Self-Funding has become the dominant financing method for health care plans for these reasons:
So long as employers are expected to be the primary source of financing, the dominance of self-funding in the future may be expected. Comparing a self-funded plan to an owned plan and a fully insured plan to a rented plan, one may easily grasp the simplicity of self-funding, and how it contrasts to a fully insured plan. There are disadvantages of self-funding, however, as not all people want the responsibility of plan ownership. For several reasons, the preferred term is self-funding and not self-insurance.
Basic risk theory underlies the employer’s decision to self-fund. Critical to self-funding is the need to have the terms of stop-loss within the employer’s comfort level. Other risk management considerations involve (a) management attitudes, (b) inherent nature of employer’s risks, (c) employer’s financial condition, (d) maintenance of reserves, (e) administration, (f) employee or union relations, (g) acquisitions/mergers, and (h) funding. The general attitude that small plans are necessarily not candidates for self-funding is simply not correct; generally, any plan in excess of 50 participants sponsored by a stable and well-managed employer is a self-funding candidate. A feasibility study is the usual basis upon which the employer bases its go or no-go decision to self-fund.
Self-funders have a keen interest in state regulatory activities because of (a) mandated benefits, (b) state registration and/or regulation of vendors, (c) ERISA preemption being not global, (d) ebb and flow of state-federal power, (e) considerable number of non-ERISA self-funded plans, (g) MEWAs, and (h) role of 24-hour coverage. It is known that states have enacted many statutes, most of which are NAIC-promulgated models. We also know that considerable legislation has dealt with vendor state licenses. Increasing activities at the federal level to tinker with ERISA are being seen, along with substantial pressure by the NAIC, and others, to amend ERISA. State attempts to effect significant health care reform to solve their Medicaid problems will probably be unsuccessful without ERISA modifications.
For the most part, the applicability of taxes to fully insured and to self-funded plans are the same. Examples include IRC §§104, 105, 106, 213, 4976, and 5000. However, there are some areas in which self-funders do face distinctions:
· Self-Funded Death Benefits. IRC §101(b) does not apply to self-funded death benefits except where done under a VEBA.
· Self-Funded Discriminatory Benefits. IRC §105(h) places tax-consequences on discriminatory self-funded medical benefits.
IRC §§419 and 419A make clear what the self-funder may deduct for tax purposes. A simple example may help.
Given for plan year/fiscal year, the following:
1. Claim Reserves at beginning of year
a. Approved for payment $100
b. Other (reported or not $1,000
2. Claim Reserves at end of year
a. Approved for payment $150
b. Other (reported or not) $1,200
3. Paid claims for year $6,000
Consider two employers:
· Employer A (general asset plan funded)
Deduction is: (100) + 6,000 + 150 or 6,050
· Employer B (trusteed)
Deduction is: (1,100) + 6,000 + 1,350 or 6,250
The claim reserve must be within 35% of the paid claims to be in the safe harbor and, if audited, actuarially supportable as well. The funding vehicle for the reserves need not be a trust; a non-profit corporation would also be acceptable.
ERISA § 401(b) requires that any self-funded plan not only have a funding policy, but that such policy be stated in the plan document. The setting of this funding policy involves numerous decisions or considerations by the employer. For example:
· General asset v. trusteed plan?
· How may plan assets be unknowingly created with general asset plans?
· Contributory v. non-contributory?
· If trusteed, should such trust be qualified or not qualified?
· How are fixed costs to be handled?
· What is reasonable compensation to vendors?
· What of dilatory claim funding payments?
· How large may advance payments be to a trust account?
· Will computer conduit accounts create plan assets?
· When does stop-loss become a plan asset?
· Who should be trustees?
· When should commissions be disclosed?
· What about incentive-related compensation?
· What are constructive trusts?
· What is the role of the cafeteria plan in plan funding?
These issues are discussed in great detail in the Self-funding of Health Care Benefits text. Secondary issues with employers involve retiree health care benefits and non-trusteed funding vehicles.
By using a Voluntary Employees Beneficiary Association (VEBA) as the governing vehicle of the health care plan, the plan sponsor will fund the plan using a qualified trust. The statute and regulations are extensive but essentially provide for the following:
· Approval of the plan and trust by means of the IRS Form 1024.
