Self-Funding

Employer Investment
Employers invest millions of dollars each year in insured employee benefit plans. As the cost of providing medical insurance increases, employers are looking at funding alternatives for their health and welfare plans. Many employers are disappointed with their fully-insured plans because:

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    		•  Fully insured plan designs remain relatively inflexible.
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    		•  Effective cost containment programs are not always available.
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    		•  Fully insured plans tend to consume compensation dollars that can be better spent to curb employee turnover and to attract new, qualified employees.

    Rising Cost
    In an effort to control rising costs, employers are examining ways to economize and improve cash flow without sacrificing coverage. Budget considerations, bargaining agreements, geography and plan design each have an effect on the way a health plan should be funded.

    For many employers, there is an alternative:  SELF-FUNDING

    Until 1974, self-funded plans were obstructed by restrictive state laws that required employers to become licensed as insurers when they funded their own employee benefit plans. Passage of the Employee Retirement Income Security Act (ERISA) removed those barriers and self-funding is now one of the fastest growing areas in the employee benefit industry.

    The Self-Funded Plan
    Under a self-funded plan, it is usually possible for an employer to reduce operating costs significantly and maintain control of reserves usually held by insurance companies. The reserves should be held in a trust, producing tax-exempt interest and thereby reducing the cost of providing employee benefits. Reserves can also be held in an interest-bearing bank trust account.

    Financial Protection
    In order to provide an extra measure of financial protection against catastrophic claims, most employers purchase Stop Loss insurance coverage. This protects the plan from individual claims and from an excessive amount of total claims.


    Self-Funding

    How does Self-Funding work?

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    		•  An employer decides on a plan of employee benefits with assistance from the experts at Tucker Administrators. This plan is often similar to the plan currently provided on an insured basis but may be changed to reflect the goals and attitude of the management team.

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    		•  Stop Loss insurance is arranged to protect the plan against extreme losses. The amount of risk to be insured will be a function of the organization's size, nature of business, location, plan of benefits, financial resources, prior experience and tolerance for risk.

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    		•  A plan document is prepared. The plan document contains all the provisions of the plan, including eligibility, coverage, and termination. Employee benefit descriptions, identification cards and other materials necessary to operate the plan are also prepared, generally by Tucker Administrators.

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    		•  Under the direction of the Plan Sponsor and Plan Administrator, Tucker Administrators operates the day to day administration of the plan. This includes maintaining proper funds on deposit so that claims can be paid, paying the claims, preparing special claim reports and other required data for the plan and the insurer, and preparing any required governmental reports. Tucker Administrators also bills and collects any premiums and other administrative fees for the plan.


    What types of benefits are self-funded?

    Usually the group medical plan is the focus of a self-funded program. Other health benefits are often included, such as dental, vision, prescription drugs, and short-term disability. Certain high loss, low frequency coverages, such as life insurance, accidental death and dismemberment, and long-term disability are generally not suitable for self-funding.

    Why use Tucker Administrators?

    Employee benefit plan administration is complex. Tucker Administrators has the expertise to handle the many requirements of Self-Funded and Flexible Compensation Plans. With over 25 years of experience, Tucker Administrators successfully combines state-of-the-art technology with highly personal customer service.


    Advantages of Self-Funding

       Elimination of most premium tax

    In most states, there is no premium tax for self-funded claim funds. This produces an immediate savings equal to the amount of the premium tax, approximately 2% to 3% of the fully-insured premium.


       Lower cost of operation

    Employers frequently find that administrative costs for a self-funded program through Tucker Administrators are lower than those charged by their previous insurance carrier.


       Carrier profit margin and risk charge eliminated

    The profit margin and risk charges of an insurance carrier are eliminated for the bulk of the plan. This translates into direct savings for the client.


       Effective claim processing

    Tucker Administrators' continued success depends upon providing accurate, controlled and fast claims processing for each employer group.


       Cost and utilization controls

    Tucker Administrators offers highly effective "best of breed" cost and care management programs in order to control costs in the least intrusive way. Most fully-insured programs use their own in-house programs that may not be the best available.


       Cash flow benefit

    The employer's cash flow is improved when money formerly held by an insurance carrier is freed for use by the organization.


       Return on investment for reserves

    Interest on reserves established by the organization remain under the employer's control, not the insurance carrier's.


       Control of plan design

    A self-funded group has flexibility in plan design that fully-insured plans cannot attain. The employer may also redesign the plan to eliminate plan abuses if they are encountered or as business conditions dictate.


       Mandatory benefits avoided

    State regulations mandating costly benefits are avoided because self-funded programs are subject to ERISA, which is a Federal law.


