How the Bay State leads the nation in Self-Funded Health Plans
by Ron E. Peck, Esq.Mr. Peck is senior vice president and general counsel at The Phia Group, LLC. and has been a member of The Phia Group’s team since 2006. As an attorney with The Phia Group, Ron has been an innovative force in the drafting of improved benefit plan provisions, handled complex subrogation and third party recovery disputes, and spearheaded efforts to combat the steadily increasing costs of healthcare. Visit phiagroup.com
Massachusetts is an incredible place to work and live.
Its history is rich — since its founding, the United States of America has routinely found its path lain out before it by the Commonwealth. From rebellion and the Boston Tea Party to government-monitored health insurance exchanges and RomneyCare, it often seems that where we go, others follow.
How odd, then, that this state — until recently — lagged behind much of the nation when it came to self-funding our health benefit plans. Certainly, Massachusetts healthcare is second to none. Our hospitals are top-notch, and our people appreciate the value of quality care.
Likewise, employers are generous in their provision of health benefits. They know that healthy employees are happy, productive employees. Strange, then, that — until recently — our employers hadn’t adequately considered the value self-funding brings to the table.
Contributions… Not Premiums
Before we delve into the details, a refresher on self-funding is likely due. A self-funded health plan is established when an employer — the primary plan sponsor — sets aside some of its funds to pay for its employees’ medical expenses.
Those employees contribute to the plan rather than pay premiums — although the similarity of the action means it’s not uncommon to hear employees and employers refer to such contributions as “premiums.”
Why would an employer self-fund, you ask? A self-funded employer enjoys:
- Plan Control
You choose what to cover and what to exclude, customizing the plan to be generous where your particular membership needs it, and stingy where benefits aren’t needed.
- Interest and Cash Flow
Funds are in the employer’s hands until they’re needed, meaning interest on those assets belongs to the employer.
- Federal Preemption and Lower Taxes
The Employee Retirement Income Security Act of 1974 states that a private, self-funded health plan is administered in accordance with its terms and federal rules. So, these plans are not subject to conflicting state health insurance regulations or benefit mandates.
Employers with self-funded plans can examine the claims data, study trends, allocate resources, and form partnerships to address their actual needs.
- Risk Reduction
Steps taken to reduce risk and costs directly impact the employer and employees. Risk posed by other populations does not impact the plan, resulting in employees of self-funded companies generally having lower single and family premiums than those with fully-funded insurance.
Overall, these benefits result in net savings for the self-funded plan over a three to five-year span, compared to a similar fully-funded insurance policy.
Yet, there are risks. Among them: the threat of catastrophic claims, inability to fund claims, and new fiduciary responsibilities to the members of the plan.
Most self-funded health plans purchase “stop-loss” — a form of reinsurance that reimburses self-funded plans for claims they pay in excess of a specific deductible. Unlike traditional health insurance, stop-loss reimburses the plan and not the medical service providers. This means the self-funded plan is on the hook for all the medical bills, regardless of whether stop-loss reimburses or denies the plan’s subsequent request.
Finally, a self-funded employer acts as — or appoints — a plan administrator. That administrator is a “fiduciary” of the plan and its members. Applicable law dictates the fiduciary must act prudently, protect the plan, and apply its terms judiciously. Failure to comply with these terms, mismanaging plan assets, or otherwise doing something not in the plan’s best interest could expose the plan sponsor to claims of fiduciary breach — resulting in steep penalties. Fortunately, third party organizations exist that will step in, aid in decision-making, and act as a fiduciary for those decisions — indemnifying the self-funded plan administrator.
Now that we’ve clarified what self-funding, or self-insurance, is, we can discuss its resurgence in the Commonwealth of Massachusetts.
Healthcare is expensive. With the advent of the Patient Protection and Affordable Care Act (the “PPACA” or Obamacare), costs imposed on benefit plans by law have been added to the already increasing cost of the care said plans are expected to purchase. The result? Skyrocketing premiums, applicable to traditional insurance programs — those where employers pay a carrier a premium, and the risk tied to paying medical bills transfers to the carrier.
Massachusetts isn’t immune to this trend. In fact, due to the implementation of Mitt Romney’s predecessor to the PPACA, we were ahead of the curve — for good and for bad. A recent article cited that the cost of health care in the Bay State jumped to $8,424 per person — a nearly four percent increase from the previous year. That’s not a surprise when you consider that we were the first state to ensure all residents had access to deep pockets (aka insurance), and their seemingly limitless funds.