· Tax advantages in that (a) advance contributions (within the IRC §419A limits) are deductible and (b) investment income is tax-exempt.
· Discrimination rules set forth in IRC §505 must be followed.
· Annual tax return on behalf of the trust is filed on IRS Form 990.
Because of the extensive and burdensome rules and also the limited available deductions, the popularity of the qualified trust has diminished in recent years. Except for large plans, or where otherwise required by law, using a qualified trust, as opposed to a non-qualified trust, is questionable as a “solution for which there is no problem.” The non-qualified trust (a) avoids the IRS-approvals, (b) has the same tax deduction as the qualified trust, (c) avoids the discrimination rules of IRC §505 but (d) has its investment income fully taxable.
Reporting and Disclosure
ERISA and the Internal Revenue Code demands that several major reports or items of disclosure be prepared for each plan or funding vehicle.
2. Summary Annual Report
This report is for plan beneficiaries and is a capsule of the Form 5500.
3. Summary Plan Description
This item is more commonly referred to as the plan booklet. It is prepared for the plan beneficiaries and describes in understandable language the plan benefits and operation.
4. Tax Filings
These are for the IRS and deal exclusively with trust filings and plans offering certain fringe benefits (premium option plan, e.g.).
There are three ways of administering the self-funded plans:
· Third party administrator
· Insurer administrator
· Employer or self-administrator.
The administrator’s duties are rather extensive, reflective of the truth that such self-funded plan is, in effect, a miniature insurance company:
· Accounting (employer, plan, trust are entities which require accounting and/or auditing)
· Actuarial (COBRA premiums, funding levels, reserves, etc.)
· Benefit processing
· Managed care-related (utilization review, arranging for benefit carve-outs, provider-assumed risks, etc.)
The TPAs have been dominant in supervising self-funded plans because (a) being local, accessible, service-oriented, and entrepreneurial by nature, they bond with employers, (b) they offer one-stop service (consulting, claims and recordkeeping, managed care options, e.g.), and (c) they are independent from the stop-loss carrier. TPAs are generally characterized as being quick to adapt, reasonable in price, attentive to good service, and able to offer a broad range of products and services. TPAs typically have dominated the small-medium plan market while insurer-administrators have dominated the large plan market. TPAs who supervise the small-medium plans typically offer both (a) consulting and risk management services as well as (b) claims and recordkeeping services. As the plan size increases, these two primary functions are split with (a) going to a large consulting firm and (b) going to either an insurer or an administrative-service-only TPA.
Stop-loss is the fail-safe to the employer which provides financial comfort and assurance that the employer will not be at risk to an extent which would cause unacceptable financial harm. The employer is applicant-owner-payer-beneficiary of such coverage. Since stop-loss has been a buyer’s market, self-funding has grown and prospered. The primary responsibility for arranging the stop-loss is typically with the plan’s consultant (usually the TPA of smaller-medium plans or the consulting firm with the larger plans). Stop-loss is sold and packaged in many ways:
· Direct with carrier, or indirect through an intermediary (or underwriter).
· Low going in rates with tougher claims handling rules and terms; or vice versa.
· Broad range of benefits, terms, provisions, etc.
· Carrier dominant to the risk (little or none of the risk retroceded); or vice versa.
Attempts by states to regulate self-funded plan through the back door (i.e., by putting restrictions on stop-loss) is being contested presently in the courts with such attempts likely to be of no avail to the states. The Supreme Court will eventually have to decide this issue of back-door regulation.
For self-funded plans of all sizes, the marketing thereof is a matter of selling the concept to the employer or plan sponsor. This concept selling is done by means of a feasibility study which shows proposed benefits and plan administration and stop-loss costs backed by carrier-provided proposals. These players are generally involved:
A - Consultant who is an employee of TPA or insurer
B - Independent consultant/risk manager
C - Broker who serves as a finder/matchmaker.
There are numerous combinations of these three players:
Dominant consultants and not-so dominant brokers both have a place in the marketing. Regardless of how it gets to the employer-decision maker, a feasibility study, done annually, showing the strengths and weaknesses of the self-funding option in hard-dollar terms is the cornerstone of self-funding marketing, and renewing (or marketing).
