Self Funding Overview
Self funding is a flexible and economical method for employers to provide employee benefits. Most American employees are covered by self funded medical plans because they allow employers to pay only for those claims that actually happen as opposed to paying an insurance company for all the claims that might happen.
The process of self funding can be summarized in these few steps:
- With the help of a Third Party Administrator (TPA), employers design health plans for their companies.
- Claims are sent to the TPA where they are adjudicated similar to the process at an insurance company.
- Claims are funded by the employer and the TPA handles the printing and mailing of checks and Explanations of Benefits, as well as customer service.
- To protect against excessive claims, stop loss insurance can be purchased by the employer. This protects the employer from high claims on both individuals and the group as a whole.
The total cost of this plan is normally much less than would have been paid out in insurance premiums and has several advantages over being fully insured, including...
- Custom-Designed Plans
- Efficiency in administration
- Lower premium taxes
- Lower overall costs
Plan Sponsor: the entity who establishes and sponsors the plan. The Plan Sponsor is the fiduciary responsible for the health plan. Typically the Plan Sponsor is an employer.
Plan Participant: an employee or dependent who is covered under the health plan.
Third Party Administrator (TPA): the entity (such as Auxiant) contracted to set up and provide administration to the health plan. (In ERISA documents, the TPA is the Plan Supervisor).
Stop Loss Carrier: the insurance company, which provides specific and aggregate protection to the Plan Sponsor. (Stop loss carriers can change from year-to-year without disrupting the health plan).
Specific Insurance: the insurance that covers any claims the plan pays that are over a chosen specific deductible. Specific insurance covers each Plan Participant.
Specific Deductible: the point when the stop loss carrier begins reimbursing the health plan for claims on any one participant.
Aggregating Specific Deductible: a deductible stacked on top of the specific deductible. All claims over the specific deductible amount (from all claimants) are aggregated together toward the aggregating specific deductible. Once this deductible is met, specific reimbursement begins. Plan Sponsors can use this technique to reduce premium.
Aggregate Stop Loss Insurance: the insurance that provides the Plan Sponsor with coverage for claims in the aggregate. I.e., if claims at the end of the year, adjusted for specific insurance reimbursements, exceed the aggregate attachment point, the Plan Sponsor is reimbursed for the amount over the aggregate attachment point.
Aggregate Attachment Point: the aggregate "deductible," above which the stop loss insurance company reimburses the Plan Sponsor. Aggregate attachment points are calculated by multiplying each month, the single census times the single aggregate factor, plus the family census times the family aggregate factor.
Incurred: claims shall be considered to be incurred on the date service or supply or rendered to a covered person is actually provided.
Paid: payment of a claim shall be deemed to occur on the date when the Insureds' payment check is issued, provided that it is promptly thereafter delivered to the payee and is paid upon presentment.
Auxiant has developed strong relationships with many top rated stop loss carriers and Managing General Underwriters (MGU's). All carriers that we work with are rated A- or higher by A.M. Best, which indicates solid financial stability.
Auxiant partners with stop loss insurance companies who have sound underwriting principles, provide fair renewals, and are flexible in the quoting process. Due to the wide array of carriers and MGUs that we work with, we are typically able to find the "right fit" for Plan Sponsors.
Stop Loss Insurance consists of two types:
- Individual Specific Insurance provides protection for the infrequent, unpredictable, but potentially severe high-dollar claims.
- Aggregate Insurance provides protection for the plan against a year of unusually high claims overall.
An Auxiant representative can discuss these coverages and provide effective strategies to manage an employer's risk while enjoying the benefits of self-funding.