Is Health Plan Self-Funding Right for Your Firm?

As group health costs continue climbing and more employees struggle with the cost of premiums and out-of-pocket expenses, some employers are starting to take a second look at self-funded, or partially self-funded plans.

These plans give employers more skin in the game and the ability to better address cost drivers and tailor their offerings to fit the needs of their employees.

But while the plans can save both employer and their workers money, they are not for every organization. Plus, there is a degree of risk as a few serious health issues among group participants can blow open claims costs.

Small employer considerations

While medium-sized and large organization are more apt to self-fund due to their resources, 21% of employers with three to 199 plan participants were self-funded in 2021, according to a study by the Kaiser Family Foundation. That’s compared to employers with:

  • 200 to 999 plan participants: 63%
  • 1,000 to 4,999 plan participants: 86%
  • 5,000 and more plan participants: 87%

Recently, insurers have been trying to address small and mid-sized employers’ concerns about risk and costs by rolling out “level-funded” plans. These vehicles provide a lower level of self-funding with a stop-loss insurance program that has lower attachment points than typical plans.

For level-funded plans, the insurer estimates the employer’s expected monthly expenses, which include:

  • A portion of the estimated annual cost for benefits,
  • The stop-loss protection premium, and
  • An administrative fee.

The employer pays the above to the insurer every month. If, at the end of the year, claims were significantly higher or lower than expected, there will be financial reconciliation between the employer and the carrier.

These level-funded plans differ from fully self-funded plans, where the employer assumes direct financial responsibility for the costs of enrollees’ medical claims. The employer will usually contract with a third party administrator or insurer to handle claims and provide administrative services for the plan.

Employers may purchase stop-loss coverage to protect against catastrophic claims.

Stop-loss basics

While these plans are called self-funded, there is still a portion of the costs that is insured to protect against catastrophic claims or unexpectedly high utilization.

There are different types of stop-loss insurance that pay the cost of claims at a certain attachment point, when plan, individual or claims spending exceeds a designated value:

Specific stop-loss coverage — This policy provides protection for the employer against a high claim on any one individual. This is protection against abnormal severity of a single claim, rather than abnormal frequency of claims in total.

Aggregate stop-loss coverage — This policy may limit the total amount the plan sponsor must pay for all claims over the plan year.

The benefits

Customization — Self-funded plans let employers customize their plan to meet the needs of their workforce.

Cost control — Self-funded plans only pay the actual costs, as opposed to fully insured plans where the premium goes towards the expected health care costs the insurer has forecast, plus its overhead, reserves, profit margin, and more.

Access to claims data — The employer gets detailed access to claims costs, so they can see what claims are driving costs. By looking at claims and plan participant needs, the employer can better decide which benefits to provide, enhance or remove if they are not being used.

Disadvantages

Compliance — Since the employer will be paying for the claims, they will be responsible for fiduciary and compliance issues.

Cash flow — The plan will need to have sufficient money going into its accounts regularly to pay for claims as they arise.

Volatility — Medical outlays can be unpredictable. A spate of high-cost claims can wipe out any potential savings.

The takeaway

If you’re fed up with rising group health plan premiums, talk to us about self-funding. We can review your current insurance arrangement and your plan costs to help you decide if it’s right for you.

Time to Comply with Health Plan Transparency Rules

July 1 was the deadline for health plans to make public their in-network negotiated rates, out-of-network billed charges, and more.

While health plans will be required to post this information, employers who sponsor their group health insurance for their employees will need to take steps to ensure that their plans comply with the law, if they have not already done so.

The transparency rules taking effect were ushered in by the Consolidated Appropriations Act of 2021 and rulemaking from the 2020 Transparency in Coverage Rules by the Centers for Medicare and Medicaid Services.

The rules require that non-grandfathered insured and self-insured group health plans post machine-readable files on a public website no later than July 1, 2022. A public website, under the rules, is one that does not require a log-in or password to access.

The machine-readable files should include:

  • In-network rates for each item or service provided by in-network providers, including any negotiated rates, fee schedule rates used to determine cost-sharing, or derived amounts — whichever rate is applicable to the plan.
    If a rate is percentage-based, include the calculated dollar amount, or the calculated dollar amount for each National Provider Identifier-identified provider if rates differ by providers or tiers. Bundled items and services must be identified by relevant code.
  • Out-of-network allowed amounts and billed charges with respect to covered items or services, furnished by out-of-network providers during the 90-day period starting 180 days prior to the machine-readable file publication date.

