Since the passage of the Affordable Care Act in 2010, employers have become increasingly aware of the potential financial benefits that come with adopting a self-funded health plan.

A primary benefit of self-funding is that under the Employee Retirement Income Security Act, self-funded plans are shielded from the reach of state insurance regulations. States are unable to regulate these self-funded ERISA plans as they would fully-insured health plans.

As a result, employers are empowered to use innovative plan language to craft an affordable, flexible plan. Additionally, employers benefit from uniform coverage and cost continuity because a single plan can cover many employees in multiple states.

Despite the real advantages of self-funding, many employers still seek out tools they can use to transfer actual or perceived risk away from their plans. That's where incentives and disincentives come into play -- but there are potential pitfalls to be aware of.

Incentives and disincentives

Federal law expressly prohibits discrimination against plan participants based on sex, disability, health factors, and other criteria. For example, offering incentives to enroll in Medicare is not permitted according to the Medicare Secondary Payer Act.

This is part of the basic structure of the Act and, as might be expected, the regulatory bodies charged with enforcement take a very broad view of what actions might constitute such an incentive.

While it may be intuitive for a plan to suggest that its participants can, for a monetary incentive, terminate coverage under the plan and instead become covered under Medicare, this runs afoul of the Act.

According to the Department of Labor, an employer can't give a cash reimbursement for the purchase of an individual market policy. If it does so, the payment arrangement is part of a “plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.”

Therefore, the arrangement is a group health plan under ERISA. Under the ACA, such arrangements can't be integrated with individual market policies. To be compliant with the ACA, a premium reimbursement plan (or HRA) must be integrated with a compliant group health plan.

Offering a choice between cash and health benefits is generally allowable, but the compensation can't be designated specifically for the payment of individual premiums. Any attempt to condition these payments on proof the employee enrolled in exchange coverage would therefore be noncompliant with the ACA.

An offer of cash in lieu of benefits would also be deemed discriminatory if made only to high risk or ill employees. Such an offer must be extended to all employees.

It's also worth noting that if the employer offers affordable coverage which meets the minimum value requirements, employees would not be eligible for subsidies on the exchange -- and exchange coverage would therefore likely be less affordable or attractive to an employee than the employer’s group plan.

Modifying copays and deductibles is another way an employer can incentivize employee behavior.

The Department of Labor indicates that a plan may waive or lower a copayment for the cost of certain services in order to encourage participants to seek a certain type of care -- such as well-baby visits or regular physicals. This can benefit the group by ensuring employees and their families are healthy.

Similar to copayments, plans may waive or lower deductibles for certain services at the employer's discretion. It should be noted that a HSA-qualified high-deductible health plan can't retain its HSA qualification if the plan pays first-dollar for services other than preventive care -- so HDHPs can't utilize deductible waivers as an incentive in most cases.

Just as providing incentives to employees may lower the cost of self-funding, so can disincentives.

The simplest type of disincentive is raising deductibles and even lowering the percentage of covered services.

By doing this, the plan sends the message to participants that remaining enrolled in the plan may not be the best financial choice. At the very least, a raise in price may cause participants to explore other options.

However, employers should note that raising deductibles could adversely impact the plan in the form of driving even healthy lives to the exchanges. In other words, recklessly including high deductibles in a plan could drive away the very lives the plan needs to thrive, as well as those it wanted to disincentivize in the first place.

An alternative option to consider would be for the plan to have no deductible up to a certain point, at which point the deductible becomes applicable -- and the deductible is the highest permitted by applicable law. By doing so, the plan can ensure that the healthy lives it wants to keep on the plan are satisfied with the care offered because they won't have a deductible for their care.

'Skinny' plans

A “skinny plan” is a type of plan that has been developed in the wake of the ACA. As the ACA imposes many requirements on self-funded plans, the skinny plan attempts to comply perfectly with the requirements of the ACA, and cover the bare minimum allowed by law.

A skinny plan is a sort of bare-bones model -- it's generally considered not suitable to employees who have underlying conditions, who may need specialty care. The ACA doesn't require that the plan cover specialty care, so skinny plans don't cover a lot of services that many employees need on a regular basis.

The ACA requires that all large employers offer health care to their employees -- but there's no requirement that the employees enroll on the employer’s plan.

If the employer offers a skinny plan, and many employees elect to not enroll due to its lack of coverage of services they may need, then the employer has still complied with the ACA.

One potential pitfall of offering a skinny plan may be relevant to employers with smaller employee bases; if not enough employees enroll, maintaining a self-funded plan may prove unfeasible. For this reason, offering a skinny plan is likely only a good option for larger employers.

Pursuing health care cost containment strategies is increasingly important for employers who wish to offer affordable health insurance to employees, especially after the passage of the ACA.

Self-funded plans can benefit from creative plan design -- and managing risk with incentives and disincentives can provide even greater savings.

Provided that employers can stay compliant with anti-discrimination regulations, self-funded health plans will continue to be uniquely flexible and offer real savings to both employers and employees alike.

Instant Insights /

How to avoid common pitfalls when managing a self-funded health plan

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