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Self-funded health care is an insurance arrangement where an employer provides benefits to employees with its own funds.  This is different from fully insured plans where an employer contracts an insurance carrier to cover their employees and dependents.  With self-funded health care, the employer assumes the risk for payment of the claims for benefits.  Terms of eligibility and coverage are set in plan documents which included provisions similar to typical group health insurance policies.

Most employers also reduce their overall financial risk of self-funding claims by purchasing stop loss insurance from an insurance carrier.  These stop loss policies reduce an employer’s risk on a specific claim and aggregate claims.  An important aspect of a self-funded group health plan lies in the requirement that the employer remain liable for funding of plan claims regardless of the purchase of stop loss insurance.  Only the employer has a contractual relationship with the plan participants and beneficiaries.  The stop loss policy runs solely between the employer and stop loss carrier and creates no direct liability to those individuals covered under the plan.  This in turn is the main difference between fully insured plans and self-funded health plans.

Stop-loss policies are crucial in establishing a worst case scenario, or aggregate for any given year.  The aggregate stop loss helps establish a defined number that can be compared to a plan’s guaranteed fully insured cost.  If the aggregate cost does not exceed the plans fully insured guaranteed cost, self-funding may be a viable option.  The employer in turn creates its own insurance policy with its employees, and in turn purchases an umbrella policy for worst case scenarios.

Most employers find it necessary to contract with a third party administrator to assist in claims adjudication and payment.  Third party administrators also provide access to preferred provider networks, prescription drug card programs, utilization review and the stop loss insurance market.  Insurance companies also offer similar services to what is referred to as ‘administrative services only’ or ASO contracts.  In these arrangements the insurance carrier provides the typical third party administration services but assumes no risk for claims.

An advantage of self-funded plans is simply transparency of claims data.  Employers who contract a TPA receive a monthly report detailing medical claims and pharmacy costs.  Reviewing this information annually becomes instrumental in controlling costs by allowing the employer to shop for the most effective coverage.

As health care costs continue to increase employers will look for alternative ways to control their overhead costs.  Consumer driven plans have also become popular as employers look to shift some of the accountability to employees.  HSAs (health savings accounts) and HRAs (health reimbursement accounts) push employees to shop around for the best value when considering elective medical procedure or filling prescriptions.

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