What you need to do

Plan sponsors:

  • Must update the machine-readable files at least monthly. So, you should establish processes to coordinate regularly with the carrier in an insured plan, and with the third party administrator in a self-funded plan. You should confirm the date your insurer will make available the machine-readable files each month.
  • Should check with your insurance company if they will be hosting on their public-facing websites the machine-readable files, or if the insurer expects the employer to post the machine-readable files on their own public site.
  • Should Identify the plan or plans you sponsor and retrieve the links to the machine-readable files for each plan.
  • Should post the machine-readable files on your public-facing website if the insurance company has decided to delegate this responsibility to the employer.
  • Should post a link on your website to the insurance carrier’s website if the insurance company plans to publish the machine-readable files on its site. However, if the group health plan contract states that the insurer is fully responsible for posting these files, this may not be necessary.

Many Employees Choosing the Wrong Health Plans

A new study  has found that many people in employer-sponsored health plans are enrolling in plans that are costing them more than they ought to be paying.

Many employees choose pricey plans with low deductibles, which force them to spend more up front on premiums to save just a few hundred dollars on their deductible.

As result, many employees are spending hundreds, if not thousands of dollars more on their health care/health coverage than they need to.

Study 1: The deductible angle

A study by Benjamin Handel, a U.C. Berkeley economics professor, found that the majority of employees at one company he studied were in the highest-premium, lowest-deductible plan ($250 a year) their employer offered.

This resulted in them spending about $4,500 a year on health care, compared to only $2,032 had they gone with the cheaper plan (which had a $500 annual deductible) and received exactly the same care.

Study 2: Too many choices?

Additionally, the research paper “Choose to Lose: Health Plan Choices from a Menu with Dominated Options,” published in the Quarterly Journal of Economics, found that more choices also didn’t yield more savings for individuals in employer-sponsored plans.

The study examined the health plan choices that 23,894 employees at one large U.S. employer made. They were able to choose from 48 different combinations of deductibles, pharmaceutical copayments, co-insurance and maximum out-of-pocket expenses. All of the plans offered the same network of doctors and hospitals.

As a result, workers paid an extra $528 in premiums for the year to keep their deductible at $750 instead of $1,000. In other words, they paid $528 to save $250.

For nearly every plan with a deductible of $1,000 (the highest deductible available for those seeking single coverage), the additional premiums required to reduce the deductible, with all other plan attributes fixed, exceeded the maximum possible out-of-pocket savings provided by the lower deductible.

The study also found that the lowest-paid workers were significantly more likely to choose dominated plans (the most expensive).

Both of the studies above looked at plan options with relatively low deductibles when compared with high-deductible health plans, which have become more popular with time.

In 2018, the minimum deductible for an HDHP is $1,350 for an individual and $2,700 for a family. But, under current regulations, total out-of-pocket expenses are limited to $6,650 for an individual and $13,300 for a family with a HDHP.

While these plans have gotten a bad rap lately, a study published by the National Bureau of Economic Research found they are often cheaper for employees, as well.

The authors, both from the University of Wisconsin-Madison, found in a study of 331 companies, that at firms offering both a HDHP and a low-deductible plan, selecting the HDHP typically saves more than $500 a year.

Strategies

To help offset the cost of a HDHP, you can offer your staff health savings accounts (HSAs), which offer a tax-advantaged way to save for health care costs. While there are annual contribution limits, HSAs allow your employees to roll over their balance from year to year. The funds they contribute to their HSA are pre-tax, so the savings are significant.

The Wisconsin-Madison authors surmised that many people choose the costlier health plan for two reasons:

  • Inertia – It’s easier for consumers to stick with their old plan rather than crunch the numbers to see if a new plan may be more appropriate.
  • Deductible aversion – When employees see a low-deductible plan they may associate it with better quality care, even though the network and coverage may be the same.

The best strategy to guide your staff to the plan that best suits them is to educate them. You should have workshops for your staff prior to open enrollment, to help them understand why the higher-deductible plan may often be the best choice for them if they want to save money on their overall premium and out-of-pocket expenses.

Ideally, you could encourage them to set aside the same amount of money in their HSA that would be enough to cover their deductible. This way, your employees would not feel burdened by health expenses they may have to pay for during the year.

Few Health Plan Enrollees Know About New Price Transparency Rules

Despite a new law requiring hospitals to post detailed pricing information for their treatments and procedures online, fewer than 10% of U.S. adults are aware of the requirement.

That’s a problem considering that a growing number of Americans have high-deductible health plans, which come with up-front lower premiums but with higher out-of-pocket expenses.

One of the driving forces behind HDHPs is that they give the enrollee more “skin in the game,” by incentivizing them to shop around for care since they will have to pay for it themselves up to their deductible.

