The Cost/Benefit Analysis of Self-Funding Employee Health Benefits

I enjoyed this article from CFO on whether smaller employers should switch over to self-funded health plans, to take advantage of potential cost savings in comparison to insured plans, and to obtain comparatively favorable treatment under the ACA. I would throw in another point that favors self-funding a plan, which is that ERISA preemption provides more freedom from state health insurance mandates in that circumstance than would otherwise be the case.

Of more import, though, is the author’s warning that there are multiple hidden risks in self-funding that can threaten the financial well-being of a smaller employer, but which larger self-insurers have the financial depth to weather. There is no doubt that this is true, and that a smaller employer that wants to self-fund its health benefits must plan well for those risks, for instance through its stop-loss insurance structure, with enough sophistication and foresight that it has controlled for those risks.

There are other hidden risks as well, however, which are predominately operational, but which the article doesn’t address. I have spent years litigating disputes between administrators and plan sponsors over problems in the administration and management of self-funded plans. These problems have ranged from whether the administrator has properly determined eligibility or coordinated benefits, to whether the administrator approved care that the plan did not cover, to allegations of outright operational incompetence. Large self-funded employers often avoid these types of problems with the administrators of their self-funded plans, because they have the deep pockets to hire major, brand name administrators. Smaller employers sometimes end up with smaller, less sophisticated administrators, either because of cost or because they simply don’t know what to look for in picking an administrator. These operational risks place a smaller employer with a self-funded plan at risk of losses, and need to be accounted for by smaller companies in, first, deciding whether to self-fund health benefits and, second, in planning how to do so.

In the end, as most if not all employers know, there is no easy answer to providing health benefits in as cost effective a manner as possible. Self-funding is one good avenue, but its no panacea: it has to be done carefully to work well.
 

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