This blog is the second of a three-part blog series on self-funding. Download the full guide to self-funding your health plan here.
In 2020, 67% of workers in the United States were enrolled in a self-funded health plan, compared to just 44% in 1999. It’s clear that self-funding is a growing trend among employers. To understand why, I recommend first understanding the basics of self-funding and exploring factors that should be considered in the decision-making process.
I’m going to assume that you’ve taken Self-Funding 101 for the purpose of this blog. And, let’s say you’ve determined self-funding is the best direction for your health plan strategy moving forward. You put a considerable amount of thought into it but are unsure of how exactly to get from point A to point B.
What exactly is the process and how you can leverage your benefits advisor and partnerships effectively?
Third Party Administrator
The first step in self-funding will be to determine a third party administrator (TPA). The TPA is the foundation of your self-funded health plan. The TPA you choose will determine your ability to create custom plan designs, the network that is offered to members, and ultimately how the plan runs effectively day-to-day for members. Here are some key functions of a TPA:
- Provide access to the provider network
- Operate day-to-day plan administration
- Process all claims for members
- Process eligibility and enrollment
- Offer reporting and claims data
- Provide customer service for members
Your choice in a TPA will also be important when considering how you will effectively control your costs moving forward. Depending on the size of your organization, some TPAs may not allow for additional cost control levers to be pulled. For example, you may be limited on your ability to carve out the Pharmacy Benefit Manager (PBM).
Some TPAs also offer access to enhanced solutions for members. These may include:
- Telemedicine services
- Cost transparency tools
- Chronic disease management programs
- Clinical and utilization management programs
- Wellness products and solutions
Most TPAs will charge a per employee per month capitated fee for their services. This is a fixed fee that will remain constant for the duration of the contract (typically 12 months) and only fluctuates with changes to enrollment. Some of the additional services outlined above may add to the overall cost of the TPA’s services. The fee is usually between 5-15% of the total annual cost when self-funding a health plan.
When self-funding a health plan, the claims risk shifts from the insurance carrier to your organization and naturally becomes a common objection for many decision makers. This is where stop loss comes into the equation. Simply put, stop loss helps limit the risk exposure for your organization in the event of a high claims year.
There are several different ways to purchase stop loss insurance. Primarily, you will partner with one stop loss carrier and may implement specific and aggregate stop loss coverage.
Specific Stop Loss Insurance
Think of specific stop loss as protecting your organization from each individual member on the health plan. You will work with your benefits advisor and stop loss carrier to determine the specific deductible level.
For example, let’s say your specific deductible is $100,000. This means your organization is responsible for up to $100,000 in claims for each member. Once a member has surpassed $100,000 in claims, the stop loss carrier is responsible for the claim’s liability. As you can see in the diagram below, Member 1 has $250,000 in claims. The organization pays the first $100,000, and the additional $150,000 is paid for by the stop loss carrier.
Aggregate Stop Loss Insurance
Aggregate stop loss is another common stop loss insurance many organizations will purchase. While the specific stop loss protects your organization from each member, the aggregate stop loss protects the organization from total claims by all members.
When quoting stop loss carriers, their team of underwriters will determine the risk of the group. The underwriters use members’ health data, claims history, demographics, and several other considerations to project the total claims for the next contract period. Through this process they will determine expected claims and a maximum claims threshold. The maximum claims threshold, or corridor, is typically 120-125% of expected claims. Here is an example:
In this example, the underwriters determined your expected claims for the 12-month contract is $1,000,000. With an aggregate corridor of 125%, the maximum claims for your organization are $1,250,000. You’re liable for all claims up to the maximum amount. By purchasing aggregate stop loss insurance, the stop loss carrier is then responsible for the amount over $1,250,000.
Considerations for Determining a Stop Loss Carrier
It’s important to consider a stop loss carrier that will help accomplish your organization’s goals. Here are a few factors to consider when determining a stop loss carrier:
Do they allow for auto-reimbursement?
If a claim goes over the specific or aggregate level, is the organization responsible to pay the full amount, and then wait on a reimbursement from the stop loss carrier? This could have significant cash flow impact on the organization. Many stop loss carriers offer auto-reimbursement where the organization only pays up to the liability amount (up to $100,000 in the specific stop loss example) and the carrier takes on the rest of the liability immediately.
Are they willing to be creative with laser liability?
Applying a laser allows stop loss carriers to target certain members and increase the member’s specific stop loss deductible. For example, if a stop loss carrier projected a member would have around $500,000 in claims next year, they could apply a laser to the member, so their specific stop loss deductible is now $500,000 vs. $100,000. Some stop loss carriers are willing to get creative when a laser is needed to find different alternatives that will not put the organization at risk for one high-cost claimant.
Do they offer innovative solutions?
Having an innovative stop loss carrier allows for opportunities like shifting laser liability, implementing stop loss contracts, and thinking about the entire risk profile of the organization versus only a few high claimants.
