Advantages of Self-Funding

Understand the Key Components of a Self-Funded Health Plan

The federal Employee Retirement Income Security Act (ERISA) law sets standards of conduct for those who manage an employee benefits plan and its assets (called fiduciaries). ERISA offers self-funded plans the advantage of not being controlled by state insurance regulations.

• Plan Fiduciary

  A health plan must have at least one fiduciary (a person or entity) named in the plan document as having control over the plan’s operation. Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of the plan’s participants. The U.S. Department of Labor’s summary of fiduciary responsibilities include:

  • Acting solely in the interest of plan participants

  • Carrying out fiduciary duties prudently

  • Following the plan document (unless inconsistent with ERISA)

  • Holding plan assets in trust

  • Paying only reasonable plan expenses

• Third Party Administrator (TPA)

  This is a partner retained to act on your behalf in the creation and administration of the health plan. As an experienced TPA, MedCost Benefit Services offers expert knowledge of best practices in self-funding to ensure that you establish proper fiduciary controls and set up your plan documents and processes to comply with all applicable laws and regulations governing employer benefits programs.

• Stop Loss Insurance

  Stop loss coverage should not be viewed as a commodity where price is the only variable. It has many nuances with significant variation between the contracts offered by different stop loss carriers. This can have a dramatic effect on how or even whether a claim is covered under stop loss. Without a clear understanding of contract terms, an employer could face unexpected exclusions or claim denials. The ideal policy will have limited exclusions or better yet, mirror the health plan’s summary plan description (SPD). If a carrier is offering premium rates below other markets, there is a reason. A self-funded health plan’s worst-case scenario:

  An employer places their stop loss coverage with a carrier that offers premium rates well below other markets and experiences a claim denial for a $700,000 heart transplant due to an “experimental” treatment exclusion. Under the medical plan, the procedure was not defined as an experimental treatment. However, because the stop loss carrier included a definition of experimental treatment within the policy that differed from the medical plan, stop loss coverage for the claim is denied.

• Disclosure

  Disclosure is a common process in the stop loss marketplace whereby a carrier requires completion of a disclosure form identifying all known and emerging claims. Claimants not properly disclosed may result in unexpected claim liability in the form of claim reductions or denials. Required information typically includes diagnosis (including all individuals who may not have large claims today, but have a “trigger” diagnosis), current/planned treatment patterns, prognosis and a signature of an officer of the company.

• Plan Document and Summary Plan Description

  Typically, the TPA will draft a plan document and SPD for review. These documents are required by ERISA and clearly describe the benefits offered to employees and their dependents. The employer (plan sponsor) should review the document carefully to verify that it accurately reflects the intentions of the plan.

• Health Information Privacy

  Self-funded plans are subject to regulations under the Health Insurance Portability and Accountability Act (HIPAA). It is important that an employer that sponsors a self-funded health plan have procedures in place to safeguard the protected health information (PHI) of the plan’s participants. The first step is to appoint a HIPAA privacy officer, the individual who will enforce HIPAA policies. The employer’s benefits advisor (broker) or the TPA can usually assist with setting up and implementing these policies.

• Establishing a Trust for Group Health Plan Assets

  Why establish a separate formal trust for group health plan assets? If the money is not in a separate trust, it is at risk. Even with the best intentions of the employer and TPA, if it is held in an employer’s general assets or even designated checking account (or in claims-paying accounts of the TPA), the money could be spent, allocated or frozen in a lawsuit. These things happen with surprising frequency, resulting in a breach of fiduciary duty that could mean jail time. A significant amount of the health plan’s money is now composed of withholdings from employees’ paychecks, COBRA and dependent contributions, so some or all of it is not the employer’s or TPA’s money to hold. The Department of Labor would view it as if you took money out of the employee’s wallet and put it into yours for “safekeeping,” and they would likely prosecute that as a criminal (jailable) offense.

• Reserve Funds

  As an overall sound business practice, a reserve should be established and maintained to accommodate monthly claims fluctuations, cover “incurred but not reported” (IBNR) claims and prepare for potential liability from new federal legislation (e.g., COBRA, Medicare, veterans’ benefits, HIPAA, Mental Health Parity Act, ACA, etc.). The premium equivalent rates included in the MedCost Benefit Services proposal are intended to represent your plan’s funding levels (fixed cost + expected claims + estimated needed reserve).