The characteristics that are required for an employer-sponsored plan with a self-funded financing model are shifting. For years, the common wisdom has been that self-funded health plans are only for large employers with hundreds, if not thousands, of participants. While the law of large numbers is important to the risk equation, the desire for increased design flexibility, curbed health care costs and now the March 2010 PPACA, we may soon see employers with less than 100 employees take a long hard look at adopting a self-funded strategy.
A few employer characteristics that will NOT change for those looking to sponsor a self-funded medical plan include:
- Understanding of and basic comfort with risk (i.e. risk tolerance)
- Financial ability to absorb potential swings (up and down) in cash flow due to claims funding needs
- Employee engagement, communication, and effective wellness or onsite strategies that ensure employers have the most productive and healthy workforce possible
The shift is expected to come around the 2014 plan year and will be driven by employers’ desire to move out of community rated fully-insured risk pools. In simple terms, the law requires that insurers no longer consider a group’s demographics or claims experience (known as “experience rating”) and take on all comers regardless of risk. The intent is that community rating will serve to stabilize the market by ensuring all individuals in a group have access. Unfortunately, the likely reality is that this will push all group rates “into the middle” and, in my opinion, the “upper middle” of the rates bands.
To combat the reality of significant rate increases, many employers will turn to self-funded arrangements. Market transformation will be needed. This includes insurance companies creating “Administrative Service Only” arrangements that allow smaller employers to benefit from the deep network discounts, while adopting a self-funded arrangement (which is currently restricted to plans with 100 or more employees).
We still have more questions than answers – but, employers who start now to explore and find solutions are going to be in the best possible position to establish strategies which ensure 2014 and beyond are well managed.
On June 7, 2011 FirstPerson will host Fresh Perspectives – Self-Funded: To Be or Not to Be? If you are an employer with 50 or more employees and interested in hearing about available solutions, we invite you to join us. For more details, visit freshperspectives.eventbrite.com. If you are unable to attend, your advisor or account executive is available to discuss self-funding in more detail - give us a call.