In this guide:
- What does it mean to self-fund?
- Administrative responsibilities
- Financial risks
- Stop-loss insurance
- Self-funding considerations
As an employer, self-funding your employees’ health benefits means you take on the risk and responsibility of paying all of their covered health claims, instead of paying an insurance company to accept that risk. You take on risk, but you may also benefit from lower costs. This may be a good alternative to buying health insurance coverage, but there are important issues to consider. This guide will help you understand your responsibilities if you choose to self-fund.
If you choose to self-fund, you take responsibility for administrative tasks that an insurance company would normally perform. These include:
- Designing plan benefits.
- Enrolling employees and covered dependents in the plan.
- Issuing plan documents and ID cards.
- Approving and paying employees’ and their covered dependents’ claims.
- Coordinating with healthcare providers.
- Making sure the plan complies with legal requirements.
Most small employers don’t have the expertise or trained staff to manage these tasks on their own. Instead, most employers hire a third party administrator (TPA).
TPAs manage your employee health plan by performing many of the tasks listed above. You provide the funds that the TPA uses to pay all covered health claims. An insurance company can also be a TPA, so make sure you and your employees know when it is providing actual insurance and when it is just a TPA.
While a TPA manages your health plan, the plan sponsor – you – are ultimately responsible for proper management of the plan and for payment of all covered claims. If you hire a TPA, it’s important that you choose a high quality one and supervise them appropriately.
- Use a well-informed insurance agent to help you find a high quality TPA.
- Make sure you choose a trustworthy TPA. You can find a list of TPAs that are registered with the Texas Department of Insurance (TDI) on our website under the “Regulated Companies” tab.
- Understand your TPA’s contract. Make sure it addresses all the necessary day-to-day operational responsibilities you expect the TPA to perform.
- Monitor your TPA. Check in with the TPA periodically to make sure they’re doing a good job. Ask your employees how the TPA is treating them. In the end, you’re responsible for how well your TPA manages your self-funded health plan.
If you choose self-funding, it means accepting all the financial risks that an insurance company normally has. You can save money if you have few claims. But it can be difficult to estimate your future claims costs. For instance, you might pay very little in claims one month, but the next month have a “shock claim” (high dollar but low frequency claims, such as an organ transplant) or “high utilization” (low dollar but unusually high frequency of claims). Many employers that choose self-funding try to reduce their risk by buying a stop-loss insurance policy.
Stop-loss insurance helps protect you from shock and high utilization claims. Stop-loss policies often include two limits:
- A specific attachment point that limits how much you must pay for each person’s claims.
- An aggregate attachment point that limits how much you must pay for claims overall.
For example, if your stop-loss policy has a specific attachment point of $20,000 and one of your employees gets very sick, you would pay the employee’s claim pursuant to your plan. Your stop-loss insurance company would then repay you for any amount you paid beyond the $20,000, but they don’t repay you for the first $20,000 of that employee’s covered claims. This limit would apply to each person each year.
In another example, assume the same policy has an aggregate attachment point of $1 million and a lot of employees get sick. If your payments reach $1 million for all covered claims for the year, your stop-loss policy would then repay you for total claims you pay beyond $1 million.
Note that stop-loss insurance protects you, not your employees. If a covered employee or dependent believes you wrongly denied their claim, they can bring a lawsuit against you for payment of those benefits. They generally can’t sue the stop-loss insurance company.
Your stop-loss insurance policy is the contract between you and the insurance company providing your stop-loss coverage. Make sure you read and understand it so you will know the policy’s limitations. Stop-loss coverage is less regulated than other types of insurance, so general requirements for health insurance may not apply to stop-loss coverage. For instance, unlike a group health insurance company, a stop-loss insurance company isn’t required to renew your policy if there have been multiple claims. Timing issues and claim lags are two other potential stop-loss policy considerations.
Timing issues. Sometimes medical providers don’t file their claims right away. Will the stop-loss policy cover medical services rendered before the policy is issued but filed after issuance? Will the policy cover claims incurred during the policy year but not filed until after the policy year ends?
End of policy year claim lag. It can be financially favorable for you if shock or high utilization claims come at the end of a policy year. For example, your policy starts in January and ends in December. It’s November, you have already paid multiple claims through the year, and you are close to reaching your attachment points. This means if you experience several shock claims in November, you won’t have far to go to reach your attachment points. On the other hand, if a shock or high utilization claim that comes at the end of a policy year isn’t filed until later, you might pay more.
If someone incurs a shock claim in December, the month that your stop-loss policy expires, and the medical provider waits until January to file the claim, your stop-loss policy might not cover the claim, since the policy year has ended. If the policy renews in January, the attachment points start over again. You may have to pay the shock claim up to the renewed attachment point before the stop-loss insurance kicks in. Also, a stop-loss insurance company isn’t required to renew a policy, so you may have to find another stop-loss insurance company for the new policy year.
