Self-funded health care
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Self-funded health care, also known as Administrative Services Only (ASO), is a self insurance arrangement whereby an employer provides health or disability benefits to employees using the company's 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 covered benefits 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").
Stop loss insurance
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 payouts. 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 instrumental in establishing a "worst-case scenario", or aggregate for any given year. The aggregate stop-loss helps establish a finite number that can be compared to a plan's guaranteed fully insured cost. If the aggregate cost does not exceed the plans' fully insured guaranteed cost, self-funding may be a viable option. Another way to look at aggregate insurance is an umbrella policy that caps a company's liability within a specified time period.
Historically self-funding has been most effective for large corporations and Fortune 500 companies with over 1,000 employees but with the rising cost of healthcare over the past ten years at a rate of close to 10%, self-funding has become an option for smaller employers. It is now estimated that the average self-funded plan covers 300-400 employees and that, of private sector employees that have a workplace health plan, 59% were covered by a plan that is at least in part self-insured.
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 (TPA's) 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.
Perhaps the biggest advantage of self-funded plans is transparency of claims data. Self-funded employers who contract a TPA receive a monthly report detailing medical claims and pharmacy costs. Knowing this information becomes instrumental in controlling costs by shifting buying patterns. Other advantages include plan flexibility, access to national PPO networks, and financial savings.
As health care costs continue to rise, more employers will look to alternative ways to finance their healthcare plans. Consumer driven plans have become popular recently as employers look to shift some of the accountability to employees. HSAs (health savings accounts) and HRA (health reimbursement accounts) encourage employees to shop around for the best value when considering elective medical procedures or filling pharmacy prescriptions. Self-funded plans take one step further in that they provide all claims data to employers allowing them to set up an EPO (exclusive provider organization) basically a PPO hand selected by the organization to eliminate high cost providers.
Affordable Care Act requirements
In the United States, self-funded plans must comply with a number of the provisions in the PPACA including dependent coverage until 26, prohibition on rescission, and prohibition annual or lifetime limits. However, while the ACA required coverage of essential health benefits for fully insured plans, self-funded plans are notably exempt from this requirement.
Lawsuits and liability
In the United States, self-funded plans regulated under the Employee Retirement Income Security Act of 1974 are notably exempted from insurance bad faith laws. The law has also affected medical malpractice liability.
- About.com > What is a self-funded health plan? From Kelly Montgomery, former About.com Guide. Updated November 12, 2008
- Pear, Robert (February 17, 2013). "Some Employers Could Opt Out of Insurance Market, Raising Others' Costs" – via NYTimes.com.
- "Self-insured Plans Under the ACA" (PDF). Hickok & Boardman. Archived from the original (PDF) on 2019-06-12.
- "Essential Health Benefits: What Could Their Elimination Mean? | Health Affairs". www.healthaffairs.org. doi:10.1377/hblog20170323.059343/full/. Retrieved 2019-06-13.
- "Do you really want that ERISA case?". www.plaintiffmagazine.com. Retrieved 2019-06-05.
- Black, Lee (2008-05-01). "ERISA: A Close Look at Misguided Legislation". AMA Journal of Ethics. 10 (5): 307–311. doi:10.1001/virtualmentor.2008.10.5.hlaw1-0805. ISSN 2376-6980.
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