Self-funded plan regulation: What matters

Traditional self-funded plans are different from level-funded plans.

If regulators try to apply the same rules to both types of self-funded plans, they'll increase the cost of the level-funded plans without doing anything to help the plan participants or the participants' healthcare providers.

Coverage types

There are essentially two types of major medical plan offerings.

An employer can buy a fully insured group health policy from an insurer, pay the premium, and the premium is gone.

An employer can also buy an ERISA self-funded plan.

Stop-loss insurance is insurance for self-funded plan sponsors. The sponsors of responsibly structured ERISA self-funded plans buy stop-loss to manage the risk of receiving large, hard-to-predict claims.

Stop-loss can insure claims costs incurred either per person per year or per population per year.

An employer who uses a self-funded plan takes more risk than the employer with the fully insured coverage.

If the claims costs for the self-funded plan are lower than expected, the employer can benefit in one of two ways: The employer can pay lower claims, or it can share profits with a stop-loss insurance carrier.

Traditional self-funded plans vs. level-funded plans

Employers can choose between two types of ERISA self-funded plans: traditional self-funded plans, with higher stop-loss deductibles, and level-funded plans, with lower stop-loss deductibles.

There are two types of stop-loss insurance: specific and aggregate.

◆ Specific stop-loss insurance covers the claims of one person per year.

◆ Aggregate stop-loss insurance covers the annual liability for a plan's entire population.

Employers can choose the deductible levels.

Traditional self-funded plans have specific stop-loss deductibles over $50,000.

Specific deductibles for level-funded plans are often much lower.

Aggregate coverage protects a plan against unexpected annual medical claims costs exceeding about 125% of the previous year's claims amount.

In short, aggregate coverage caps the employer's risk at about 125% of the previous year's claims.

Once a plan reaches the aggregate deductible, the specific coverage turns off.

The stop-loss policy then provides "first-dollar" risk transfer for 100% of all additional claims, without the need for the plan to meet any further specific or aggregate deductibles.

The stop-loss coverage structure is designed to keep unexpected, multimillion-dollar medical claims from making the employer insolvent, especially early in the year, before the employer has had time to fund the medical claim accrual account enough for the amount to be comparable to the deductible, or deductibles.

Level-funded plans come with stop-loss insurance that allows the employer to avoid assuming catastrophic medical claims risk, unlike the sponsor of a traditional, higher-deductible ERISA self-funded plan.

Employers with traditional, higher-deductible self-funded plans may have to personally fund the claim accrual accounts.

Employers with level-funded plans don't bear the same risk and do not have to personally fund claims accrual accounts.When level-funded plans have lower claims than expected, that causes a claims surplus. The employer can use the surplus to pay the health insurance premiums, or throw a party.

Catastrophic risk

All types of employer-sponsored health plans need to transfer catastrophic risk.

The insurance company manages catastrophic risk and reinsurance for a fully insured major medical insurance plan.

Traditional self-funded plan employers are on the hook for a catastrophic event, and must come up with the cash to "pay it timely."

An employer with a level-funded plan sends monthly premiums to the sponsoring carrier. The carrier is on the hook when a claim exceeds the monthly premium.

In other words, a level-funded plan's catastrophic risk is capped at the monthly premium, if the premium is "paid timely."

An employer with an ERISA self-funded plan uses specific stop-loss insurance to transfer catastrophic risk to the stop-loss insurer.

When big claims arrive at traditional self-funded plans

Almost all large, traditional self-funded plans use stop-loss insurance to transfer specific and aggregate risk, but they accept much higher risk-retention levels.

If a catastrophic claim below the retention limit occurs, a traditional plan must come up with the cash to pay a complete bill within 30 days.

At most, if not all, level-funded plans, the third-party administrator is a big health insurer that's authorized by insurance regulators to do business in the plan's state.

The same carrier is also the medical case manager and the plan's stop-loss claims administrator.

The TPA timely pays claims with the employer's funds.

For a traditional self-funded plan with a high stop-loss deductible, the TPA may advance additional funds to pay claims if employer cash isn't available. But the TPA immediately charges the employer, in accordance with the TPA contract.

The TPA contract also requires the employer to pay a complete claim within 30 days.

Many TPAs pay large claims without challenging them.

TPAs often receive large claims for expensive "specialty drugs" and experimental procedures that weren't medically necessary, or even FDA-approved, yet still get paid timely.

Big claims and level-funded plans

When the participants in a level-funded plan have catastrophic claims, the employer doesn't face the same kind of contractual exposure to the claim costs, or the same urgent need to come up with the cash to pay a large claim in a timely manner.

Problems can occur when medical care that's neither medically necessary nor FDA-approved shows up.

TPAs may pay the claims timely to avoid violating their TPA contracts, even though they know that they aren't ultimately financially on the hook for the payments.

But, unlike the sponsors of traditional self-funded plans, level-funded plan sponsors aren't financially exposed to catastrophic claims liability, whether for specific risk or aggregate risk.

Who's holding the bag?

Although an employer fiduciary is the plan sponsor for both a traditional self-funded plan and a level-funded plan, level-funded plan sponsors don't face the same amount of exposure to financial risk.

The sponsor of a traditional plan is liable for timely claims payment and case management.

The sponsor of a level-funded plan passes most of those responsibilities on to a stop-loss provider through a single contract.

Different regulatory needs

Because sponsors of level-funded plans face a much lower level of claim-payment liability than the sponsors of traditional plans do, putting the level-funded plan sponsors under the same rules that apply to traditional plans would create unnecessary compliance costs for the level-funded plans.

Increasing regulation of traditional plans makes more sense.

I'm not aware of any state insurance department or U.S. Labor Department mandate requiring an employer's financial strength to match its risk appetite.

The sponsors of some traditional ERISA plans have high stop-loss deductibles.

Their risk appetite could outstrip their ability to pay unexpected catastrophic claims.

The impact of one-size-fits-all regulation

If the NAIC wants to help, it must listen to stop-loss brokers, learn from brokers and talk about the elements of risk transfer before it starts to regulate.

Regulating clearly defined self-funded risk-transfer elements at scale is essential to free-market, cost-effective compliance mandates, both at the U.S. Department of Labor and at each state's insurance department.

But traditional high-deductible ERISA plans are already highly regulated, and the sponsors already face tough reporting requirements.

If state regulators or the U.S. Labor Department increase level-funded plan costs by adding the kinds of compliance requirements imposed on traditional self-funded plans, more employers will stop offering health benefits.

Stephen George, MBA-HA, is CEO, Provider Risk LLC, a 30-year-old firm specializing in self-funding, stop-loss brokering and related consulting services. He is a federal court-qualified expert in self-funded medical plans.