A Broker’s Guide to Self-Funding

If you’re working the bigger group market you will run into and want to offer self-funded plans. Many brokers and employers know this method of funding employee health insurance can hold a lot of advantages over a fully insured plan:

right arrow icon   It has a flexible plan design.
right arrow icon   Renewals can actually decrease.
right arrow icon   Unspent money for claims stays in the company’s bank account.

But self-funding is not like a fully insured plan. It has terms and a funding structure you need to understand in order to successfully present your quote. We know this is a lot to digest, but please read it in its entirety.

Don’t wait, start learning more about how self-funding can help your clients


Fully Insured Health Plans vs Self-Funding

TERMS TO KNOW:

Self-funding goes by a lot of names; self-funded, partially self-funded and, less frequently, high employer deductible plans.  For our purposes we are talking about partially self-funded plans when we say “self-funding” or “self-funded”. By strict definition:

   Self-Funded Plans are usually reserved for the biggest employers who pay no insurance premiums but take on the full liability of employee claims.

  Partially Self-Funded Plans incorporate some insurance to protect the employer against catastrophic claims while the employer takes on the liability of employee claims up to a predetermined limit.

   Third Party Administrators (TPAs) are not insurance companies but manage the employer’s plan, adjudicate claims and coordinate insurance coverages in partially self-funded plans. They typically offer other services as well, such as management of COBRA.

The diagram above shows the difference between traditional fully insured plans and self-funded plans.  In a fully insured plan the employer pays 100% of all premiums to the insurance company, and while the insurance company is on the hook for all claims the carrier keeps the premium dollars not spent on claims.

In a partially self-funded plan the employer pays “fixed costs” which include a small insurance premium for catastrophic claims protection and an administrative fee to a third party administrator. On top of the fixed costs the employer will be responsible for “claims liability” up to two limits (and for which they pay that small premium to the TPA as part of the fixed costs):

  • The Specific- a cap on the dollar amount of claims per individual, after which the insurance company pays all claims on that individual.
  • The Aggregate- a cap on the employer’s liability once a dollar amount in claims has been paid on the entire group.

The total of the “fixed costs” + “claims liability” = the employer’s maximum liability (or costs) for the plan year. (This is divided by 12 monthly payments with fixed costs going to pay premiums and the TPA while the claims liability portion goes in a “bank” for the employer.) In other words, even if the employer’s workforce has a horrific year in terms of health claims, the employer will pay no more than the maximum “Aggregate” liability for the year.  Likewise, if any employee or family member had a high utilization, the employer’s responsibility is capped for that individual at the “Specific”. These are the two important ways employers are protected from paying too much in claims during a given year.

SO…

Imagine a typical plan year for a fully insured carrier. Assume an employer of 100 with an average fully insured cost of $1,000/per employee/per month, equaling $1,200,000 per year. All of that money spent in premiums the employer will never see again.

BUT…

In a typical year with an MBA Self-funded plan, the amount set aside in the bank for the employer’s claims liability is not exhausted. Unlike a fully insured plan, the portion not spent on claims remains in the employer’s bank and under the employer’s control. At the end of the year employers are free to use as they wish; take it back or leave it in the bank to reduce the following year’s claims liability payments.

But self-funding is not like a fully insured plan. It has terms and a funding structure you need to understand in order to successfully present your quote. We know this is a lot to digest, but please read it in its entirety.

Total first Year Savings!

Under a self-funded plan, assume the same employer will start the plan year with a claims experience (fixed costs of $300,000 + max claims liability of $600,000) equaling $900,000.  (NOTE:  The first year’s claims experience is typically 75% of a fully insured plan!)

Also assume that the actual claims for the entire year equaled 80% of the total possible claims liability ($600k x 80%), or $480,000.  That leaves $120,000 in the unspent bank that belongs to the employer. This is in addition to the $300,000 already saved over a fully insured plan.  In this example the total first year savings is $420,000!

