Making the switch to self-funding is not a decision groups can take lightly. The group's demographics, financial stability and benefits program goals are influencing factors that must be reviewed at the start. When a proper evaluation is completed, some groups will find that self-funding is not the best choice for their program; others will be confident in the decision to make the switch.

Self-funding can provide groups with an option to be in control of their benefits during a time of uncertainty in the insurance industry. This is particularly true when a group's financial integrity remains at the core of the decision and the program is backed by a plan for additional protection. Potentially, groups making this switch reduce their benefits spend by responsibly building their coverage and maintaining their financial obligations. To help ensure success, the decision must be contemplated with an understanding of the key components for a successful program - group traits and stop loss options.

Determining a "Fit" for Self-Funding

Self-funding is receiving more and more attention as groups look for ways to continue providing benefits to their employees in light of health care reform mandates. Certainly, self-funding can be advantageous for many groups, but they may need guidance in understanding how to tell if it is a solution for them. Groups really need a trustworthy benefits consultant on their side to help them make an informed decision - someone who will demonstrate how this option works, under what conditions it works best and how to potentially achieve success in the decision.

With so much uncertainty surrounding health care, helpful guidance can go a long way. To thrive in a self-funded setting, groups need to have a set of established attributes and provisions in place to best manage their benefits options and spending. The success of the program is greatly tied to the due diligence being completed prior to implementation. Self-funding most resonates with groups seeking to manage their own risk, potentially reduce coverage costs and offer their employees a custom plan based on flexible plan options.

To begin making the determination, a strong self-funding prospect should have the following attributes:

• Stable claims experience - helps to predict the plan's liability
• Steady population - provides validity to past experience because the employee cohort hasn't changed frequently
• Financial stability - demonstrates cash on-hand to pay claims directly
• Willingness to manage claims - shows commitment to the hands-on element of a self-funded program
• Willingness to take on risk - verifies understanding that claims will be funded directly by the employer
• Access to a carrier or TPA with expertise in self-funding - understands the importance of having someone with experience helping to manage the plan in the best interest of the company

Above all else, risk tolerance is essential. Because the group is responsible for its health care spending, it must be able to take on the risk involved with claim fluctuations. The past truly can predict the future, so claims experience is an excellent indication of risk. Risk predictability grows with employer size. This is why, traditionally, larger groups have more frequently opted for self-funding than smaller groups. However, in today's marketplace, smaller groups (e.g., less than 100 employees) are expressing greater interest. And it can work, if the decision has been informed.

In addition, groups making the switch to self-funding also must be willing to stick with the option long enough to see the positive effects, which experts say is around three years. This should be clearly communicated so they have a reasonable expectation.

Protecting Finances with Stop Loss

Stop loss is essential for any group that moves to self-funding. Stop loss acts as reinsurance for the employer-sponsored plan and protects the company from the financial loss connected to high-dollar claims. Stop loss does not cover individuals, but covers the plan itself. It protects employers from large, catastrophic individual claims (specific) or an unanticipated number of claims across the group (aggregate) to help maintain the financial integrity of the company. The necessary amount of stop loss coverage relates to the employer's risk tolerance, financial results, size and industry. The amount of risk is determined primarily by deductible level - the higher the deductible, the lower the premium and the higher the risk.

When evaluating risk tolerance, it is important to remember that a deductible that is too large for the plan creates the potential for problems with cash flow, while too low of a deductible results in larger stop loss premiums. Finding appropriate balance is necessary. What groups must do is consider following a 3% to 12% rule, wherein the specific deductible is 3% to 12% of first-dollar claims. As the group grows in size and claims, the specific deductible should remain in that range.

When it comes to group size, the ability to predict claims is largely tied to the size of the group. The larger the employer, the more predictable the claims will be. Larger employers can limit their protection to specific catastrophic claims, while smaller employers should purchase both specific and aggregate coverage. Since the elimination of lifetime maximums was enacted with health care reform, many larger groups who originally went unprotected by stop loss are now opting to stop their liability at $1 million with the purchase of specific stop loss coverage.

It also should be said that certain industry types, such as health care and municipalities, tend to utilize benefits at a higher level than a typical group. For example, claims costs can vary by more than 30% across industries, so brokers and plan sponsors need to understand the expected claims cost for the group's industry and company and then adjust their expected cost and deductible level accordingly. Knowing which industries are at greater risk of a higher incidence of large claims is essential for sound decision-making. And groups with the potential for higher than average results should determine if they have enough capital and cash flow to cover their claims. If so, they can take a higher deductible. If not, a lower deductible should be chosen. Understanding the group dynamics is a key element in determining the stop loss coverage program that works best.

Easing the Transition to Self-Funding with New Stop Loss Products

New stop loss products, often called balanced or level funded, are emerging for those groups that are open to the possibility of self-funding but have reservations about how to transition to a different payment style. These products enable them to make payments in a more predictable manner, similar to a fully insured environment. Such products allow them to pay a consistent amount each month to cover administration, claims and stop loss premium so that the expenses feel similar to their previous plan.

Level funded products provide a stable expense each month, mimicking what fully insured groups are accustomed to in terms of billing. They are a good option for smaller groups looking to self-fund but wanting consistent monthly cash flow. However, while they do provide the same protection and risks as standard stop loss, groups must remember that these products do not remove risks such as liability of claims that come in after the stop loss contract, year-over-year rate increases, compliance requirements and others.

In times of uncertainty, groups look to their brokers for guidance. They need someone willing to help them determine if situations truly will work for them by asking the right questions and knowing all areas that must be considered. And when they go down the path of self-funding, they need to know that they have stop loss protection in place to help ensure their financial stability should something catastrophic occur.

This article was contributed by Beata Madey, Senior Vice President, Underwriting, at HM Insurance Group. Beata can be reached at beata.madey@hmig.com.