But if people are not aware they can find pricing for medical services on providers’ websites, they may not know how to begin comparing prices.

A new study by the Kaiser Family Foundation found that only 9% of those surveyed were aware that hospitals are required to publish the prices for their services online, in line with new price transparency regulations that took effect Jan. 1, 2021.

The price transparency rule, implemented by the Trump administration, requires hospitals to post on their websites:

  • A plain language description of each shoppable service and item.
  • A description of charges, including:
    • Payer-specific negotiated charge, or the price a third party payer such as a health insurance company would pay.
    • Discounted cash price, or the price a patient would pay without insurance.
    • Gross charge, or the charge absent any discounts.
    • De-identified maximum and minimum negotiated charges for each.
  • Any primary code used by the hospital for purposes of accounting or billing.

Here’s what the survey found:

  • 69% of respondents were unsure whether hospitals are required to disclose the prices of treatments and procedures.
  • 22% believed hospitals are not required to disclose this information.
  • 9% were aware hospitals are required to disclose the prices of treatments and procedures on their websites.
  • 14% said that they or a family member had gone online in the past six months to research the price of a treatment at a hospital.
  • Younger adults (ages 18 to 49) were more likely to say they or a family member had searched for the price of care online.

Educating your staff

Employers with HDHPs should inform their staff about the price transparency rule so that they can research pricing ahead of any procedures they may have. Most health system websites should be posting their pricing by now, but it may take some digging to find them. 

If they have been ordered to get a certain procedure, they can start by going to each provider available to them through their health insurance and researching the pricing on their website. If they can’t find the information, they should call the provider to get the information. They will need the negotiated price between their health plan and the provider.

Prices can vary dramatically between providers, and your staff need to make sure they are comparing the exact same service between them.

They should also consider calling the providers and inquiring about the cash price for the services. In some instances, the cash price may end up being even less than their deductible or copay.

One problem: Many hospitals have not published their rates and there has been a lack of consistency between providers in terms of how they are providing the information.

This has prompted the CMS to audit hospitals’ websites and complaints, and it recently started sending out notices to hundreds of hospitals that are not complying with the transparency regulations.

Finally, many insurance carriers offer searchable online databases for their enrollees where people can research the approximate cost of certain procedures among all the providers available to them.

Health Plan Rebates in 2021 to Be Second Highest on Record

Group health plan insurers are expected to pay out $618 million in rebates to plan sponsors for the 2020 policy year after seeing use of health care services plummet during the COVID-19 pandemic.

That’s according to a Kaiser Family Foundation estimate in April, which also projects that insurers will pay out $1.5 billion in rebates to enrollees in the individual market. 

The total $2.1 billion estimated payout this year is second only to the $2.5 billion insurers paid out in 2020 since the Affordable Care Act took effect and started requiring these rebates.  Small and large group health plans received $689 million in rebates in 2020.

The ACA requires insurance companies that cover individuals and small businesses to spend at least 80% of their premium income on health care claims and quality improvement, leaving the remaining 20% for administration, marketing and profit. If they spend less than 80%, the shortfall has to be returned to policyholders in the form of a rebate.

The threshold for large group health plans is 85%. This threshold is called the medical loss ratio (MLR). 

The rebates that will be paid in 2021 are based on a three-year MLR average loss ratio (2020, 2019 and 2018). Rebates this year will be paid to sponsors who had group health policies in effect in 2020, and only to those who were in plans that failed to spend enough on medical services. Many plans spend more than the MLR cap on medical services and do not have to pay.

There are two main drivers of larger rebates this year:

There was a significant drop in health care utilization in 2020 — The pandemic depressed the use of medical services as many people who would normally have gone to the doctor for ailments chose to stay home to avoid the risk of contracting COVID-19.

Also, hospitals cancelled elective care early in the pandemic and when COVID-19 cases were cresting, so that they could free up resources for coronavirus patients and reduce the virus’s likelihood of transmission. In fact, an analysis by the Peterson-KFF Health System Tracker found that health care spending fell slightly in 2020, making it the first year on record to see spending decline.

Insurers in the individual market had record profits in 2018 and 2019 — The Kaiser Family Foundation earlier reported that individual market insurers were very profitable in 2018 and 2019, even though the individual mandate penalty was eliminated in 2018 and insurers had been reducing their rates the previous few years.

How to handle rebates

Health insurers may pay MLR rebates either in the form of a premium credit (for employers that are still using the insurer) or as a lump-sum payment. More than 90% of group plan rebates come as a lump sum.

Once an employer receives this money, it is their responsibility to distribute the rebate to plan beneficiaries appropriately within 90 days, or risk triggering ERISA trust issues.

