Self-funded health care, also known as Administrative Services Only (ASO), is a self insurance arrangement in the United States whereby an employer provides health or disability benefits to employees using the company's own funds.About.com > What is a self-funded health plan? From Kelly Montgomery, former About.com Guide. Updated November 12, 2008 This is different from fully insured plans where the employer contracts an insurance company to cover the employees and dependents.
In self-funded health care, the employer assumes the direct risk for payment of the claims for benefits. The terms of eligibility and covered benefits are set forth in a plan document which includes provisions similar to those found in a typical group health insurance policy. Unless exempted, such plans create rights and obligations under the Employee Retirement Income Security Act of 1974 ("ERISA").
Health plans In the United States, a self-funded health plan is generally established by an employer as its own legal entity, similar to a trust. The health plan has its own assets, which, under the Employee Retirement Income Security Act of 1974 (“ERISA”), must be segregated from the employer's general assets. The health plan's assets are derived from pre-tax (in most cases) contributions made by employees, and sometimes additional contributions made by the employer.
The contributions to the health plan's assets are required to be immediately segregated from the employer's general assets. Any claims incurred by plan members in excess of the amount contained within the health plan's pool of assets are the sole responsibility of the employer. The employer, in that case, must deposit its own funds into the health plan's trust account sufficiently to fund any outstanding claims liabilities.
Health plans that cover dependents as well as employees collect contributions for dependents from the employee's payroll deductions. Similar to in traditional insurance, the plan sponsor determines the cost of health coverage and generally requires different payroll deductions depending on whether an employee elects self-only coverage, self plus spouse, self plus spouse plus child(ren), or certain other permutations as determined by the plan sponsor.
Self-funded health care allows some flexibility in structuring a benefit plan; some plans allow fewer options, for example, only a choice between self-only coverage and full family coverage, with two contribution tiers.
Designs As health care costs continue to rise, more employers will look to alternative ways to finance their healthcare plans. Consumer-driven plans have become popular recently as employers look to shift some of the accountability to employees. HSAs (health savings accounts) and HRA (health reimbursement accounts) encourage employees to shop around for the best value when considering elective medical procedures or filling pharmacy prescriptions. Self-funded plans take one step further in that they provide all claims data to employers allowing them to set up an EPO (exclusive provider organization) basically a PPO hand-selected by the organization to eliminate high-cost providers.
Prevalence Historically, self-funding has been most effective for large corporations and Fortune 500 companies with over 1,000 employees, but with the rising cost of healthcare over the past ten years at a rate of close to 10%, self-funding has become an option for smaller employers. It is now estimated that the average self-funded plan covers 300-400 employees and that, of private sector employees that have a workplace health plan, 59% were covered by a plan that is at least in part self-insured.
While some large employers self-administer their self-funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment. Third party administrators (TPAs) provide these and other services, such as access to preferred provider networks, prescription drug card programs, utilization review, and the stop-loss insurance market. Insurance companies offer similar services under what is frequently described as "administrative services only" or "ASO" contracts. In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.
Affordable Care Act The Affordable Care Act has had huge ramifications on self-funded health plans. The ACA's market reforms have invalidated many plan designs that were in use. Now that employees are required to have health insurance and many employers are required to offer health benefits as well,Dempsey, Kelly E. (July 6, 2015), Ready or Not, Here it Comes! The Employer Mandate is Finally Applicable the self-funded industry has enlarged.
In the United States, self-funded plans must comply with a number of the provisions in the ACA including dependent coverage until age 26, prohibition on rescission, and prohibition on annual or lifetime limits. However, while the ACA required coverage of essential health benefits for fully insured plans, self-funded plans are notably exempt from this requirement.
ERISA ERISA is a federal law that sets minimum standards for employee benefit plans, including pension plans and health benefit plans, in private industry within the United States. ERISA neither requires an employer to establish a pension plan, with few exceptions, nor dictates what benefits must be offered; instead, it requires that employers who establish plans meet certain minimum standards. The law is designed for the protection of plan participants, and to ensure a uniform statutory body of law regulating applicable benefit plans, throughout every jurisdiction in the country.
Plan sponsor and plan administrator There are two primary entities involved in the formation and administration of a health plan: the plan sponsor and the plan administrator. These terms are defined separately, and the difference is important.
