Partially Self-funded Plans
Partial self-funding takes an unbundled approach to funding an employee welfare plan.
There are three components to any medical insurance plan: fixed cost, incurred claims and the terminal reserve. Partial self-funding enables the employer to purchase support for each of these segments a-la-cart. There are several advantages to the employer:
- significantly lower insurance premiums,
- lower state premium taxes
- greater control over claims cost
- control over the terminal reserve
- better cash flow.
The fixed cost consists of the premium for both specific and/or aggregate reinsurance.
This coverage protects the plan from excessive loss to any one individual claim or to excessive claims by the group as a whole. The specific is also known as a pooling level in an insured plan. Fees are also incurred in contracting with a third party administrator (TPA). The TPA often secures the reinsurance for the plan, pays claims, prepares utilization reports for the employer and Explanation of Benefit forms (EOBs) for the plan participants. The TPA will contract with a provider network to secure the same claims discounting and managed care support offered through a fully-insured PPO plan.
The largest cost, of course, is the claims themselves. By adjusting the benefit design and pooling level, the employer can maintain better control over the exposure to loss and the plan's fixed cost. Under ERISA, there are no costly state-mandated benefits with which to comply.
The terminal reserve is built into the premium of a fully insured plan. In a partially self-funded plan, the employer holds the reserve, earns interest and disburses only what is required to satisfy the run-off for claims that are incurred but not reported (IBNR) after the termination of the contract.
Not every employer should self-fund. First the employer must be large enough such that there is a measure of credibility to the group's claims. The firm should be well capitalized. Discipline is required in issues of eligibility, claims payment, availability of quality plan administration and reinsurance capacity.
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