules. Companies that use them don't pay state taxes onpremium dollars, either.

Wellness and consumer-drivencare
Self-funding companies can passively pocketwhatever savings exist—or they can actively nudge their employeesin healthier directions, combining the trend in self-funding withanother movement of corporate wellness programs and consumer-drivenhealth care. That puts more responsibility on employees to keepmedical costs down by actively managing their health.

More and more companies include campaigns to combat common (andexpensive) ailments — heart disease, diabetes, obesity, backproblems, depression — in their total employee benefits package.They could send employees information about the costs of treating aparticular problem, then follow that up with advice on managing acondition, lifestyle coaching, Biggest Loser-style competitions, orWeight Watchers meetings on company time.

Employees who use these opportunities to improve their healthmight get rewards in the form of time off, gift cards, healthsavings account contributions, preferential parking spots, lunchwith senior management, paid time off, the chance to help designfuture company-wide health initiatives, or even investments inprofessional development or resources. Nothing prevents employersfrom having both wellness programs and fully funded medicalbenefits, of course.

By using self-funded benefits, however, firms get to keep themoney that they save by using wellness programs. A company thatimplements a successful wellness intervention, for instance, maypay for a worker's $12,000 angioplasty—but not for his $250,000triple-bypass surgery. The firm pockets the difference. “You havethe opportunity to benefit from your own claims experience,” Riddersays. Self-funding also lets smaller firms join larger ones intailoring total benefit programs to their worker population.

Consider a particular business in which workers do a lot ofbending and lifting, for example. That employer could offer greatchiropractic care and frequent employee education on back healthand safe lifting practices, as well as incentives for workers whouse good biomechanics on the job. The firm would likely see greaterproductivity and reduced absenteeism, as well as a direct reductionin medical costs. For even more tailoring, some stop-losspurchasers search for what exactly the firm is spending its medicalmoney on.

“The whole idea behind self funding is greater control ofemployee benefit dollars, and we are evidence that employers areplaying a more active role in controlling their benefits costs,”says Chris Metcalf, marketing and communications director atBenefit Informatics in Tulsa, Okla. Metcalf's firm collects andanalyzes health care data, then passes that information on to itsclients, which include reinsurance companies, consultants,insurance brokers and third-party administrators.

The company can slice data in a wide variety of ways, revealingeverything from specific “trigger ailments” to where it's spendingthe most money, then projecting how benefit program changes willaffect a given group. “They're always evaluating plandesign—co-pays, deductibles, plan features, drug formulary,”Metcalf says. “We're definitely seeing more smaller groups in ourbook of business,” Metcalf says. In the past, 500 employers was thelower limit for self-funded benefit plans.

Now, Metcalf says, he commonly sees self-funded firms with 200workers, and even notices self-funded companies with 100 or 50employees.  Virtually all of them, he says, are motivatedby the possibility of maximizing the return on their health caredollars, as well as by the chance to keep whatever they don't spendon medical benefits.

They use detailed data to help design wellness andconsumer-directed health care programs that are maximally effectivefor their employee populations. Ironically, being self-funded helpsthem get this information in the first place. Fully funded carrierscan give firms data, but an employer might have multiple carriers,each with their own data collection and analysis systems.

Fully funded firms have one data source — their own firms — andcan choose their own data collection and analysis systems. In thefuture, Metcalf predicts, companies with fewer than 25 workers willbe fully funded, or will buy coverage through insurance exchanges.Other firms, he thinks, will self-fund their employee benefits,using stop-loss insurance and wellness plans to get the healthiestworkers they can—and the best possible return on theirinvestments.