FAQS

What if the total maximum employer’s exposure (fixed + max claims) is not 75% below a fully insured plan?
Remember that even if a total maximum exposure is 100% of a fully insured cost, the potential savings for that year is in the unused claims monies. Most employers will recognize the max costs and understand the potential for savings. They’ll see that even with a maximum exposure of 100% when compared to the cost of a fully insured plan, they have nothing to lose. In fact, most brokers find it’s not unusual to sell a self-funded plan with a maximum exposure 3, 5 or 10 percentage points higher than a fully insured premium because of this potential savings. (And remember that the employer’s current carrier is up for renewal – which means the cost of a fully insured plan next year will be higher than current year costs.)
What constitutes a “large group”? What employers are suitable candidates for self-funding?
Typically a large group is defined as 50+ employees. If you have a potential candidate that is slightly smaller, please contact us.
How is the Specific and Aggregate determined?
The Specific is predetermined at a level the employer is comfortable with, and is usually based on group size. Some brokers suggest a multiple per employee, such as $100. In a 100-person group this translates to a $10,000 Specific and can be adjusted from there. The Aggregate is calculated actuarially by the company offering the insurance protection. They take into account the employee census, location, any known pre-existing considerations and then add a buffer for their own profitability.
Does the employee notice a difference in their plan deductible or coinsurance?
The short answer is, “No”. Their plan documents will tell them the plan is self-funded, but unless an employer wants to change benefits the employees can have the same benefits they enjoy now.

Another benefit of a self-funded plan, however, is that benefit design can be very flexible – and these plans can cross state lines. (Self-funded plans fall under federal ERISA regulations, not state insurance commissions, making this possible.) This means an employer with multiple locations can offer the same plan and benefits to all, or tailor benefits based on locale, and still have everyone fall within the same self-funded plan umbrella.

This is especially advantageous for employers with multiple locations. Take advantage of it!

If the premiums for a self-funded plan are lower than a fully insured plan, how do I get paid? Is my commission still based on a percent of premiums?
With many TPAs you’d be right in assuming your commissions would be hurt by going to a self-funded plan with lower premiums. But MBA pays you per employee, typically $25 but you can request what you need within reason. On a 100-person group you’d make $2,500, which is in line with a fully insured commission on a group this size. And remember, the larger group market is your open door to other sales for other product lines currently offered by you or your agency!
What happens if the amount of claims coming in (before the bank is built up) exceeds the amount of claims monies available?
Self Funded PlanThis is actually an unusual scenario because of the “run-out” or “run-off” claims the prior carrier is still responsible for. (See Illustrated Example) The fully insured carrier from the previous year is still responsible for all claims incurred in that year, even if it takes several months for them to be adjudicated and paid. This lowers the liability exposure for the employer in the first few months of the new self-funded plan year.

If this is still a concern to potential employer clients, insurance can be added to the fixed cost portion of the self-funded plan to cover claims over a bank’s assets for the first few months of the year. This only adds a buck or two per employee to the fixed costs.

An Important Contract Consideration With Self-Funded Plans

12/12 15/12 12/15 what does this mean
The question of “run-out” claims raises an important distinction within self-funded plans that brokers need to be aware of. As we know, claims incurred during a plan year are still paid by the insurance company into the following year under a fully insured plan. But contracts for self-funded plans are a little more specific when it comes to “incurred” and “paid” exposure.

Typically many brokers will present a 12/12 contract in the quote for the first year of a self-funded plan, meaning claims incurred in the 12 months of the plan need to be paid within the 12 months. That leaves a lot of room for run-out claims exposure after the end of the year.

Here is how run-out claims are handled under self-funding:

You can request as 12/15 contract, which means claims incurred in the first 12 months have an extra 3 months into a new year to be paid. So even if the employer leaves the self-funded plan in the second year that employer is protected. A 12/12 contract is less expensive, but a 12/15 might be the plan to present if an employer is self-funding savvy or concerned about run-off.

Likewise, if you are taking over a self-funded plan you need to be concerned about an employer’s current contract. If the employer currently has a 12/12 or 15/12 contract you need to be concerned about run-out claims going into your new plan year. You will likely need a 15/12 contract. This pays claims incurred 3 months prior to the beginning of the new plan and year, leaving no gaps in payment. This may also be a good contract to consider in the second year of self-funding when you yourself offer the renewal.

SALES TIP! If you are in a competitive situation with another self-funded plan, and especially if this is the employer’s first year in self-funding, ask to see the competitor’s quote and bring up the likelihood that this is a 12/12 contract. Raise doubt in the employer’s mind about its suitability due to possible liability for the next year. Then present both a 12/12 and 12/15 contract from MBA; an “apples to apples” and “one deal better” comparison. With MBA your 12/15 contract will still likely be lower than a competitive 12/12 contract and you will have set yourself apart as a trusted advisor who is looking out for the employer’s best interests!

The Advantages of Self-Funding in a Nutshell:

  • The potential for employers to save money is very real.
  • An employer’s liability and expenses are capped.
  • Monies not used for claims remain with the employer, not an insurance company.
  • Employees see no difference in benefits unless the employer wants otherwise.
  • Benefit design is very flexible.
  • Self-funded plans work well for employers with multiple locations, even across state lines.
  • Renewals with MBA, for reasons we’ll cover coming up, are generally flat or decrease.
  • Brokers are well taken care of by MBA.  Commissions are typically based on a per employee dollar amount.

