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Rising costs, health care reform law create more interest in self-funding

Rising costs, health care reform law  create more interest in self-funding

As health care costs continue to climb, many midsize employers are turning to self-funding as a cost-effective way to provide health benefits to their employees.

Fifty-eight percent of employers with 200 to 999 employees self-funded their health care programs in 2010, up from 44% in 1999, according to the annual Kaiser Family Foundation/Health Research & Education Trust Survey of Employer-Sponsored Health Benefits.

Even though middle-market self-funding lost some ground in 2011, dropping to 50% of midsize employer plans, it is expected to regain its upward momentum as the economy picks up, and in response to the federal health care reform law.

Although self-funded benefit plans are subject to many of the coverage requirements imposed by the Patient Protection and Affordable Care Act, such as unlimited annual and lifetime benefits, the cost of self-funded benefit plans will remain lower than fully insured plans because they are not subject to state benefit mandates or premium taxes that add to plan costs, experts say.

New minimum medical loss ratio requirements for insurers under PPACA also are expected to prompt more employers to switch to self-funding. Under the law, insurers must spend 85% of premium dollars collected from groups of 100 or more on medical care, leaving only 15% for overhead costs, including broker commissions.

Before PPACA, commissions generally were included in premiums. But beginning in 2012, these intermediaries will be forced to seek compensation directly from insurance buyers, which some experts say could add to the cost of fully insured health benefit programs.

Moreover, because self-insured plans are governed by the Employee Retirement Income Security Act, self-funded employers will continue to be able to design benefit programs that are exempt from state benefit mandates and premium taxes.

While stop-loss coverage—which 90% of midsize self-funded employers purchase, according to the KFF/HRET survey—is subject to premium taxes, the total paid is considerably less because the premiums are far less than fully insured benefits, experts note.

Self-funded employers also will retain the flexibility to make value-based plan design changes that deter employees from using expensive providers or nonessential services or to encourage healthy behaviors. By contrast, insured programs still must meet state insurance regulations, which do not permit such modifications.

Self-funding also will continue to make claims and health care utilization data transparent, allowing employers to identify what drives their health costs and direct their programs to prevent disease and better manage employees already suffering from chronic conditions.

Because insured products often are community-rated, in which all employers in an area or industry pay the same regardless of their group's health status, an individual employer rarely benefits from wellness initiatives because pricing is applied almost universally across the group.

Until recently, using self-funding as a cost-containment strategy was out of reach for many smaller and midsize companies because many third-party administrators and insurers that administer self-funded benefits programs were reluctant to contract with employers with fewer than 1,000 employees.

Many midsize employers also shied away from self-funding because insurers were unwilling to share claims data, making it difficult to gauge the risk employers would assume or obtain reasonably priced stop-loss coverage.

However, predictive modeling enhancements and the availability of reasonably priced stop-loss coverage with lower specific deductibles have made self-funding a feasible alternative for many smaller and midsize employers faced with escalating health benefit costs.

“Stop-loss insurance is more readily available now than it has been in the past,” said Aron Minken, a director at PricewaterhouseCoopers L.L.P. in New York. “Carriers are offering greater protection for smaller companies. We've seen companies with rather low individual stop-loss deduc-tibles. If they can manage the risk with affordable stop-loss, that's another reason to go self-insured.”


PwC has more middle-market clients that are self-funded today than it did five or six years ago, he said.

Ironically, health insurers recently stepped up efforts to attract middle-market self-funded business, primarily because it is more profitable for them because they are not taking on any risk, industry analysts say.

“If you isolate WellPoint (Inc.) and see how their mix of business has evolved over time, they have a lot more (administrative services-only) business than they did five years ago as a percentage of the total,” said Joe Marinucci, a primary credit analyst at Standard & Poor's Corp. in New York who tracks the industry. In addition, “the needle has been moving down on the average group size,” he said.

A spokeswoman for WellPoint verified that the Indianapolis-based insurer does have a higher percentage of self-funded business today than it did five years ago.

Most of Bloomfield, Conn.-based Cigna Corp.'s income also is derived from being an administrator of self-funded benefit plans. Since its 2007 acquisition of Great-West Healthcare in Denver, it has been making significant strides to capture more middle-market business, he added.

Cigna also verified that it has been seeking more business in the lower end of the middle market since its acquisition of Great-West. Cigna's Select Segments product caters specifically to employers with 51 to 250 employees.

Mr. Marinucci also noted that Hartford, Conn.-based Aetna Inc. and Minnetonka, Minn.-based UnitedHealth Group Inc. recently acquired middle-market third-party administrators, indicating an appetite for growth of this business.

Most independent TPAs and insurers that provide administrative services-only contracts to self-funded employers are courting middle-market business, according to Mike Ferguson, chief operating offer of the Self Insurance Institute of America Inc., whose membership comprises about 800 TPAs, insurers and midsize self-funded employers. “This is the biggest growth area,” he said. “Middle-market employers can now easily access specialty health plan management expertise either on an a la carte or bundled arrangement.”

“Self-funding proposals are being included in the renewals of many more of the fully insured employers we work with,” said Michael Reid, director of operations and client services at twentytwenty Insurance Services in Lakewood, Calif.

For example, “select insurers have begun offering quotes for turnkey self-insured products designed to transition fully insured employers to self-funding, in addition to their fully insured product offerings, as a form of creating market awareness, even if the employer has not specifically sought such a comparison,” he said.

“Given that health care costs keep getting more expensive and there's more focus on how it affects an organization's profitability, more employers have been willing to take the risk” and self-fund their employees' health care benefits, said Rick Wald, national practice leader for employer health care consulting and health care reform solutions at Deloitte Consulting L.L.P. in Minneapolis.

This story is from the Feb. 20, 2012, issue of the weekly print edition of Business Insurance, a special theme issue featuring an in-depth look at self-insuring benefits programs of mid-market companies.

Copies of this issue, which includes a data poster featuring detailed breakdowns of mid-market self-insurance trends, are available for $100 by contacting our Single Copy Sales department at 888-446-1422.

To subscribe to Business Insurance to receive all future special print issues, click here.

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