       Administration tailored to the employer's needs

    Tucker Administrators will assist the group with customized plan design and hands-on implementation. The Tucker team will be with you through every step of the process.


       Risk management effectiveness through Stop Loss insurance

    Employers select the amount of risk they wish to retain and the amount to be covered by Stop Loss coverage. An insurance company has set limits, allowing little flexibility based on the employer's needs.

    Self-Funded vs. Fully Insured

    Traditionally, a self-funded plan will be more cost effective than a fully-insured plan because many expenses associated with a fully-insured plan are eliminated and gains from better than expected claims experience belong to the plan and not the insurance company. In addition, groups with good experience do not subsidize those with bad experience.



    STOP LOSS COVERAGE

    Frequently Asked Questions About Stop Loss Coverage

    What is Stop Loss coverage?
    Stop Loss is an insurance product that provides protection against catastrophic or unpredictable losses. It is purchased by employers who have decided to self-fund their employee benefit plans, but do not want to assume 100% of the liability for losses that exceed certain limits called deductibles.

    Who is insured?
    A significant difference between Stop Loss and conventional employee benefit insurance is that Stop Loss insures only the employer. Stop Loss does not insure employees.

    What Stop Loss coverages are available?
    Stop Loss comes in two forms: Specific and Aggregate

       Specific Stop Loss is the form of excess risk coverage that provides protection for the employer against a high claim on any one individual. This is protection against abnormal severity of a single claim rather than abnormal frequency of claims in total. Specific Stop Loss is also known as Individual Stop Loss.

    Aggregate Stop Loss provides a ceiling on the dollar amount of eligible expenses that an employer would pay in total during a contract period. The carrier reimburses the employer after the end of the contract period for Aggregate claims.

    A number of variations are available for each of these two products.

    Generally, all but the largest employers will want to protect their plan with both Specific and Aggregate Stop Loss coverage. Occasionally, circumstances may be such that Specific Stop Loss by itself will fulfill the employer's need for protection.

    What is the role of the employer's plan document?
    The plan document defines the benefits offered to the employees and is critical in determining liability under Stop Loss coverage. Because the employer has great latitude in designing the plan, there may be elements in the document that are not included under the Stop Loss coverage. The covered portions of the plan document must be approved by the underwriter in order to effect the Stop Loss coverage. Changes in the plan document after its initial approval must be approved before their inclusion in the Stop Loss coverage.

    How is loss defined?
    Expenses are determined to be eligible for reimbursement based upon two criteria:
       1) The expenses must be eligible under the employer's benefit plan as approved and

    2) The loss must be covered under the loss definition in the Stop Loss policy.

    When are claims paid?
    Stop Loss insurance is provided on a reimbursement basis. The group is responsible for payment of all losses under a self-funded plan. With the purchase of Stop Loss coverage, the group is still responsible for all losses including those that exceed the deductible. After the losses have been paid, the employer will be reimbursed for the amount of the loss that exceeds the deductible. All reimbursements are paid directly to the employer, never to an employee or to a provider of services or supplies.

    Specific claims are generally submitted and processed as soon as the deductible is met. Aggregate claims are usually processed only after the close of the contract period. Occasionally, there are requests for a "monthly accommodation" on the Aggregate. This means the employer wants the year-to-date Aggregate claims to be compared to the year-to-date Aggregate Deductible to determine if any amount is payable. Money could change hands during the year. The ultimate amount of the claim should remain the same. There is a business risk in this situation rather than an insurance risk as the employer may have to pay back advances if it turns out that claims in a later month would not have been reimbursed.

    What happens when someone leaves the self-funded plan?
    The group can offer conversion privileges to qualified members leaving the group. This pressure is being reduced to a noticeable extent by the COBRA requirement to extend coverage. Sometimes two complementary products are offered: Medical Conversion and Temporary Medical. Neither plan requires proof of good health, but the approach to either coverage varies.

    Medical Conversion is similar to a classic insured plan's medical conversion. The rates are high and the benefits are limited, but usually all existing medical problems are covered.

    Temporary medical coverage is for the self-perceived healthy person leaving a group. The rates are lower and the benefits are more generous, but no pre-existing conditions are covered. This product is also offered only for a limited coverage period.


    Specific Stop Loss Coverage

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    		•  Specific Stop Loss is provided to limit the employer's cost for eligible medical expenses for each covered individual. This coverage addresses the organization's exposure to high expenses on a given individual, as opposed to an accumulation of expenses on all covered individuals. Generally, medical expenses are covered. An actively-at-work provision occasionally applies. Specific Stop Loss may be purchased without the purchase of Aggregate Stop Loss.