There may be lag time between when you sign up for stop-loss coverage and when the policy starts. Normally claims that happen before the policy period begins don’t count toward your attachment points and won’t be eligible for stop-loss coverage, regardless of when the claims are filed.
Some stop-loss policies offer solutions to issues resulting from claim lag. They offer either “run-out” coverage, “run-in” coverage, or both.
- Run-out coverage protects you from end-of-policy year claim lag.
- Run-in coverage protects you from new policy lag.
The length of time for run-out and run-in coverage varies from policy to policy.
Stop-loss policy premiums aren’t strictly regulated, so you should shop around for the best rates. If you have had a lot of claims, you should prepare for a rate increase on renewal. You should also ask about whether your policy allows the insurance company to increase your premium in the middle of the policy year.
A stop-loss insurance company may set a specific attachment point for someone who is at risk for high cost medical claims (for instance, an employee with a preexisting condition). This is called “lasering.” For example, your policy’s specific attachment point is $60,000 but an employee’s dependent has a preexisting condition. The stop-loss insurance company may set a higher attachment point, such as $100,000, for that dependent. This means the stop-loss insurance company will repay you for covered claims paid that exceed $100,000 for that dependent, instead of $60,000.
Under federal law, an employer’s ability to put annual or lifetime limits on plan coverage is limited, but some stop-loss policies have annual limits of $1 million or less. Make sure you understand if you are taking on all risks above the limits of the stop-loss policy. You also need to check how your plan’s medical benefits line up with what the stop-loss policy will cover, so that you can better estimate your risk. For instance, if your plan includes prescription drug benefits but your stop-loss policy excludes them, you won’t be reimbursed for any of the drug claims. Also, see if the policy defines terms the same way your plan does. Ask the insurance company what benefits covered by your plan won’t be covered by the stop-loss policy.
A stop-loss insurance company may refuse to reimburse you for a health claim that you have already paid if the insurance company decides the claim shouldn’t have been paid under the health plan.
Note that if an employee is unhappy with a decision on a claim, they can go to an independent review organization (IRO) for an “external” review. An IRO can decide whether the plan should pay the claim. You, as the plan sponsor, must generally comply with the IRO’s decision, but a stop-loss insurance company does not. This means that you must pay the claim even if your insurance company won’t reimburse you. You should review the stop-loss policy to see if the stop-loss insurance company is bound by IRO decisions.
In some cases, a stop-loss insurance company can cancel your policy in the middle of the policy period. Always read the policy to understand its rules on termination. Reasons for termination might include:
- You haven’t paid your premium. If you don’t pay your premium, you’ve broken the contract terms and a stop-loss insurance company might cancel your policy.
- You made an intentional or unintentional mistake or misrepresentation. Some stop-loss insurance companies have strict rules about inaccurate information you may have given them in the application process – especially if they based their decision to provide the stop-loss coverage on that information.
- Your plan no longer meets participation requirements. Some policies require a certain number or percentage of employees be covered.
- You haven’t timely reported large claims. Some policies require notice when you become aware of the possibility of large claims.
- You changed your TPA. Some stop-loss insurance companies will terminate coverage if you change TPAs, because they own or have a close business relationship with the TPA.
- Termination at will. Some stop-loss policies allow the insurance company to terminate your policy for any reason, at any time, with 30 days’ notice.
It’s important that you choose a high quality stop-loss insurance company, and carefully review the terms of your policy.
A small employer may not save as much money by self-funding as a large employer, because both employers’ overall administration costs may be nearly the same. In other words, under certain circumstances, self-funding may not be significantly less expensive than group coverage. Ask yourself whether the savings you see from self-funding are worth the additional responsibilities and risk.
Make sure you budget for shock and high utilization claims. Some stop-loss policies let you go into a temporary negative balance where the carrier will pay for the claim without you having to pay it first, sometimes called “accommodation.” This is essentially a loan from the stop-loss insurance company to you. Carefully review your stop-loss contract for repayment expectations, interest, and penalties.
Insurance companies usually negotiate discounted rates with providers. If you buy group insurance coverage, you and your employees will benefit from those lower rates. For example, if an employee has a $1,000 medical procedure, an insurance company might have negotiated a 50 percent discount with that provider and would only pay $500 for the claim. As a self-funded employer, you or your TPA can negotiate prices with providers, but you might not be able to get the same discounts that an insurance company can negotiate. This might increase your overall costs.
You will be responsible for ensuring your health plan complies with all applicable provisions of the Employee Retirement Income Security Act, Health Insurance Portability and Accountability Act, Affordable Care Act, and other federal laws.
If you have complaints about your stop-loss carrier, you may file them on the our Online Complaint Portal or by calling our Help Line at 800-252-3439.