Related Topics

Cloud iconHow to overcome the myths, lies and heresies you may hear about self-funding.

As in every product line, you will run into competition in the larger group market. If a competing broker is unfamiliar with self-funding or is captive to a fully insured company, you may hear him or her disparage your quotes and broadcast a lot of misinformation. At the same time employers may have questions you need to know how to answer. This lesson sets the record straight and gives you the knowledgeable advantage. You’ll be able to answer every objection with fact!

 

Person User iconGetting to Know MBA Benefit Administrators.

Does is matter which third party administrator administers a self-funded plan? Don’t they all do the same things?
All TPAs offer claims adjudication. But MBA’s secret weapon is in how those claims are handled; how they can cut employer’s claims expenses and how this has a big impact on renewals the following year. These practices allow MBA to repeatedly offer renewals below current year costs and is a big reason the average client stays with MBA for 12 years…unheard of in the health insurance market. That’s good for employers – AND YOU!

Further Actions to Take Now:

right arrow icon    If you haven’t already, begin building a list of businesses to call for health insurance renewals and quotes.

right arrow icon    Click on this link. You’ll be taken to a page just for brokers. Once there you’ll find two things:

 

  1. A whiteboard presentation presented by Phyllis Merrill, CEO of MBA Benefit Administrators.  It is a recap of what we just covered, presented in front of employers.
  2. HIPAA Compliance Training:  Regulations within the Health Information Portability and Accountability Act are a big deal and you will constantly run into HIPAA in the larger group market.  We offer HIPAA compliance training to protect you and us. Each of the two 15-minute videos includes a 10-question quiz you must pass to sell for MBA.

Contact Us

Learn more about how The Open Solution™ offered by MBA Benefit Administrators can work as the healthcare advocate for your organization. We provide medical case management, third party administration, fiduciary protection and  auditing and re-pricing services that bring your organization big savings. You are making a decision to contain your medical expenditures, and protect your financial interests while maintaining a high quality care for each and every plan member. You are not alone in the quest to provide necessary benefits and to navigate to pitfalls of the healthcare industry. We’re with you every step of the way!


About The Open Solution™ | Cost Savings Estimator | FAQs | Success Stories | Contact Us

Phone: 855-743-6070 (toll free)
801-743-6070 (local)
Mail: P.O. Box 57340
Salt Lake City, UT 84157-0340
Email: info@theopensolution.com

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Abraham Lincoln said, “Our commitment is what transforms our promises into reality. It is our words that speak boldly of our intentions, and our actions which speak louder than words. It’s being on time when we promise. It’s coming through time after time, year after year after year.” And that is our commitment to you.

Mission Statement

“As a team of professionals, we are committed to delight those we serve with quality service, excellent performance, and respect for their individual needs. We are dedicated to fostering an environment of productivity, job satisfaction, harmony, and a willing attitude. We are committed to the highest standard of honesty, personal integrity, and fairness.”

 

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The Open Solution Founder Phyllis Merrill

 

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We're neighbors you can talk to...
Where else can you get a direct line to a claims adjudicator, plan manager or even the President of the company? Only at MBA Benefit Administrators. We’re the big third party administrator for health plans with personal service that you can only wish others would provide. Like talking to a friend over a fence, we have that neighborly feel…but we provide world class advantages.
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…and we prove real solutions do exist for escalating healthcare costs.
We’ve received national kudos for our multiple, proven strategies which reduce claims and plan costs without harmful benefit reductions for our clients’ employees. Proof of MBA’s effectiveness in this is in the numbers. Our clients see:

  • An immediate average reduction of up to 25% in maximum health plan costs the first year,
  • Flat renewals after that, and because of this and our commitment to impeccable service…
  • Our clients remain with us an average of 12 years…an unheard of accomplishment in the health insurance industry.
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With “outside the box” flexibility in health plan administration…
Since 1987 MBA Benefit Administrators has successfully served large and small employers, public entities, associations, tribal nations, school districts, non-profit organizations and insurers. We have the capability to administer anything from single-plan 25-life groups to complex employee organizations with multiple medical, dental and vision benefits or employees in multiple states. We also provide a wide array of ancillary services such as COBRA and HIPAA administration and HSAs. When you discover:

  • The depth of our experience
  • The flexibility we offer in benefit design
  • Our commitment to technology to make your life easier
  • Our can-do attitude toward service

 

…we’re confident you too will see why MBA is a national leader in third party administrative healthcare benefits.

