How Can My Group Self-Fund? What Are My Choices?
Fortunately, there are now a number of different methods for a group to self-insure, more so than there had been even five years ago, not to mention ten to fifteen years ago. There are three primary methods for a group to self-insure.
One is what I refer to as “Classic” self-insurance. In this strategy, the self-insuring group contracts with a network of providers to access their “discounts” (namely the fees that the network has negotiated with providers to charge for their services), contracts with a third-party administrator to administer claims, and purchases stop-loss protection, also called re-insurance. This stop-loss protection, also referred to as reinsurance, takes two forms, specific and aggregate. Specific caps a group’s liability on each insured individual, whether employee or dependent. Aggregate caps the group’s entire liability. When a group is in this type of arrangement, they are sometimes referred to as “partially self-insured” because of the purchase of stop-loss protection.
A second form of self-insurance is the Captive Insurance Model. In this strategy, a group of employers join together to form what is their own insurance company, of which each employer is a pro rata owner. Very often each employer group has its own plan design or designs, can choose its own third-party administrator, and rents its own network of providers. The entity that manages the captive, the captive manager, typically negotiates with one stop-loss carrier. This stop-loss carrier assumes the risk for each group’s specific claims, typically after a corridor that the captive group funds, as well as the captive’s aggregate risk, again after a corridor that is funded by the captive.
That the stop-loss carrier only has exposure after the specific and aggregate corridors allows for lower stop-loss rates and, for some captives, obviates the need for specific stop loss lasers. Any excess funds that remain from one plan year after that year’s run off, are distributed on a pro rata basis to the members of the captive. It should be noted that, ideally, the amount distributed back to the members is small because the captive manager has been accurate in predicting claims amounts. The funds distributed should not be seen as profits, rather they are a return of an over-payment on premium.
The third primary form of self-insurance is known as Level-Funding. Under Level-Funding, the entity that offers the self-insured plan will contract with both a TPA to administer claims and a network of providers. This entity – which we call the Level-Funded Manager – will medically underwrite the group wishing to self-insure, establish the group’s expected claims and Maximum Claim Exposure (often 125% of expected claims), add that amount (the maximum claim exposure) to such fixed costs as network rental fees and stop-loss premium to arrive at the maximum annual cost for the group’s prospective Level-Funded plan. This maximum cost is then divided into 12 monthly installments billed to the group. As a result, this plan feels like a fully-insured plan and, thus, becomes an easy transition into the self-insured environment for groups.
One of the major benefits of this type of plan occurs if a group spends less than 125% of expected claims in the plan year; when that happens, the amount by which the group under-spent the Maximum Claim Exposure is refunded. However, caveat emptor – some Level-Funded Managers retain a portion of that amount.