In the wake of the upcoming (though slightlydelayed) 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 therequirement. The benefits community will likely face many questionsfrom current and potential customers about self-funding options andthis overview will briefly touch on the basics of self-fundedplans, the pay or play requirements, and a few reasons that PPACAmay have caused increased interest in self-funding. 


In short, self-funding is the absence of health insuranceprovided by a third party. Self-funded health plans operate bypaying claims from the plan sponsor's general assets, usuallycombined or offset by participant contributions, instead ofpurchasing insurance through an insurance company by payingpremiums. In some cases, plan sponsors pay claims from a trust thatis funded by plan sponsor contributions and participantcontributions. Self-funding also is called “self-insurance,” whichindicates the plan sponsor's assumption of the responsibility topay benefit claims and to accept the risk of those claims exceedingits expectations, thereby self-insuring the risk.


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


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

  • New fees and mandates for insurers. Insurance companies arefacing a variety of new fees under PPACA, which will likelyincrease expenses, which will be reflected in premium rates andpassed on to policyholders. PPACA also imposes rating limitations,as well as guaranteed-renewability and guaranteed-availabilityrules on insurers that are anticipated to drive up costs (and as aresult, premiums). Employers that complete a cost/benefit analysiscomparing the rising cost of insurance premiums to the costs ofself-funding may find that self-funding could generatesavings.
  • Less risk if employer decides to go back to insured plan. Underthe guaranteed availability rule mentioned above, beginning in2014, health insurance issuers in the group market must allow anemployer to purchase health insurance coverage for a group healthplan at any point during the year. Because of this rule, employerswho attempt self-funding and find it too costly may find it easierto move back to an insured product. This may encourage thoseemployers who thought self-funding was too risky in the past togive it a try.
  • Loss of availability of carve-out plans for management. Acurrent benefit of sponsoring an insured plan instead of aself-funded arrangement is the avoidance of the nondiscriminationrules under the Internal Revenue Code's section 105(h), whichcurrently apply to self-funded plans only. PPACA appliesnondiscrimination rules similar to those of section 105(h) toinsured plans, which may cause problems for employers who continueto sponsor carve-outs for management or other highly-compensatedemployees. While the effective date of this provision of PPACA iscurrently unknown, those employers who maintained an insuredarrangement because of this particular benefit may soon be lessinclined to do so.
  • Easier integration of wellness programs. A major focus of PPACAhas been to emphasize preventive care and wellness programs in theworkplace in order to keep people healthier and reduce health carecosts down the road as people age. In particular, PPACA hasincreased the permissible differential in the cost of coverage thatemployer plans may charge depending on whether an employeeparticipates in a wellness or disease management program(particularly targeting tobacco use). Employers wishing toimplement wellness or disease management programs may find thatintegration of these programs is easier in a self-fundedarrangement, because communication and access to claims data may beeasier with a third-party administrator rather than an insurancecompany.  Self-funded plans may also be able to bettertailor wellness programs to the needs of their employees becausethey will not be limited to the products available from insurancecompanies. Finally, some self-funded plan sponsors may realizesavings from their wellness or disease management programs muchmore quickly than insured plan sponsors, who have to wait for thesavings to trickle through the experience rating in futureinsurance premiums.

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

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