Employers with a self-funded (or self-insured) group health plan assume the financial risk for providing medical benefits to their workers. The benefits of self-funding include: plan design flexibility, exemption from certain state-mandated benefits laws, and access to claims data (which fully insured companies generally don't have access to).

Armed with claims data, self-funded companies can monitor their health care costs and target wellness and disease management programs to specific employee populations. 

Stop-loss insurance — commonly sold by brokers and third-party administrators — allows employers who self-insure to limit their financial exposure. It helps protect them when their group medical costs are higher than anticipated or individual employees experience high-cost catastrophic illnesses or accidents.

Impact of health reform law        

The Patient Protection and Affordable Care Act of 2010 is driving interest in self-funding. That's because it says that group health plans can no longer have lifetime dollar maximums on "essential health benefits" effective for plan years beginning on or after Sept. 23, 2010. For calendar year plans, this means the provision was effective Jan. 1, 2011. This prohibition applies to both fully insured and self-insured group health plans.

"Essential health benefits," while yet to be spelled out specifically by the government, are broadly categorized in the law to include prescription drugs and lab services, emergency services, hospitalization, maternity and newborn care, and mental health and substance use disorder services.

Self-funded companies have some time to adjust since the law allows them to impose annual "per employee" limits on benefits through Jan. 1, 2014. But advisers shouldn't wait to contact their clients to discuss how to best structure their health benefit plans.

No longer able to cap lifetime benefits, some fully insured employers are responding by switching to self-funding with stop-loss coverage as a more financially stable alternative. And self-insured companies are seeking stop-loss coverage to manage their potential financial exposure.

Some stop loss carriers also provide carve-out options, such as insurance for transplants. Or, they may assist a health plan's administrator with services to help them recover or contain costs, such as medical management for complex cases like premature births or cancer.

High-dollar claims  

That potential financial exposure is very real. A catastrophic claim for a serious illness could threaten an employer's financial viability. Consider, for example, that just one complex case of congenital heart disease costs $286,000 on average, and can even exceed $2 million. The average billed cost for a transplant episode is $427,000, but depending on the circumstances, it can rise to $1 million or more.

Self-insured employers are naturally concerned about their ability to absorb the entire amount of these kinds of claims.  That's why groups of 50 or more are increasingly showing interest in exploring risk-sharing arrangements like self-funding, combined with stop-loss insurance, to better control their risks.

Brokers should be able to offer guidance on these options to their employer clients and also help them research the financial strength and claims-paying record of stop-loss carriers that their clients are considering.