Self-funding is only the beginning

The cost of health insurance is directly related with the cost of actual health “care”, and as health CARE costs continue to rise in the U.S., health insurance premiums follow a similar trajectory.

This trend is prompting more and more employers to explore and transition to a self-funded plan arrangement, which is where “stop-loss insurance” plays a key role. Self-funding requires more knowledge and understanding of risk, risk management, population health management, benchmarking, and cost-containment, but the financial rewards can be significant for employers and their employees.

Stop-loss insurance does exactly what it says……it stops financial loss on specific claims, and on aggregate claims. Therefore, there are two types of stop-loss insurance that most self-funded employers purchase; SPECIFIC stop-loss, and AGGREGATE stop-loss. I’ll quickly explain each:

SPECIFIC stop-loss

This excess risk coverage deals with a high claim for a single individual person. It’s protection against one person’s large claim risk. Think cancer, or premature twins, or an extended hospital stay for a single employee. This coverage comes with a “specific deductible” amount, which is the amount of financial risk the employer takes on for any one employee. Amounts vary, but typically range from $35,000 for smaller employers, up to over $1M for large organizations. So, if a single employee were to have a very large medical bill, the employer pays up to the specific deductible amount, and stop-loss insurance begins reimbursing the employer for losses beyond that amount.

AGGREGATE stop-loss

Aggregate coverage is also designed to limit claim exposure to a specific amount, but this deals with numerous claims on numerous covered members, up to a certain amount. Here’s how it works. Remember that each member has a specific deductible, and for this example, let’s say it is $50,000. All claims on all members under this $50,000 specific deductible are applied to what is known as the “aggregate attachment point”, which is an accumulation of everyone’s claims put together. Collectively, if the groups claims exceed this “attachment point”, stop-loss will reimburse beyond that amount.

Aggregate stop loss puts a cap on the amount that a self-insured employer has to pay across an entire plan year, which helps the employer budget for its healthcare costs with some level of accuracy, since the aggregate puts a dollar figure on its maximum potential claims liability for the plan year.

Few companies, outside some very large corporations, can truly be 100% “self-insured” and able to absorb ALL claims that members incur. This is why companies buy both specific and aggregate stop-loss coverages. So, when companies tell me things like, “Self-funding is too risky”, well, risk is also insured under a self-funded arrangement, and to me, it’s the only vehicle employers have to give themselves a chance to win!

Here’s what I mean. If an employer is fully-insured, and their annual premiums are $100,000, that is a guaranteed loss of $100k, no matter what the claim experience looks like. On the other hand, if the maximum liability under a self-funded plan is also $100k, and claims are $50k, then the employer, not the insurance company, retains the windfall. To me, the “riskier” of the two is a guaranteed loss of $100k!

So why aren’t more employers embracing self-funding?

Well, they are. Today, 64% of covered workers are enrolled in a self-funded health plan, and stop loss premium has grown to more than $26.8B in 2021. But I get the question. To me, employers have simply lacked the proper education when it comes to self-insuring their benefits, and that all begins with a good understanding of how stop loss insurance actually works.

Self-funding sounds scary in a way, but what really sounds scary is simply accepting your 8%-15% annual premium increase on your health insurance plan year over year, with no control, no access to data and information, and a guarantee that you’ll lose 100% of those premium dollars each and every year, no matter what your loss ratios were! That sounds scary folks!

Self-funding is a vehicle for risk management, and believe this or not, health care risk CAN BE better managed. Employers CAN have a little control over what gets paid for health care related goods and services. But this begins with a mindset shift, and a basic understanding of how stop-loss works. It’s not any more “risky” than being fully-insured. In fact, my experience has been that brokers who tell their clients that self-funding is “too risky” before they’ve done a feasibility analysis, are typically saying so because they do not fully understand self-funding themselves. Let’s be honest, for brokers, self-funding means more work, more complexity, and usually less money in their own pocket. Just a fact.

Secret Sauce to Self-Funding

As I mentioned, self-funding is simply a vehicle, it is not a solution in and of itself. Many employers may say, “Ok, I’ve gone self-funded, I’m done, time to save a lot of money”, but in reality, self-funding is just a vehicle to help an employer manage risk. It is within this “risk management” atmosphere that an employer has a chance to save money, by better managing risk (loss).

For example, if an employer, or their broker/advisor, knows that a covered employee just got prescribed a very expensive medication, that creates the opportunity to find a less costly solution for that medication. One pharmacy may sell it for $1000/month, while another may sell the exact same prescription for $600/month. In this example, the employer has mitigated $400/month of risk.

The more proactive and aggressive an employer becomes in managing risk, the more savings can be generated by the plan and the covered employees/members. So, cost-containment and risk-management really are what self-funding is all about; the employer’s ability to manage the frequency and the severity of claims.

Josh Butler

Josh is the President of Butler Benefits & Consulting. Passionate about healthcare reform and helping employers save money while improving the quality of employee benefits.

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