The New Self-Funding Option: Ultra-Small Group

The New Self-Funding Option: Ultra-Small Group

Shaun Snyder

May 17, 2013

The New Self-Funding Option: Ultra-Small Group

While self-funding has been commonplace for mid-sized and large groups for quite some time, recently there has been an increase in small groups joining the revolution. In fact, with the new exchanges approaching in 2014, a new self-funding product is starting to raise its head; ultra-small group self-funding. Whereas most self-funded products require a minimum employee population of around 100 participants (with some small group versions dipping as low as 50), this new concept is bringing the opportunity of self funding to groups with only 10-25 employees. Ultra-small group self-funding is a response to the demand for an alternative to the upcoming exchanges and new fully-insured plan requirements. And while these new options may provide that alternative, it is essential that small groups consider the many facets that make up the wonderful world of self-funding.

Self-funding offers many positive aspects: savings on insurer risk premiums, taxes, and administration costs; more control over the plan; customized networks and plan design; and heaps of reporting and review options, not usually available to fully-insured customers. The list goes on but, realistically, you’re already aware of the plus side of this equation if self-funding is already under consideration. The key is keeping the aforementioned advantages by not succumbing to a plan option adverse to your group’s needs. The ultra-small group product is unique and enticing, providing value to those who utilize it properly. Review the following material to ensure that what you intend truly comes to fruition.

Although differences exist among the few options currently being marketed, there are some “standards” that make up the concept of ultra-small group self-funding. Primarily, the ultra-small group product is designed to offer customers with very low employee population numbers an Administrative Services Only (ASO) option. This means small employers will now be responsible for many aspects that the insurance carrier used to provide as part of a fully-insured product. Some of those responsibilities include funding claims, determining eligibility, plan design (the extent varies by product and carrier), and compliance. Although many of the ultra-small group products will package some of the necessary tasks, these elements will remain the burden of the employer. The last element mentioned is significant. Regardless of the product, self-funding requires the group to adhere to compliance requirements, including but not limited to ERISA reporting, Summary Annual Report distribution, and 5500 filings. A broker or benefits consultant may be able to assist with these but, ultimately, the responsibility falls on the plan sponsor; which is now you.

A second aspect is stop loss coverage. Stop loss (often referred to as “reinsurance” or “excess loss indemnity insurance”) provides a safety net against catastrophic loss due to excessive claims or expenses related to the plan. Traditional self-funding offers stop loss on both an individual basis (also known as “specific coverage” or “individual stop loss/ISL”) and on the plan as a whole (known as “aggregate coverage” or “aggregate stop loss/ASL”). Individual stop loss coverage sets a deductible (not for the participant but, rather, for the company) that needs to be met before the coverage begins to reimburse claims expenses. Aggregate stop loss provides an overall umbrella for the company’s plan, calculating all claims paid out at the end of the policy period. Ultra-small group plans will have stop loss coverage wrapped into the product from the start. Also, some products will only offer coverage on the aggregate side. The logic for leaving out individual coverage falls on two fronts: first, the specific deductible may be too high to offer any actual value to reducing catastrophic risk to the group and, second, the additional premium added-in to provide the individual coverage will negate the cost effectiveness of the entire ultra-small group product.

To combat some of the possible limitations of the stop loss set-up, a third aspect may be common to the ultra-small group self-funded products. Monthly aggregate accommodation or maximum claim liability funding devices will be offered or wrapped into the product. These devices are designed to offset the group’s expenditures by setting incremental “maximums” based on the annual attachment point. Each policy year, an attachment point is set.  Essentially, this is an estimate of the anticipated total claims for the entire group plus a risk corridor (which will vary by carrier). In traditional stop loss coverage, if at the end of the policy period the group’s claims are in excess of this annual attachment point, a reimbursement would be due to the group. With the ultra-small group products, many carriers will divide up this annual attachment point into monthly attachment points and reimburse accordingly if the amount is breached. Of course, if following months are more prosperous, the carrier will expect a refund. As such, this is a cash flow-friendly funding method, not a month-to-month policy, with the end result being cumulatively correct at the conclusion of the policy year.

A fourth aspect relates to customization.  A major benefit to self-funded groups is the ability to design the plan to fit their population’s specific needs.  Ultra-small group products will likely limit this option. The more customization, the more time needed to prepare a group for the plan year. Since time often equals money, carriers will be less receptive to extensive plan changes. “Template” plans will be commonplace, with minor adjustments available for eligibility and a few other coverage options.  Plan amendments will be sent out automatically based on the carrier’s standards, possibly without opportunity for revision.  And while exceptions to the plan will still be technically available, hurdles will be implemented to further discourage this practice.

Along with standardized plan design, custom reporting will also be limited. One of the valuable aspects of traditional self-funding is the multitude of reports that are provided to the group. Line-by-line claims expenses, large claimants, savings and cost analyses, and eligibility reports are normal reporting options, often supplied with the ability to modify the contents. Under the ultra-small group products, these will be condensed and special customization requests will be restricted.

Vendor selection will also likely suffer customization restraints. Whereas traditional self-funded groups can select a third-party administrator (TPA) and then work with a separate pharmacy benefit manager, mental health administrator, disease management review group, and/or subrogation and recovery vendor, the ultra-small group product will initially only be offered extensively by larger national and regional carriers. In an attempt to provide a concise (and profitable) product, they will package all the services, thereby limiting the group’s ability to pick and choose vendors. While vendor offerings may expand over time, most certainly the preliminary selections will be limited to a handful of options. Brokers and TPAs may try to accommodate this situation by creating consortiums or unions of small groups; however, the success of these will be determined on a case-by-case basis. Also, beware of plans that masquerade as self-funded when, in reality, they are just high-deductible or alternatively funded fully-insured products.

Finally, a primer on the “standards” that cover both traditional and ultra-small group self-funding.  Both products carry a certain amount of financial risk. Although the ultra-small group product will try to offset this with a more stable stop loss product, claims up to that reimbursement level will still need to be immediately funded (sometimes in substantially large amounts), fixed administrative fees will carry a solid cost per employee (often including a pooling-type charge for the stop loss coverage), and exceptions that are made by the group may not be covered by the stop loss insurance.

Broker commissions apply to both products. How, and if, the commissions will change for these ultra-small group products is yet to be seen but, due to the lower profit margins for carriers on self-funded plans in general, it is not unreasonable to anticipate modifications to those schedules. 
And, of course, self-funded groups are experience rated. For a fully insured small group that may be accustomed to a community rating, this could be a big surprise (a positive for healthy populations and a negative for high-risk populations). An added complication for small groups is the potential of re-rating.  Administrative services agreements and stop loss policies may call for re-rating if the population varies by as little as ten percent. With an ultra-small group, that could result in re-rating after a loss of a few as three employees.

A last detail: several states are trying to put a stop to these ultra-small group self-funded products. States like California and Utah have bills on the table that require minimum attachment points (for aggregate stop loss coverage) and minimum specific deductibles (for individual stop loss coverage). The argument is that ultra-small group plans would allow insurers to target healthy groups for self-funding, leaving the exchanges with high-cost groups. This may impede groups considering ultra-small group self-funding within states that pass these laws. For all groups considering self-funding though, it is important to remember that all self-funded models are long-games, requiring a commitment to the good years and the bad, with the ultimate goal being an enduring and successful self-funded health plan.

About the Author

Shaun Snyder is currently a health care analyst for a major insurance carrier and specializes in Administrative Services Only products.  The majority of his nearly ten years of experience with
self-funded plans has been on the plan administrator side.