How the employer distributes the check will depend on how much their employees contribute to the plan, if at all. Here are the basic rules for employers handling their MLR rebate checks:

  • If you paid 100% of the premiums, the rebate is not a plan asset and you can retain the entire rebate amount and use it as you wish.
  • If the premiums were paid partly by you and partly by the participants, the percentage of the rebate equal to the percentage of the cost paid by participants must be distributed to the employees.

If you have to distribute funds to the plan participants, the Department of Labor provides a few options (if the plan document or policy does not already prescribe how they should be distributed):

  • The funds can be used to reduce your portion of the annual premium for the subsequent policy year for all staff who were covered by all of your group health plans.
  • The funds can be used to reduce your portion of the annual premium for the subsequent policy year for only those workers covered by the group health policy on which the rebate was based.
  • You can provide a cash refund to subscribers who were covered by the group health policy on which the rebate is based.

COVID-19 Changes to Health Plans Must Be Documented, Circulated

A number of plan sponsors have made changes to their group health plans in response to the COVID-19 pandemic, such as covering testing and sometimes treatment without any cost-sharing by the plan enrollee.

But any changes that are made must be followed up by amending the plan and communicating the changes to the enrollees.

Under the Employee Retirement Income Security Act, all health plans are required to deliver a Summary Plan Description (SPD) to enrollees to inform them of the full spectrum of coverage and their rights under the plan.

Whenever a plan sponsor makes a material modification to the terms of the plan or the information required to be in an SPD, they must amend the plan and let participants know about the change through a Summary of Material Modification (SMM).

Material changes

To qualify as “material,” a change must be important to plan enrollees. Examples include adding or eliminating a benefit, changing insurance companies, or changing rules for dependent eligibility.

Plan changes related to the COVID-19 pandemic that would have to be included in the SMM and SPD could include:

  • Offering continuing coverage to staff who would otherwise lose coverage due to a furlough, layoff or reduction of hours.
  • Changing eligibility terms to allow workers who may not have been eligible for coverage before to secure coverage (this could include part-time workers).
  • Covering a larger portion of an employee’s premium share.
  • Adding an employee assistance program to provide counseling for workers who may be undergoing unusual stress.
  • Adding telemedicine coverage.
  • Using funds in health savings accounts (HSAs) and flexible spending accounts (FSAs) to purchase over-the-counter medications.
  • Covering COVID-19 testing with no cost-sharing. 
  • Covering COVID-19 treatment without cost-sharing.

Some of the above changes are required by new laws and health plans must respond accordingly by changing their SMMs and SPDs. For example, the Families First Coronavirus Response Act requires that group health insurance and individual health insurance plans cover coronavirus testing with zero cost-sharing.

And the Coronavirus Aid, Recover and Economic Stabilization Act reverses an Affordable Care Act rule that barred policyholders from using funds in HSAs and FSAs to pay for over-the-counter medications. 

When the plan sponsor adopts these changes, it must also amend its plan summaries.

And SMMs must be delivered to plan participants within 60 days after a change has been adopted. You can deliver the SMM by mail, e-mail or posting it on your company’s intranet site. It’s recommended at this time that you opt for e-mail delivery.

One of the issues that may come up with any changes implemented in response to the COVID-19 outbreak is that some of the changes may be temporary. 

If that’s the case, the plan needs to include the termination date of any benefits that are adopted on a temporary basis.

However, if you don’t know how long the temporary benefits will be in effect, their temporary nature must be communicated in the SMM. Employers need to issue another SMM when the temporary benefit or coverage term ends.

The takeaway

This is an unusual time and unusual times call for unusual measures. It’s unusual for changes to be made to a plan in the middle of a plan year but because of the way the pandemic crash-landed, many plan sponsors have had to make changes. 

That said, you should work with us and your carrier on ensuring that the amended documents are sent out to staff.

As the employer, you should be aware of all the changes that have been made in response to COVID-19 so you can discuss them with any employees that have concerns or questions.

CARES Act Helps Coronavirus-affected Employers, Employees Alike

The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus law to help American workers and businesses weather the outbreak has a number of provisions that employers and their workers need to know about and can take advantage of during this crisis.

The CARES Act includes provision for:

  • Extended unemployment benefits.
  • Requiring health plans to cover COVID-19-related costs.
  • Small Business Administration (SBA) disaster loans.
  • Loans for large corporations.

Parts of the CARES Act will likely benefit your organization and employees in some way. Here’s what you need to know:

Extended unemployment

The CARES Act extends unemployment insurance benefits to workers, as long as they lost their jobs due to the outbreak.

