This blog is the third of a three-part series on self-funding. Download the full guide to self-funding your health plan here.
Congratulations! You’ve made the decision to transition to a self-funded health plan. There’s no doubt you put a lot of thought and work into ensuring this was a good decision for your business. Good news: The work isn’t over; it’s only just beginning.
Now that your health plan is self-funded, how should you adjust your approach to managing your health plan? You’re in luck! That’s exactly what this blog is about.
While self-funding a health plan is (almost) always a wise financial decision, it does present challenges and new opportunities to direct the course your plan will take.
Managing Cash Flow
The first change – and it is a big one – is cash flow management. Fully insured plans are easy (except when your renewal comes in at more than 20%). You pay your premium with the only variability coming by way of changes in your enrollment. This is a simple and predictable way to pay for healthcare, but only for each year. The renewals are what present the challenge.
The good news is that cash flow management can be done in a similar manner to your old fully insured plan. Part of self-funding is working with your consulting or actuarial partners to establish something called premium equivalents or fully insured premium equivalents. These premium equivalents are developed to help you budget your health plan and depend, to a degree, on how conservative or aggressive you want to budget. For first year self-funded health plans, most groups prefer their premium equivalents be set at a fairly conservative (higher to support higher costs) during their first year.
Managing your cash flow effectively as a self-funded plan is critical. Fixed costs (administrative fees and stop loss premiums) make up only about 10-30% of your total costs. The actual medical and pharmacy claims make up the lion’s share of the expense. Your third party administrator will bill you on a regular cycle, often weekly for these claims expenses. The first few months will seem too good to be true, because they are! Claims volume and expense are likely to be light the first month and will start to tick up each week. This is due to the timing of when claims occur versus when they are paid, which is typically 30-90 days.
How you account your plan is up to you and depends on what makes the most sense for your business. Some groups choose to cash account their plans, but accrual accounting is more common. During the first 30-90 days of the plan year, it’s important to take advantage of the lighter claims expenses and build a reserve of funds to pay future claims. If you are accrual accounting, this is pretty simple in that all you need to do is accrue the entirety of premium equivalents (employer + employee premiums) into an account to be used to pay claims. If you choose to cash account your plan, be sure to set aside a cash reserve sufficient to cover a specified amount of claims expense, often determined using an incurred but not yet reported calculation of one to three months-worth of estimated claims.
Preparing for Your First Stop Loss Renewal
Once you’ve got a handle on cash flow management, you’ll want to prepare for your first stop loss renewal. Yes, right after you’ve just self-funded. You’re going to begin preparing for your first renewal much earlier in the year than you did when you were fully insured to stay ahead on your budget and renewal. An illustrative stop loss renewal or soft quote should be available to you approximately three or four months before your renewal date. This will give you an indication as to where that renewal will land in terms of rates and will allow your consultant to model out some rate scenarios. Final stop loss renewal rates will be available 90-120 days before the new plan year begins and can be locked in by signing the proposal.
The stop loss contract you have in your first year as a self-funded plan is a 12/12 contract. The 12’s refer to the period of months when claims are incurred and paid that are covered on the stop loss policy. In a 12/12 contract, the stop loss policy only covers claims incurred and paid in the policy year. For your second year, it’s highly recommended that you “mature” your stop loss contract to a 24/12. This type of contract will give you better financial protection due to the latency of claims processing. Brandon Collins does a nice job of explaining stop loss contract types in more detail in his blog on transitioning to self-funding.
Maturing a stop loss contract most commonly comes with a stop loss premium rate increase of at least 20%, regardless of how your plan performed in the first year. If your plan performed exceptionally well (low claims) during the first year, then you might see a number lower than 20%. If your plan had a rough year with high claims, you should expect to see your stop loss premiums increase by more than 20%. It’s important to have this second-year rate increase in mind now so you’re prepared to make the financial adjustment necessary to accommodate this increase in premiums.
Now that we’ve discussed some of the critical financial management aspects of having a self-funded health plan, there are some additional considerations a plan administrator can take on.
Accessing Healthcare Claims Data
One of the biggest changes as a self-funded health plan is that you have a dramatic improvement in access to claims data that help you understand what exactly is driving your plan expenses. Typically, the available data is separated into two categories: financial and clinical. Financial data is exactly what it sounds like and only includes information for you to understand the cost elements of the claims on your plan. Clinical data includes the actual nature of the claims, such as primary patient diagnoses.
You may be wondering: Do you really want access to any clinical patient information? The answer might be “yes “and “no”. Generally, your benefits advisor will have access to this type of data and can help dig into any details to answer questions you might have on a particular claimant.
A good example would be when evaluating plan performance and high-cost claimants that might be approaching or over your specific deductible amount and inquiring as to the forecasted risk or cost potential for that claimant’s condition and treatment needs. That said, if you’d like to have one or more members of your team have access to Protected Health Information (PHI), consult with your benefits advisor regarding appropriate safeguards to protect your business and employees.
Containing Costs and Mitigating Risk
Perhaps the most important element of managing a self-funded health plan is crafting a strategy to contain costs and mitigate future risk. This is another place where having access to both financial and clinical data is helpful. That information can help you determine which strategies will most effectively help you manage your costs and future risks. For instance, if your pharmacy costs are a higher-than-normal percentage of your overall spend, then you might want to consider working with a different pharmacy benefits manager (PBM). There are many levers to be pulled and several strategic partners with whom you can align to drive the outcomes your plan needs. Your data will tell you a story. It’s important to use that story to craft the appropriate strategies.
Determining Employee Contributions
Ahead of Open Enrollment, you’ll need to determine employee contributions or premiums you will charge your employees to be covered on your health plan. To arrive at these numbers, you first need to have your fully insured premium equivalents. These equivalents will take into account your stop loss premium rates for the next year and your forecasted claims expenses. With this information and an understanding of how aggressively or conservatively you want to budget for the next plan year, you can get your premium equivalents in line. Once you have these equivalents, you can determine your employee premiums and move into Open Enrollment.
As you have likely learned, operating a self-funded health plan is quite different than having a fully insured plan. In most cases, a plan sponsor will experience financial wins when self-funding their plan when evaluating it over time. There are likely to be more ups and downs in the experience, but the long-term benefits are significant in terms of potential cost savings, but most importantly flexibility and a much higher degree of control.
This blog is the third of three blogs from our self-funded series. To download the full guide to self-funding your health plan, go here.
Not quite ready to make the change? Check out these other blogs for a better understanding of what it means to self-fund your health plan:
- Weighing the Decision of Self-Funding Your Group Health Plan
- Your Guide to Transitioning to a Self-Funded Health Plan