A MEWA is a self-funded plan where unrelated employers share the funding and administrative obligations as a joint venture. It is essentially a miniature insurance company normally structured through a trust. MEWAS became tarnished after ERISA because many were entrepreneurially-sponsored and poorly or crookedly managed, or the participating employers were without any relationship or commonality of interest. Many went bankrupt causing much pain to the participants. With the so-called Erlenborn amendment to ERISA, such arrangements were classed as either (a) unauthorized insurers with no standing either with ERISA or the state or (b) ERISA plans where the regulation thereof was, in great part, delegated to the state. Also, states proceeded against MEWAs by either banning them outright or regulating them as quasi-insurers. As a result of these legislative/regulatory actions, the number of MEWAs and their significance has decreased significantly. If interest in MEWAs were to be revived, it should necessarily be done at the national level with special enabling legislation. Such legislation has been and continues to be under active discussion. There is presently a bill before Congress which would allow a federally-regulated MEWA.
Because a self-funded plan is a mini-insurer, it is not at all surprising that actuaries are directly or indirectly involved in such plans in these ways:
· Providing benefit content studies
· Recommending participant contributions, COBRA premiums, or funding contributions
· Computing claim reserves by either traditional or AICPA SOP No. 92-6 standards
· Doing state-required certifications (MEWAs, FL, and IA governmental entities, e.g.)
· Managed care-related studies (Capitation, and indemnity v. HMO employer contributions for parity purposes, e.g.)
· Estimating impact of anti-selection where high/low plans are involved
· Establishing underwriting rules where a go or no go decision is to be made on plan adoption, renewal, open enrollment, e.g.
· Computing reserves needed to meet AICPA FAS No. 106 (retired life reserves) or FAS No. 112 (post-termination reserves)
Monte Carlo techniques are useful in checking the reasonableness of stop-loss quotes, particularly where several benefit options are involved.
The genesis of self-funding is with the insurers who decades ago offered retrospective premium agreements, retentions, minimum premium plans, and ASO arrangements. The insurers have encouraged the growth of self-funding by actively marketing stop-loss and creating provider networks. Clearly, however, the dominance of insurers in health care financing has weakened as the risk pie, once their exclusive domain, is now shared by (a) employers (by funding), (b) providers (by HMOs), and (c) participants (by Medical Savings Accounts).
The real impetus to self-funding lies with the employer's desire to manage its plan and control its costs which are, two goals more easily achieved by owning (self-funding) the plan than renting (fully insuring) the plan. It is in the plan management that we see the evidence of cost control. Such cost control began originally as (a) cost containment programs (primarily second opinions, precert/recert, etc.) evolved into (b) managed care (letter solutions primarily, such as PPO, HMO, POS, EPO, e.g.), then (c) provider-dominated arrangements (PHO, direct contracting, e.g.), and then the (d) newer techniques (demand and disease management, corporate medicine, e.g.). While the managed care movement has been nothing short of traumatic to the providers, insurers, and participants, the employer self-funder has gone with the flow. As risk has shifted, however, from employers to providers (HMOs, e.g.), the role of the employer has been diminished, at least temporarily. Recent trend in self-funded managed care should be noted.
Workers' Compensation is of interest to students of self-funding
because it is health care. Also, the walls between workers' compensation and employee benefits are coming down, not only by legislative fiat, but also because the umbrella of managed care is covering and protecting both. It remains true that workers’ compensation is solidly under state dominance and ERISA-exempt. This central fact continues to demand, a11 24-hour programs to the contrary, that such programs be treated separately. Self-funding, while more administratively burdensome with workers’ compensation than with employee benefit plans, continues a viable and popular option in those states which permit it.
As self-funded plans have grown in scope and complexity, for each employer need or problem, there have arisen numerous vendors offering solutions. As most employers would be reluctant to be totally self-administered so would they be reluctant to deal one-on-one with each vendor. Each employer finds its own comfort level with the number of vendors it needs or wishes to deal with. Examples of the more significant vendors are:
· Administration (TPA, e.g.)
· Insurance (stop-loss, carve-outs, conversions, e.g.)
· Technical (computer, auditing, communications, e.g.)
· Managed care (networks, UR, e.g.)
· Demand management (wellness, behavioral, disease controls, e.g.)
· Professionals (accountants, attorneys, actuaries, e.g.).