Plan sponsor The plan sponsor (also known as the “employer” or “group”) is the entity that sponsors, crafts, offers, maintains, and funds the plan. While the duties of a plan administrator may be delegated to an entity other than the employer, the law invariably requires that the employer be considered the plan sponsor.29 U.S. Code Section 1002, accessed at Legal Information Institute
Plan administrator The plan administrator is the entity charged with general plan administration duties, similar to a trustee in the case of a trust. The plan administrator is always a plan fiduciary; the plan administrator can share the fiduciary duty with other entities, but the plan administrator is required to assume some fiduciary duty and cannot disclaim that duty. In general, the plan administrator is the employer—but new trends in the industry are seeing more and more groups outsourcing plan administrator duties to TPAs or other entities for a fee.
Employers that sponsor self-funded insurance plans often contract with a third-party administrator (TPA), which is an entity that provides ministerial services on behalf of the health plan and the plan sponsor. Traditionally, TPAs do not make discretionary claims determinations; if a determination requires interpretation of the governing plan document, most TPAs do not make it but instead require the plan administrator to provide its own determination. This is because a fiduciary duty is incurred by any entity that exercises discretion over plan assets or in connection with making a binding determination under a health plan. According to ERISA, no matter which entity is identified as a fiduciary within the health plan, any entity will be considered a fiduciary if that entity acts as a fiduciary in a given case. Plan sponsors contract with their chosen TPA by means of an agreement known as an administrative services agreement, which outlines the TPA's duties, generally including administering payment for claims, issuing benefit determinations, and distributing documentation. This agreement generally contains provisions that provide for the TPA's access to the employer's claims funding bank account, and TPAs generally charge on a per-employee-per-month fee.
Contrast to traditional insurance Traditional insurance is a method for individuals to manage the risk of their health care expenses. Individuals pay a set premium to an insurer, and in turn the insurer agrees to pay that person's eligible healthcare claims. All risk transfers to the insurer; no matter how much is racked up in eligible claims, the insurer bears the risk of paying those claims, and the insured can rest easy knowing that he or she will not be responsible.
In self-funded health care, plan sponsors have broad discretion to determine what terms will be used in the plan, as well as to decide which entities will have the authority to make benefits determinations, factual determinations, appeals determinations, and language interpretations. In traditional insurance, those responsibilities (and risks) are all borne by the insurer.
Part of every insurance premium is allocated to the payment of health claims, and part is allocated to profit for the insurance company. Profit generated by a traditional insurer comes directly from the policyholders, while a self-funded health plan is, or is funded by, a trust.
Funding Self-funding involves a transfer of risk from the employee and his/her dependants to the employer directly. Self-funded health plans pay health claims out of plan assets; there is no element of traditional insurance on these programs, and the employer assumes all additional liability for claims that have not been paid by plan (trust) assets. Some health plans have no plan assets; known as an unfunded plan, a plan with no assets is funded solely from the general corporate assets of the plan sponsor.
Plan assets can never inure to the benefit of the plan sponsor. Once funds become plan assets—whether through payroll deductions from employees or employer contributions to the plan—those assets invariably belong to the plan.Department of Labor, Technical Release No. 2011-04
Level Funded Plans offer a simpler way for small to mid size plans to budget the monthly expenses. This involves the splitting of the estimated aggregate deductible into 12 and paying this monthly. This allows the plan to avoid the cash calls that are associated with larger group plans. This additionally allows the plan owners to have a surplus of unused claims fund dollars if they are not used for plan expenses during the plan year.
Stop-loss insurance Stop-loss insurance is a form of reinsurance that insures self-funded plans and their assets.
Due to the limited assets at the disposal of an average employer as compared to an insurance company, an employer could easily bankrupt itself if its employees incur a large number of high-dollar claims and the employer is unable to fund them all. This risk is where the concept of stop-loss insurance comes into play, as it provides the employer with an additional source for funding to pay for catastrophic losses. Smaller managed care organizations also may purchase stop-loss insurance to protect themselves from the risk of catastrophic claims loss, but larger insurance companies, such as those that more commonly provide fully insured policies to employers, typically have a large enough pool of assets to be able to assume all of the risk of paying claims. Most employers, however, have a tangibly limited pool of assets.