Small businesses in particular saw just a few weeks ago that their premiums would jump — for some, by double-digit increases. And with four in ten small business owners admitting they’ve had to turn away quality candidates because of rising insurance costs, the increases are no joke.
Employers in Massachusetts seeking to continue offering benefit plans to their employees were faced with a decision. They could purchase less expensive insurance policies (with high deductibles, copays, narrow networks, limited coverage, and other cost-cutting mechanisms that shift the burden onto the employees), they could cease offering insurance entirely (paying a penalty and forcing employees to purchase their own individual policies on the exchange), or — they could self-fund their health plan.
Bigger the Better
For large employers — with 500 or even over 1,000 employed lives — it’s easy to self-fund.
The contributions from employees to help fund the program are substantial, and if an employee suffers a catastrophic loss or costly ailment, there are enough people contributing enough money into the plan to bear the cost.
In other words, when you have more people paying into the “risk pool,” you increase the number of healthy lives and contributions to the plan that will likely not be used by the contributor. This buffers the plan against the occasional — albeit rare — catastrophic claim.
For smaller employers — with 100, or in some instances, less than 50 lives) — self-funding is more daunting. Indeed, if I have 10 employees, and one is stricken with a very costly disease, the contributions from my firm, and the other 9 employees, won’t be enough to bear the cost.
This risk is lessened by stop-loss as discussed above, but it’s not eliminated. Therefore, it takes a lot more in potential savings to get such small employers over the hump and past that risk-aversion. But with healthcare costs continuing to skyrocketing, employers are reaching their breaking point. Smaller employers in Massachusetts now realize that they need to either take a risk and self-fund, or entirely give up on providing health benefits to their employees.
For many, that isn’t a choice. They are giving self-funding a chance. Reports indicate that the rate of self-funding has jumped nationally by nearly 20 percent since 2000 — with a spike after the passage of Obamacare.
Massachusetts in particular saw a boom in self-funding, becoming the state with the highest rate of self-funding in the nation. Three out of four workers in Massachusetts were self-funded by the end of 2011 — with a 13 percent jump in self-funding by employers of 50 to 1,000 lives. Only the smallest employers didn’t share the 13 percent growth, but still increased their self-funding all the same.
How has it worked for these employers?
A central Massachusetts ski resort, with nearly 70 full-time employees, self-funded ten years ago and haven’t looked back. They stay self-funded because it keeps the plan affordable — they don’t have to raise employee copays, deductibles, or contributions from their paychecks.
Likewise, a 40-life tire sales company decided to self-fund six years ago. As a franchise with many locations all over the Bay State, including in Worcester, they want to ensure self-funding remains the best deal for them. So they shop for traditional fully insured coverage every year — but have never found a better way to pay for their health care. They have not cut benefits to their employees in the last four years.
My own company made the decision to self-fund our health plan nearly a decade ago — at the time having less than 100 lives. In that time, our contributions dropped drastically from the premiums we’d been paying — by nearly 30 percent in two years. Since then, they haven’t increased by more than a few percentage points annually and we’ve yet to submit a single stop-loss claim.
Some see a difference as quickly as a couple years into self-funding. A 30-employee life car wash company decided to self-fund a mere two years ago. They came from a traditional fully insured program and they have saved money for two years straight — without cutting any benefits to their employees.
Similarly, a 66-life real-estate firm moved to a self-funded plan from a fully insured policy two years ago because of huge unsubstantiated rate increases from the fully insured carrier. They have kept costs and benefits stable for the last two years under the self-insured plan and are renewing now for their third year.
A final example is a Boston-based private transportation firm integral to the Commonwealth’s tourism trade. They have self-funded for 30 years, routinely enjoy savings, and pass those savings onto their employees as well as customers.
Method Appears to be Working
Will all Massachusetts employers experience the same success? Likely not. But the fact that our state now sports the most self-funded population in the nation, and that the rate is not slowing or reversing, is a good indicator that the method is working for the majority of Bay State employers. Not only does it work for Massachusetts, but this trend suggests that this may be a window into the rest of the country’s future reaction to Obamacare.
Massachusetts once again serves as a crystal ball, and in this instance, the future is bright. ◊
Excellent article. I ran a company in the mid-90s with 100 full-time employees. (Peer Review Analysis Inc., if anyone cares.)
The insurer said we were nuts to self-fund with so few employees, but we did. And never looked back, Our spending fell by about 30% immediately (including stop-loss and adjusted for claims runout), Yes, we were lucky, but chance favors the well-prepared. I knew every employee and maybe 2 were both high-risk and also old enough that the risk might pan out. Doing the math, even if one had a heart attack we were still way ahead of the game, and neither did.