The large insurance companies including Blue plans (generally referred to as BUCA’s) are offering a version of self-funding we characterize as ”Fixed Funded”. We call them ”Fixed” since there is no options for the self-funded employer to modify the financing arrangement. In real self-funding, the decision to ”Level Fund” is a choice made by employers who remain in control of their plan.
Most Fixed Funded products are essentially fully insured products that provide a dividend using a self-funded platform. The self-funding platform offers regulatory advantages related to health care reform laws. The “risk corridor” is an artificial construct that allows the insurance company to keep the first layer of underwriting profit and make a partial return of self-funded assets only in case of excess profits. This is somewhat identical to the dividends paid to group policyholders by mutual insurance companies in the early days of group insurance.
The insurance company that administers the claims for the Fixed Funded product also provides the insurance protection. The company’s financial department pays any claims as they are adjudicated by the company claim department. Similar to fully insured products, they can guarantee the monthly payment will equal the maximum possible cost, just like full insurance.
An advantage for employers with Fixed Funded products is they don’t face any of the normal hazards of self-insurance, such as stop loss underwriting actions, or concerns with plan assets and fiduciary duties, and other ERISA based concerns. Fixed Funded customers aren’t even aware there are special requirements under ERISA applied to self-funding. There is no possibility that the administrator approves a claim not covered by the stop loss policy since the administrator and the risk taker are the same company.
The disadvantage is the limited return of surplus compared to actual self-funding. Typical Fixed Funded products confiscate a percentage of surplus each year, all the Rx rebates, and usually all the surplus at termination, just like fully insured products. In true self-funding, the assets belong to the plan and cannot be confiscated without violating ERISA plan asset rules. The confiscated surplus is used to provide an attractive maximum cost compared to true self-funding. For employers focused solely on maximum cost, this appears to be a good deal even if the rewards at year end are much less.
We consider Level Funding to be a true self-funded product. Level monthly billing is an attractive way to finance the program. The administrator and the insurance company are different parties but work closely together to provide quick reimbursements for any employer self-funding costs that exceed the monthly maximum target. This is typically very smooth administratively, but, in true self-funding this cannot be guaranteed if there is an administrative delay in the stop loss claim recovery or claim paid by the administrator that is disputed by the stop loss review team.
The advantages of true self-funding are large. Employer surpluses belong to the employer. Money held in the employer account belongs to the employer and cannot be confiscated by the insurance company at the end of the year, ever. Lucrative Rx rebates, typically confiscated by insurance companies, also belong to the employer.
Fixed costs are usually lower, and gains are usually higher. Any wellness activities, provider engagement, increased provider discounts, and other cost control strategies directly accrue to the employer. Third party administrators are recognized as managing claim payments more efficiently than insurance companies. Self-funding allows enormous flexibility in plan design and risk tolerance. We believe Fixed Funded is an improved fully insured product, but level funding of self-insurance remains a better strategic option for long term lower cost and control.
Commentary by Rick Burd, FSA, MAAA, President, Contribution Health