In the wake of the upcoming (though slightly delayed) employer shared responsibility (or “play or pay”) requirements of the Patient Protection and Affordable Care Act, there's been increased interest in self-funded health plans, particularly among those employers who will be subject to the requirement. The benefits community will likely face many questions from current and potential customers about self-funding options and this overview will briefly touch on the basics of self-funded plans, the pay or play requirements, and a few reasons that PPACA may have caused increased interest in self-funding.

In short, self-funding is the absence of health insurance provided by a third party. Self-funded health plans operate by paying claims from the plan sponsor's general assets, usually combined or offset by participant contributions, instead of purchasing insurance through an insurance company by paying premiums. In some cases, plan sponsors pay claims from a trust that is funded by plan sponsor contributions and participant contributions. Self-funding also is called “self-insurance,” which indicates the plan sponsor's assumption of the responsibility to pay benefit claims and to accept the risk of those claims exceeding its expectations, thereby self-insuring the risk.

PPACA's play or pay rules require those employers with 50 or more full-time equivalents to provide health coverage under an employer-sponsored plan to all full-time employees, which are those who work an average of 30 hours per week or more. The plan generally must meet certain minimum value requirements and be affordable to the employee. If an employer does not comply with these requirements, it will face stiff penalties. The play or pay mandate was set to be effective Jan. 1, 2014, but it was announced recently by the Treasury Department that it is pushing the mandate's effective date to Jan. 1, 2015.

Many of the employers who will be subject to the requirements to offer health coverage to their full-time employees are now faced with the added cost of providing coverage to many more employees than currently eligible under their plans (or offering a plan at all where they never have before). Some may look to a self-funded plan to meet their needs and comply with the law. Interest has increased in self-funding in the wake of PPACA for a variety of reasons:

New fees and mandates for insurers. Insurance companies are facing a variety of new fees under PPACA, which will likely increase expenses, which will be reflected in premium rates and passed on to policyholders. PPACA also imposes rating limitations, as well as guaranteed-renewability and guaranteed-availability rules on insurers that are anticipated to drive up costs (and as a result, premiums). Employers that complete a cost/benefit analysis comparing the rising cost of insurance premiums to the costs of self-funding may find that self-funding could generate savings.
Less risk if employer decides to go back to insured plan. Under the guaranteed availability rule mentioned above, beginning in 2014, health insurance issuers in the group market must allow an employer to purchase health insurance coverage for a group health plan at any point during the year. Because of this rule, employers who attempt self-funding and find it too costly may find it easier to move back to an insured product. This may encourage those employers who thought self-funding was too risky in the past to give it a try.
Loss of availability of carve-out plans for management. A current benefit of sponsoring an insured plan instead of a self-funded arrangement is the avoidance of the nondiscrimination rules under the Internal Revenue Code's section 105(h), which currently apply to self-funded plans only. PPACA applies nondiscrimination rules similar to those of section 105(h) to insured plans, which may cause problems for employers who continue to sponsor carve-outs for management or other highly-compensated employees. While the effective date of this provision of PPACA is currently unknown, those employers who maintained an insured arrangement because of this particular benefit may soon be less inclined to do so.
Easier integration of wellness programs. A major focus of PPACA has been to emphasize preventive care and wellness programs in the workplace in order to keep people healthier and reduce health care costs down the road as people age. In particular, PPACA has increased the permissible differential in the cost of coverage that employer plans may charge depending on whether an employee participates in a wellness or disease management program (particularly targeting tobacco use). Employers wishing to implement wellness or disease management programs may find that integration of these programs is easier in a self-funded arrangement, because communication and access to claims data may be easier with a third-party administrator rather than an insurance company. Self-funded plans may also be able to better tailor wellness programs to the needs of their employees because they will not be limited to the products available from insurance companies. Finally, some self-funded plan sponsors may realize savings from their wellness or disease management programs much more quickly than insured plan sponsors, who have to wait for the savings to trickle through the experience rating in future insurance premiums.

These are just a few aspects of PPACA that may affect an employer's decision to self-insure their health plan, whether because employers are now forced to comply with play or pay, or simply because they are attempting to navigate the changing waters of the post-PPACA health insurance world.

Instant Insights /

Self-funded plans and PPACA: Is this the new normal?

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