Self-funded health care

Self-funded health care is a self insurance arrangement whereby an employer provides health or disability benefits to employees with its own funds. This is different from fully insured plans where the employer contracts an insurance company to cover the employees and dependents. In self-funded health care, the employer assumes the direct risk for payment of the claims for benefits. The terms of eligibility and coverage are set forth in a plan document which includes provisions similar to those found in a typical group health insurance policy. Unless exempted, such plans create rights and obligations under the Employee Retirement Income Security Act of 1974 ("ERISA").

Many employers seek to mitigate the financial risk of self funding claims under the plan by purchasing stop loss insurance from an insurance carrier. These policies typically provide for risk retention limitations both on a specific claim and aggregate claims basis. An important aspect of self funded group health plans lies in the requirement that the employer remain liable for funding of plan claims regardless of the purchase of stop loss insurance. What this means, in turn is a fund or company's own bank account creates a pool of their employees and is managed & distributed to claim pay outs. In other words, only the employer has a contractual relationship with plan participants and beneficiaries. The stop loss policy runs solely between the employer and the stop loss carrier and creates no direct liability to those individuals covered under the plan. This feature provides the critical distinction between fully insured plans (subject to State law insurance regulations) and self funded health plans which, under the provisions of Section 514 of ERISA, are exempt from State insurance regulations.

Stop loss policies are effective for large corporations with large losses. The stop loss feature is most cost effective for large companies, typically Fortune 500 companies with over 10,000 employees.

Stop loss policies should be distinguished from "reinsurance" arrangements. Under reinsurance arrangements, one insurance carrier cedes risk to another carrier to lessen its risk. Reinsurance arrangements fall under specific State insurance regulations designed to assure the financial integrity such arrangements. Stop loss policies are also sometimes referred to as Associated Services Only.

While some large employers self-administer their self funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment. Third Party Administrators provide these and other services, such as access to preferred provider networks, prescription drug card programs, utilization review and the stop loss insurance market. Insurance companies offer similar services under what is frequently described as "administrative services only" or "ASO" contracts. In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.

Confusion of coordination of benefits with Medicare Primary

Stop loss policies have been a work of confusion. When an individual is 65 years old, retired & is eligible for Medicare benefits, a stop loss program reimburses healthcare expenses differently than when non eligible.

For instance, a 65 year old employee will have their stop loss policy primary, Medicare secondary. The instant the employee retires, Medicare becomes primary, the stop loss policy secondary.

When the individual is 65 and working, the aggregate deductible (ex. $1,100) of a stop loss plan is the patient's initial responsibility after Medicare A pays. When an individual is retired & 65 & over, the aggregate deductible (ex. $1,100) is over looked & superseded by the stop loss (ex. $10,000.) A stop loss (ex. $10,000,) in turn, becomes the new larger deductible—a savings for large corporations.

See also

• Arlington County v. White
• Medical care ratio
• Self insurance

Further reading

• Captive 101 - Roundstone Management [1]
• Self-Funded Health Care Could Lower Costs - Milwaukee Biz Journal [2]
• Is Self-Funded Health a Path for Small Firms? - HR Magazine [3]
• Self-Funding of Health Care Benefits [4] by Carlton Harker
• ERISA Group Health Plan Administration, Health Plan Law [5],
• Partially Self Funded Group Health Plans - High Deductible Health Plans [6]

External links

• National Employer Self Funding and Self Insurance Healthcare and Workers Compensation Conference, September 20-22nd, 2010 in Los Angeles
• Self Funding Magazine
• Self Funding Employers Association