About HM Insurance Group

HM Insurance Group, headquartered in Pittsburgh, is a recognized leader in stop loss and reinsurance, offering employer stop loss, provider excess and HMO reinsurance. HM's product portfolio also features workers' compensation (Pennsylvania only) and worksite/voluntary accident, critical illness, disability income, hospital indemnity and term life insurance, as well as individual critical illness and accident insurance. Through its insurance companies, HM Insurance Group holds insurance licenses in 50 states and the District of Columbia and maintains 23 regional sales offices across the country. For more information, visit www.hmig.com. 

By Robert A. Holden, Vice President, Stateside Associates.

By Bob Ziomek, Principal, Axia Strategies

As a managed care consultant, I have worked with dozens of stop-loss carriers, reinsurers and managing general underwriters in the development of effective cost containment models targeted to curtailing the runaway costs associated with catastrophic health care claims.  While acknowledging the intrinsic uniqueness associated with the needs of every individual client, common characteristics, traits and behaviors are consistently evident at those payers that most effectively manage catastrophic cost events.  The following article outlines the most common characteristics of carriers that achieve consistent, "best of class" cost containment results:

1.  The Presence of a Comprehensive Array of Managed Care Vendor Solutions

The types of claims that emerge as catastrophic typically include solid organ and bone marrow transplants, renal dialysis, NICU, specialty Rx, complex oncology and implants.  These types of catastrophic cases are often referred to as "event-specific" and the vendor solutions utilized to contain the costs associated with them must be as specifically-designed and targeted as the medicine being managed. In addition to event-specific solutions, "non-specific" solutions such as specialty claim negotiations firms, both prospective and retrospective, must be available to address questionable, high-dollar claims.  Carriers that maintain a comprehensive suite of event-specific and non-specific vendor services are ideally positioned to address the clinical and cost challenges as catastrophic cases occur. 

2.  Methodologies for Assessing, Selecting and Measuring Managed Care Vendor Performance

Effective cost containment begins with the selection of the best managed care vendor partners, but defining "best" is the challenge.  Absent an assessment process to define the cost containment capabilities of a vendor, carriers fall prey to the siren's song of the vendor with the largest marketing budget, or jump on the bandwagon by "using whatever the competitor uses." A comparative vendor assessment process conducted by the carrier removes subjectivity and bias while defining critical product features and performance attributes, vendor by vendor.  Carriers with robust cost containment suites typically have well-designed processes for reviewing both incumbent vendors and newcomers, performing assessments per vendor category every three years or so to quantify and assure product relevance.  The work involved in performing these processes translates into improved cost containment performance and carrier profitability.

3.  Targeted Vendor Deployment Strategies

Regardless of the event-specific category, it is becoming increasingly uncommon for one vendor to be the sole-source solution for a national or regional carrier.  Multiple vendor usage is common in the transplant network, renal dialysis and specialty claim negotiation spaces and well-prepared carriers have become very adept at deploying "the right vendor, on the right case" as needed.  The deployment of the correct vendor is predicated upon carrier access to historical or comparative information which allows the carrier to make informed decisions, either at the time of a patient referral or at the time they are selecting a vendor to manage an event.  This information is oftentimes gathered by the carrier during their vendor assessment process and subsequently transformed into an "informational dashboard" to be used by carrier nursing personnel after product installation.

4.  Cooperation and Collaboration between Carrier Business Executives and Clinical Personnel

The ongoing involvement of carrier business executives in cost containment initiatives and strategy "raises the performance" of carrier clinical personnel and injects business process and profitability disciplines into the equation. Absent business executive involvement, clinical personnel may tend to focus on options that provide more clinical support and "ease of vendor use," oftentimes at the expense of carrier cost containment and profitability. Periodic executive reviews of clinical personnel vendor selection and usage patterns can protect carrier profitability from clinical personnel complacency. Business executives must challenge clinical personnel periodically to validate current vendor strategies while effectively incenting clinical personnel to contribute to carrier profitability objectives.

5. Emphasis on Clinical Personnel Training

The time demands placed on busy carrier clinical personnel leaves very little bandwidth for nurses in need of continuing clinical education, evolving product knowledge or new case management approaches. Carriers that emphasize cost containment typically view their clinical staff as a critical resource, a resource that requires educational investment in order to maintain managed care nursing skills. Aside from allocating budget dollars to clinical continuing education courses, carrier business executives also must cultivate nurse development in the methods of managing catastrophic care dollars by providing access to specialized insurance conferences and other educational forums. It is common for effective carriers to conduct periodic internal seminars with clinical personnel to review current vendor results, new vendor additions and current product usage strategies. Creating this educational and developmental environment apart from direct vendor involvement eliminates bias and cultivates a culture of cost containment expertise among carrier clinical staff.

In the final analysis, stop-loss carriers that achieve high levels of cost containment effectiveness do so based upon their commitment to a set of internally accepted processes and value systems centered around understanding the full spectrum of catastrophic cost exposure and the applicable solutions available to them for use. More specifically, these carriers possess well-designed assessment and measurement standards for vendor selection/retention and constantly review new ways to utilize selected vendors in a targeted, strategic manner. Effective carriers commit to a "culture" of cost containment and make the necessary investments in the management and support of their clinical staff. In today's environment of escalating catastrophic event frequency and claim size, it is an essential component of every carrier's profitability equation.

About the Author 

Bob Ziomek is a Principal with Axia Strategies, a managed care consulting firm based in Savage, MN. Mr. Ziomek works with carriers throughout the United States, assisting in the development of cost containment strategies specific to addressing catastrophic health care claim events. Mr. Ziomek can be reached at bziomek@axiastrategies.com or (952) 945-3535, ext. 105.