Unemployment benefits under the CARES Act also apply to furloughed employees.

Depending on your state, workers will be able to collect both state unemployment and federal unemployment through the CARES Act, which was designed to augment any unemployment benefits workers may receive in your state.

The Pandemic Emergency Compensation program funded by the CARES Act will provide an additional $600 per week on top of state unemployment benefits, through July 31. 

The law extends state-level unemployment by an additional 13 weeks. For example, whereas most of California’s unemployment benefits last 26 weeks, the bill extends state benefits to 39 weeks. The extended benefits will last through Dec. 31.

Health plan changes

Under the CARES Act, employer-sponsored group health plans must provide for covered workers – without cost-sharing or out-of-pocket expenses – the cost of COVID-19 testing, treatment and vaccinations when and if they become available.

SBA loans

In response to the Coronavirus (COVID-19) pandemic, small business owners are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000.

This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available following a successful application. This loan advance will not have to be repaid.

This program is for any small business with fewer than 500 employees (including sole proprietorships, independent contractors and self-employed persons) as well as private non-profit organization affected by COVID-19.

And the law’s The Paycheck Protection Program offers 1% interest loans to businesses with fewer than 500 workers.

Borrowers who don’t lay off workers in the next eight weeks will have their loans forgiven, along with the interest.

These loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. If small businesses maintain payroll through this economic crisis, some of the borrowed money via the PPP can be forgiven – the funds will be available through June 30. Act fast.

Mid-sized employers

Under the CARES Act, the Secretary of the Treasury is authorized to implement financial assistance programs which specifically target mid-size employers with between 500 and 10,000 employees.

Loans would not have an annualized interest rate higher than 2% and principal and interest will not be due and payable for at least six months after the loan is made. But unlike loans under the PPP, these are not forgivable.

Large employers

The CARES Act provides $500 billion to the Treasury Department’s Exchange Stabilization Fund for loans and other funding for large companies and corporations affected by the outbreak.

  • $454 billion is set aside for loans, loan guarantees.
  • Companies that receive funds are prohibited from using them for stock buybacks.
  • Loans include terms limiting employee compensation and severance pay.

Like loans for mid-sized employers, they are not forgivable.

Workers Getting Squeezed by Higher Health Plan Costs

While health insurance premiums aren’t going up as much as they used to, both employers and their workers are still struggling with higher health care costs.

According to the “2018 Health and Voluntary Workplace Benefits Survey,” published by the Employee Benefit Research Institute together with Greenwald & Associates, roughly half of all workers experienced an out-of-pocket cost increase in their workplace health insurance plans.

That’s roughly the same percentage as in 2017, but lower than the 61% who saw cost increases passed on to them from their employers in 2014.

And employees are feeling the pinch: About 28% of all workers affected by reductions in employee contributions to health care plans have decreased their own contributions to retirement plans such as IRAs, 401(k)s, 403(b)s and 457 plans.

Nearly half have cut back on other savings as well, to cover their rising share of health care costs.

The troubles don’t end there, though: About 25% of respondents reported they had trouble paying for basic necessities like shelter, rent and heat, and 36% reported difficulty with paying other bills.

About 27% told researchers they had already used up all or most of their savings, while about one-third have increased their level of credit card debt. Thirty percent have delayed retirement, and 21% have been forced to drop other insurance coverage. Twelve percent have taken a withdrawal or loan from a retirement plan.

The increased out-of-pocket costs on workers seem to be having some effect on consumer behavior as well, as more individuals are taking steps to control overall costs. For example, 73% are trying to control health care costs by taking better care of themselves.

One-quarter of respondents said they had not skipped prescription drugs to save money, while half reported delaying going to the doctor.

Employees like their plans

That said, half of workers surveyed expressed satisfaction with their own company health plans.

But price remains a sore spot: Only 17% of respondents said they were extremely satisfied or very satisfied with the cost of their health insurance plan, while just 15% reported satisfaction with the cost of health care services excluded by their plans.

However, only 12% reported that they were unsatisfied with their own health plan.

The takeaway

While workers are generally happy with the plans currently on offer from employers, they are anxious about what the future may hold for them and their families.

While nearly half of workers surveyed said they were very confident or extremely confident that they could get needed treatments today, only about one in three expressed confidence about being able to get needed medical care over the next 20 years.

For employers, that means providing better education and working with employees to provide them with specific voluntary benefits like long-term care insurance in case they suddenly have a medical emergency that will keep them laid up for some time.

You can also work with us to see where you can save money and pass those savings on to your employees, while at the same time improving their benefits package. If you are concerned about what employees are feeling, call us and we can go over your current benefits package to see where you can make improvements.