Stop Loss

Information About Self Funding

What is Self Funding?

Self Funding (Or Self Insurance) of employees health benefits is an alternative for an employer who might otherwise purchase a traditional fully insured employee benefit program from Blue cross/Blue shield or another insurance carrier. The employer pays employee benefits (the cost of medical services) covered by the plan from his/her own funds or those of a trust set up exclusively for that purpose. The employer manages assets of the plan, invests them to the employees advantage, and eliminates significant costs normally attributed to fully insured plans such as; taxes and insurance company charges.

All self funded health benefit plans are regulated by the federal government under the Employee Retirement Income Security Act (ERISA), a comprehensive law setting high uniform national standards for strong employee protection and high fiduciary requirements. Until 1974, self funded plans were obstructed by restrictive state laws that required employers to become licensed as insurers when they funded there own employee benefit plans. Passage of ERISA in 1974 removed those barriers to a great extent, and self funding is now one of the fastest growing areas in the employee benefit industry.

Why Self Fund?

For employers, self funding is a way to improve cash flow and control rising costs without sacrificing coverage for their employees. Under a self funded plan, it is possible for an employer to maintain closer control of operating costs and reserves. The reserves may be held in a trust, producing tax exempt interest and thereby reducing the overall expenses of providing employee benefits. These savings can be passed on to the employee in the form of improved benefits.

How Does It Work?

Once an employer decides to self fund employee benefits, the employer develops an employee benefit plan with the help of a broker, agent, or third party administrator (TPA). Most new self funded plans are designed to be very similar to the previous fully insured plan. To protect the employer against large claims and lessen the amount of risk, most employers who adopt self funding will purchase Stop Loss coverage.Stop Loss coverage protects the employer against excess losses; the amount of risk to be insured is dependant upon various factors, such as the employer's size, location, and nature of business.

What Is Stop Loss (Or Excess Risk) Coverage?

Stop Loss coverage is insurance sold to employers who offer self funded health plans. It is designed to protect them against unanticipated losses. There are two types of Stop Loss coverage:

Specifics Coverage insures against a single catastrophic claim that exceeds a dollar limit chosen by the employer. Specific coverage would come in to play if one of the covered participants was in a catastrophic accident and had claims that exceeded the dollar limit. In this case, the Specific Coverage would reimburse the employer for the covered expense beyond the dollar limit. For example; an employer with 200 employees and dependants may buy Specific Coverage, which covers any plan participant incurring claims in excess of $30,000, for instance, each year. Therefore, any large claim over $30,000 would be covered limiting the employer's liability to $30,000.
Aggregate coverage insures against multiple claims exceeding a specific dollar limit set by the employer and the Stop Loss carrier. If the total of all claims payable during the contract period exceed the agreed upon dollar limit, Aggregate coverage would reimburse the employer for the excess.

Who self Funds?

Currently, more than 75 Percentof the employees protected by group health programs participate in self funded plans, and this number has continued to increase. Employers seeking to manage escalating health costs have adopted self funded health plans to provide quality health care at an affordable cost. Today, over 100 million U.S. employees and their family members receive health benefits through self funded plans.

All employers can benefit from self funding, even the smallest. Nearly half (43 percent) of all small employers (fewer than 500 employees) with group medical plans chose self funding in 1992.

Advantages Of Self Funding?

Employers often find the following advantages when operating a self funded program (many of these benefits overlap, but they all may affect any employer):

Administrative Savings. Employers frequently find that administrative costs for a self funded program through a professional TPA are lower than those charged by their previous insurance carrier.
Carrier Profit Margin And Risk Charge Eliminated. The profit margin and risk charge of an insurance carrier are eliminated for the bulk of the plan.
Effective Claim Processing.The TPA's success depends upon providing accurate, controlled claim processing for each employer.
Cost And Utilization Controls. The TPA usually offers a second surgical opinion program, a hospital bill audit program, a large case management program, access to a preferred provider organization (PPO), and other programs through a variety of sources, rather than the employer being limited to only the insurance company's in house programs.
Cash Flow Benefit. The employer's cash flow is improved when money formerly held by the insurance carrier in the form of various reserves, such as for unreported and pending claims, is freed for use by the employer to benefit all employees.
Control Of Plan Design. The self funded employer has flexibility in the original plan design. The employer may also redesign the plan to eliminate plan abuses if they are encountered.
Unbundling Of Costs All the cost components of providing health benefit plans by an employer are unbundled. Therefore, allowing the employer to concentrate on controlling each one of these cost components independently. The cost components are risk, claims processing, claims control and management and quality of care.

Re-Insurance Carriers:

Standard Life and Accident Insurance Company

Ace American Insurance Company

Fidelity Security Life Insurance Company

Companion Life Insurance Company

Standard Security of New York