Health Care Reform

A New Health Plan Option for Small Business: Modified Self-Funding

Benjamin Ekhaus
February 28, 2017

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Small business owners across Indiana are likely all too familiar with the challenges presented with rising healthcare costs. Like their large group colleagues, premiums seem to soar year in and year out. Small businesses, however, are not afforded nearly as many options to reduce premiums through plan design, wellness strategies, and other tactics.

For several years, businesses with 50 employees or less have been told they will eventually have to switch to being community rated. For some employers (those whose population is not as healthy as the general public), this was a welcome change. For many others, however, this meant higher premiums. Small businesses that have avoided taking on these new rates must make the switch by January 1, 2018.

Will all small businesses be forced to either accept their ACA community rates or drop group health coverage all together? For many organizations, an option called modified self-funding has provided a way to continue having the cost of their health care tied to their own plan costs.

First, understanding self-funded plans

Before we dive into modified self-funding, let’s go over the basics of a self-funded health plan.

Self-funding is an approach used by businesses to ideally better manage their health plan costs. By paying a Third Party Administrator (TPA) to handle the administration and covering the costs of their employees’ claims themselves, the business eliminates the extra cost of paying the carrier to take on the risk. Since it’s impossible to predict exactly when a major claim will occur, these companies must have enough cash flow to cover unexpected claims. This unpredictability may cause self-funding to be more challenging for small businesses. Businesses in this arrangement most often purchase reinsurance coverage to provide financial protection over an identified higher dollar amount.

In a traditional fully-insured policy, costs are broken down into four segments:

  1. Administration (cost the carrier incurs)
  2. Claims paid
  3. Risk of future claims
  4. Trending health care costs

Essentially, a carrier will estimate what they believe the rates will be based on similar employers and the demographic of the employee group. The carrier understands that if the claims are higher than expected, they will pay to cover those. This is where risk comes in to play. Paying to transfer this risk burden is costly to businesses.

What is modified self-funding?

Modified self-funding is designed to make this self-funded concept palatable for those who are more risk averse. It allows businesses to pay level premiums throughout the year. When renewal time arrives, the claims are analyzed. If the claims paid are higher than expected, the renewal will be an increase. Alternatively, if they are lower than expected after the full 12 months, the business will receive a refund for the difference between expected and actual claims.

Am I a candidate for Modified Self-Funding?

If you’re wondering whether your organization is a candidate for a modified self-funded plan, here’s a rundown of things to consider:

  1. Participation requirement. Indiana’s most popular modified-self funding program is United Healthcare’s AllSavers platform, which requires 15 lives enrolled. Some carriers will go down as far as 10, but most require 25.
  2. Financial impact. Assuming your group meets the participation requirement, the next question to consider is the financial impact. If you have not compared the cost of moving to a community rated plan during the past few years, it is fairly easy to do. If those rates are concerning, a modified self-funded plan could become a viable option. (Remember- by January 1, 2018, ALL fully-insured groups under 50 employees must move to that platform).
  3. Underwriting. Since rates are based on expected claims, underwriting plays a major role in the process. This means that to move to a modified self-funded plan, every employee must complete a thorough application (with health questions). This alone may discourage employers. All this setup work is needed just to get a quote, so it’s important to make sure it is worth the effort.
  4. Wellness program. Since rates are based on the overall health of the group, this is a great reason to introduce a wellness program. For firms looking to rationalize the cost of implementing wellness initiatives, the ability to possibly save on insurance premiums down the road may be enough to justify the investment.
  5. Level of uncertainty. Finally, even though the rates are level from month to month, there is still some degree of uncertainty with the expenses. Rates are more fluid from year to year, and while some years will see a refund get paid, others will not.
  6. Network disruption. One additional item to consider is that while there are many carriers who are selling this kind of product across Indiana, most of the networks they have teamed up with are weaker than what you and your employees may be used to. For example, Anthem does not offer a modified self-funded option (that may change in the future). Employers on Anthem plans would be looking at switching to a network with either fewer providers or lower discounts.

In summary, a modified self-funded plan could be an effective way to avoid the higher rates of a community rated plan for small businesses. In doing the research and understanding the tradeoffs, many organizations that have made the decision have saved money over the years. Now may be just the time for you to consider this type of plan for your organization.