An Overview & Explanation of Misconceptions
by Frederick D. Hunt, Jr. - SPBA President
What is self-funding?
Perhaps its other name "self-insurance"
is more descriptive. Instead of paying an insurance company or Blue Cross &
Blue Shield money to pay the claims (and keep any profits), a self-funded
(self-insured) employer or plan puts the money into a trust fund that is overseen
by strict Federal government regulation, and that trust fund pays the claims
(and keeps any profits on behalf of the workers to offset future expenses).
To avoid catastrophic losses, both commercial insurance companies as well as
self-funded plans usually buy re-insurance. In self-funding, the re-insurance
has the descriptive name "stop-loss". It allows a plan to set in advance
the maximum loss levels it is willing to sustain on any specific situation or
on the aggregate of claims on the whole group. Thus, even a one-person
employer can budget to meet his pre-designated stop-loss trigger points and
can self-fund successfully.
Technical note #1: Within the benefits business, we occasionally
use the term "partially self-funded" to differentiate between "bare"
and self-funding with stop-loss. However, it is very important to remember that
legally & technically, there is no such subset or term as "partially
self-funded". A self-funded plan is simply legally a self-funded ERISA
plan whether it has stop-loss or not (just as a barbershop is a barbershop whether
it has fire insurance or not.) So, a self-funded plan with stop-loss
is subject to the same tough Federal ERISA fiduciary standards and all aspects
of the plan (including the stop-loss) are preempted from state intervention.
This "partial" term and role of stop-loss has caused confusion for
many state Insurance Commissioners. The law is clear, however. It is preempted.
Technical note #2: Too much of the health reform rhetoric
is ignorant of the existence & role of stop-loss, and assumes all self-funding
is "bare" (with no stop-loss). Only the largest plans usually find
it prudent to go without stop-loss, and that's why there has been misplaced
talk about floors and caps of what small employers may use self-funding. Any
employer of any size should be allowed to self-fund. The size
limits are not only senseless & discriminatory, but also unnecessarily add
to the complexity of health reform proposals, which raises suspicion & opposition
to reform. It is viewed as forcing small employers into health ghettos.
Medical IRAs/MSAs: There has been significant support in Congress
and the public for Medical IRA or Medical Savings Accounts (MSAs). While it
is a great idea for people who are responsible savers and knowledgeable medical
consumers, it allows others to fall through the cracks. Self-funding
for tiny employers achieves the goals of MSAs (and thus attracts those supporters)...while
providing a safe structure that remedies the problems of the less responsible
or unfortunate. A small self-funded plan is like the workers pooling
the equivalent of their MSAs.
Reformers & state officials often make the misstatement that ERISA
plans "are not subject to regulation". That could not be
farther from the truth (as the constant flow of new rules, enforcement cases,
and specialists attest). ERISA was carefully & specifically designed by
Congress to be the ultimate consumer protection law. ERISA fiduciary responsibility
has far stronger consumer protections than state insurance regulation or even
normal business customs. ERISA demands that the plan as a whole as well as each
transaction be viewed to assure that it was the "most prudent" for
the safety & efficiency of the plan assets and the plan participants (covered
individuals). Thus, for instance, various tie-ins, less-than-arm's-length business
arrangements, and administrative costs not fully disclosed in advance can bring
civil and/or criminal ERISA penalties...and the penalties go to the person who
made the judgement. They can't hide behind a corporate veil. It's powerful incentive!
"Choice" and "efficiency" are big words
in the health reform debate...and self-insurance truly accomplishes that. The
choice is the flexibility of ERISA self-funded plans to design a plan for the
needs of that particular work force...rather than be subject to the
1,100 state-mandated benefits, such as toupees in one state and hair implants
in another. It makes the greatest use of limited health dollars.
For instance, one plan of food workers includes lead testing for cannery workers
and testing for exposure to pesticides for the farm workers (required of the
workers by other government agencies) in the plan's benefits. Those, of course,
would not be in some government "standard" set of benefits. Yes, state-mandated
toupees probably aren't included, but isn't it better for the workers to have
these services in the plan rather than having to pay out of pocket?
How big is self-funding, and who uses it most? In truth, about
85% of employer health plans currently use some form of self-funding,
and are subject to ERISA regulation. (The percent is also sometimes reported
as 67%, depending on how certain plans are defined.) The point is that
self-funding is the major player and the normal mode of health
benefits chosen by workers & employers. Fully-insured is the minor
player (9% of health plans, according to Foster Higgins). This
is the opposite of the assumptions on which most health reformers are basing
their proposals. This is especially ironic, since most health
reformers vilify the insurance companies...but would end up forcing back to
insurance companies the customers who had chosen to leave.
Self-funding has grown many thousand percent in the past 15 years...and
most of that growth has been among small and very small employers (and
the stop-loss industry has matured and become more and more adept at tailoring
services for small plans). Why smalls? The answer is actually quite logical.
Big employers can exercise the clout of their size to demand special rates &
flexibility from insurers. Small employers tend to get inflexibility at higher
prices (or no insurance offered at all). As even tiny employers found
that they could safely custom-design a plan for the needs of their particular
workers...and save as much as 40% on the overall cost, the choice became clear.
Some have their own single-employer plans, and others banded together in their
trade association or other group or union to create a large plan composed of
small employers. It has been very cost-effective, flexible, and successful.
These small self-funded employers & plans are furious at the thought
that Congress & states feel financially sound small employer plans should
be abolished...but it's OK for large companies who may be on the brink of bankruptcy
to do as they please. Angering such a huge portion of the workforce
will have serious repercussions.