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    		•  The "per person" deductible is determined before the start of the contract period, subject to certain minimums and maximums. If eligible medical expenses on a covered individual exceed the selected amount, the deductible is satisfied. The employer does not need to wait until the end of the contract period to submit a Specific claim for reimbursement.

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    		•  The premium charge is expressed as a rate per covered employee per month and a rate per covered dependent unit per month.

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    		•  The lifetime maximum benefit per person is generally $1,000,000, but higher amounts are often available depending upon the reinsurance carrier.

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    		•  A new deductible amount and new rate are established at each contact renewal.


    Aggregate Stop Loss Coverage

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    		•  Aggregate Stop Loss is provided to limit an employer's overall annual cost for a self-funded plan. This coverage addresses the accumulation of expenses on all individuals, as opposed to high expenses for particular individuals.

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    		•  Any health benefit can be included under the Aggregate Stop Loss, such as medical, dental, vision, prescription drugs, and short-term disability. Stop Loss is generally not suitable for Life Insurance, Accidental Death & Dismemberment, Long-Term Disability, or other high loss insurance products, due to the unpredictability and infrequency of claims. Sometimes an actively-at-work/not-hospital-confined provision applies. Specific Stop Loss must be purchased along with Aggregate to provide protection for the Aggregate. Aggregate-only contracts will usually not be issued except in the rarest conditions, such as an employer with a $100,000 lifetime maximum. When eligible expenses paid during a contract period exceed the Annual Aggregate Deductible, the group is reimbursed as specified in the contract, after the close of the contract period.

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    		•  The premium charge is expressed as a rate per month.

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    		•  New monthly deductible factors, a new minimum Aggregate Deductible and new rates are established at each contract renewal.


    ANNUAL AGGREGATE DEDUCTIBLE

    An employer is expected to be able to fund the normal expected claims plus an additional amount, called margin. These two elements are combined in the Annual Aggregate Deductible, often referred to as the AAD. The monthly Aggregate Deductible is calculated by multiplying each month's number of covered employees and covered dependent unit by the appropriate monthly deductible factors.

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    		•  Minimum Amount
    The minimum annual Aggregate deductible is the greater of: (a) 95% of the first monthly Aggregate Deductible times 12 or (b) a fixed dollar amount set by the underwriter.

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    		•  Margin
    Margin is the difference between expected paid claims and Aggregate Deductible. This is the risk the group is accepting in this self-funded plan. The more risk the group assumes the less risk there is for the insurance company to bear and therefore the lower the Aggregate premium. Minimum margins apply to groups based on their size and other factors.

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    		•  Maximum Aggregate Benefit
    The maximum Aggregate reimbursement is usually $1,000,000.

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    		•  Contract Basis
    Aggregate contracts are offered on an incurred and paid basis, the classic Aggregate Stop Loss contract basis. Only eligible expenses that were both incurred and paid while under contract are covered.

    This ongoing incurred and paid contract has the effect of being an incurred and paid contract during the first contract period and a paid contract during subsequent periods. However eligible expenses incurred before the initial effective date are not covered regardless of when they are paid (unless specifically covered by an amendment).

    A 15/12 variation is often reasonable for Aggregate when the group is currently self-funded and needs run-out protection. Other variations are frequently available to satisfy the needs of a particular employer.


    Contract Basis

    Specific and aggregate contracts are generally offered on an incurred and paid basis, the classic Specific Stop Loss contract basis. Only eligible expenses that were both incurred and paid while under the contract are covered.

    An ongoing incurred and paid contract has the effect of being an incurred and paid contract during the first contract period and a paid contract during subsequent periods. Expenses incurred before the initial effective date are not covered regardless of when they are paid, unless specifically covered by an amendment. The following diagram illustrates this incurred and paid approach:

    DIAGRAM OF INCURRED AND PAID CONTRACT
    THROUGH THREE CONTRACT YEARS



    There are two primary variations to the Specific contract, both dealing with the time periods considered valid for incurring and paying the eligible expenses:

    Incurred in 15 months and paid in 12 months (15/12)

    This variation provides coverage for expenses that are incurred in the 3 months before the carrier's initial effective date and paid during the first contract period. This approach is desirable to groups that are already self-funded and are not likely to have coverage for the run-out of claims from the period preceding the contract period. Please note that this is not a "paid" contract as it will not consider as eligible every expense paid during the contract period, only those incurred within the specified 15-month period.

    Incurred in 12 months and paid in 15 months (12/15)

    This covers events that are incurred during the contract period and paid by the employer within the contract period or the 3 months immediately following. This variation provides greater protection to the group for events occurring at the end of the contract period. This 3-month extension applies to every contract period, not just a termination of the contract.


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