It’s important to work with stop loss carriers that are interested in a true partnership for these reasons. Similar to a TPA, the stop loss premium is a fixed cost. In the stop loss contract, it’s usually stated as a rate per employee per month and only fluctuates with enrollment. The specific stop loss premium is typically around 20-30% of total spend, while the aggregate premium is usually under 1%.
Captive Stop Loss Contracts
Joining a captive should be a strong consideration for small to mid-market organizations exploring self-funding. A captive is an insurance arrangement consisting of several other organizations that come together to pool the risk of their self-funded claims.
The section above discussed stop loss, and a captive is a strategy for purchasing these stop loss contracts. The captive will not impact your decision on TPA, or any other considerations when self-funding. Some captives offer access to member tools, concierge services, well-being solutions, and pharmacy benefits strategies, but these are not required to be implemented.
For many small and mid-market employers, a captive is a great way to obtain leverage, stronger contracts and buying power for stop loss contracts. Here are a few contract enhancements that can be obtained by joining a captive:
- Stop loss renewal limits. Some captives limit the stop loss renewal increase an organization can receive.
- No new lasers. Some captives offer policies with no new lasers in perpetuity. This can be appealing for organizations that are worried about one high-cost claimant driving a considerable amount of the claims spend.
Stop Loss Contracts
Stop loss contracts are written to cover claims within a specific period. The claims are broken down into when they were incurred and when they were paid. These are always written as Incurred/Paid. For example, a common first-year contract when transitioning to self-funding is a 12/12 contract. For the first 12 months of the contract, claims are covered only if they are incurred and paid during the policy term.
At the first renewal heading into the second year of self-funding, it will be important to mature the contract to a 24/12. This will cover any claims incurred prior to the effective date and paid during the current contract period. Maturing the stop loss contract could increase the stop loss premium. Estimates are usually in the range of a 25% premium increase, but it’s important to include an additional time period for incurred claims. This will be helpful for your organization, especially when considering potential reimbursement amounts from specific or aggregate stop loss. Here is a diagram of how these time periods and contracts would work.
Pharmacy Benefits Managers
Another important consideration when self-funding your health plan is choosing a pharmacy benefits manager (PBM). Due to your organization’s size, this may not always be available. Some TPAs limit an organization’s ability to carve out the PBM from the TPA’s service model.
If you partner with a TPA that allows flexibility with PBM partnerships, it will be important to do an in-depth analysis and determine the best PBM for your organization’s strategy. If the TPA you choose does not allow flexibility, you will be required to partner with the PBM of their choice. Here are some of the key functions of a PBM:
- Process prescription drug claims for members
- Develop and maintain preferred drug lists (formulary lists)
- Negotiate rebates and discounts from drug manufacturers
- Contract directly with pharmacies for reimbursement of drugs dispensed
All PBMs have different operating and cost structures. It’s important to understand these nuances and partner with a PBM that aligns with your organization’s health plan strategy. Is cost and pricing transparency important to you? What about a large pharmacy network? Are specialty drug programs valuable? It’s imperative to determine these factors and many more when analyzing PBMs.
Our team has developed tools and resources to identify network comparisons, PBM revenue models, rebate analysis tools and clinical program comparisons to identify which PBM partners are best for an organization.
The most important cost consideration when self-funding is the claims incurred by members. This will typically equate to around 60% of the total annual spend on a self-funded health plan.
Unlike in the fully insured market, cash flow is more volatile when self-funding. Some months may incur large spikes in financial liability, while others may not see much claims activity at all. It’s important to work with your benefits advisor and financial team to establish a cash flow strategy. The premium amounts you budget as an organization and deduct from members’ paychecks will need to be set aside to pay for the claims as they are incurred. This is called a “reserve” account. First Person provides several reports to our clients to easily track cash flow month-to-month and ensure the reserve always has a surplus.
“It has been our focus for several years to always provide our talent team with a healthcare benefit that is robust and cost manageable. Through our partnership with First Person, we made the decision – based on data First Person provided – to transition to a self-funded health plan. Over the three years we’ve been self-funded, First Person has provided education and actionable data to help us make an informed decision that is proving to be the correct decision.”
– Chief of Staff at the City of Westfield
There are several components to consider when determining your self-funding strategy. What TPA will you partner with? How will you purchase stop loss and with what carriers? What is the design of the stop loss contract? What PBMs are aligned with your organization’s goals? What is your cash flow strategy?
Once you’ve completed the process and have your self-funded health plan, what should you expect? Check out this blog where Cameron Troxell shares what to anticipate in your first year and how to prepare for your first renewal.
Or, check out the full guide to self-funding your health plan here.
At First Person, we’ve developed a timeline and checklist to help organizations through the process of self-funding their health plan and create a seamless experience during the transition. If you’d like to learn more about how the process works, reach out to a member of our advisory team or send me a note via email or LinkedIn.