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…and state-of-the-art technology for painless administration and integration of services, we make your life easier.
No one thinks about making your life easier and more efficient than MBA Benefit Administrators. Our technological investments are totally integrated across services so that employees and employers – with HIPAA-compliant and appropriate need-to-know safeguards – can view at a glance their standing for benefits, claims, plan reporting and other services. These advancements provide:

A Comprehensive On-Line Enrollment Wizard: Employee self-enrollment or HR department enrollment methods, including ancillary program enrollments and billings.

HR On-line Capabilities: View, adjust and approve on-line employee eligibilities; check claims status, print reports and plan documents all from one place.

Multiple Employee Access Channels: Employees can view on-line their claims status, eligibility and account balances of reimbursement plans such as HRA, HSA, Flex and Executive Reimbursement plans. In addition, we offer all employees our MBA App, where they can:

  • Carry a virtual ID card,
  • Check on the status of a claim,
  • Submit secure documentation to MBA,
  • Contact our support team,
  • …and more!

On-line Document Management: In one place view specific documents such as:

  • Plan Documents
  • Temporary ID Cards, and
  • Employee Communications and Forms

HSA Services Integration: MBA seamlessly integrates HSA plans with HealthEquity Services. Claims information is electronically transferred from MBA’s claims system to HealthEquity employee accounts. There is no need for paper claim filing or second-guessing the eligibility of expenses. Even employee eligibility is updated through MBA data feeds.

HRA Reimbursement Plans: MBA’s administration processes allow clients and their participants to rely on accurate and timely processing of reimbursements. Eligibility, billing and remittance of claims, integrated scanning and storage allow for real-time remote access.

Section 125 Flexible Spending Plans: MBA Benefit Administrators coordinates with employers to offer Section 125 Flexible Spending administration and help employees save money on medical expenses. Providing this benefit for your employees is like getting a 30% discount on Medical Premiums, uncovered medical expenses and dependent care.

COBRA Administration: MBA Benefit Administrators can handle all of your COBRA requirements. We will mail and track notifications, coordinate COBRA payments, receipts and reporting and ensure claims match “paid through” dates, plus give you on-line access to all activities.

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At MBA employers are cared for too…
MBA goes the extra mile to ensure that as an employer your health plan does not complicate your life. We give you things like:

  • Business intelligence for advanced reporting and critical analysis of your plan’s performance, costs, payouts, claims analysis and large claims submitted for insurance.
  • Billing and Funding services integrated with enrollment, customized to your specifications and handled electronically.
  • Account balancing systems produce cost accounting reports and perform bank reconciliation activities, available for review at any time.
  • And the ability to review multiple reports regarding your plan; check registers, active employee reports, YTD recaps, claims reviews and lots more.
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...with powerful health care and claims management systems to save them money.
We believe your investment in a health plan should be treated like any other aspect of your business, with upfront knowledge of the costs and all attempts to weed out waste. MBA saves employers more than nickels and dimes with many methods of management, including:

Metrics Based Pricing: Why rejoice over a 30% discount on a claim that is 1000% too high? Metrics Based Pricing reduces claims to a “cost of service + reasonable margin” level by auditing claims for unfair markups and inaccurate or fraudulent billing. This results in an average $1500 per employee savings – AND WE DO IT WITHOUT RESTRICTIVE NETWORKS!

Medical Management Services: Proven to reduce hospital admissions and the average length of stay.

HealthSteps™: Wellness plans and initiatives that do make a difference in the overall health of your workforce and drive down health claims.

Prescription Benefit Management: With an average reduction of 9.4%.

Internet Prescription Bidding: Allowing employees to save up to 87%.

Actuarial Projecting: The projection of benefit costs and savings is one of our underwriting core competencies. Go ahead – suggest benefit changes, add or drop a plan component, change eligibility: MBA will accurately determine the financial impact on the plan and offer suggestions to tweak the benefits to suit your objectives. We offer the facts then you call the shots.

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1. It’s an “easy in”.
Almost every larger employer (50+ employees) annually shops their company’s health insurance. Rapidly rising rates and diminishing benefits have traditionally caused them to shop this aspect of company insurances more than any other.

With very little work this easily opens a lot of doors you wouldn’t otherwise get through. Furthermore, local employers like local expertise. They welcome the neighborhood broker who can answer service questions or help with the employee enrollment process. All you have to do is be ready with competitive products at the appropriate time.

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2. Group health opens the door to other profitable sales.
There are a lot of needs that are begging for solutions within the corporate world, whether that world employs 50 or 5,000. CEOs and business owners want to retain key employees or prepare themselves for the future. Employees need guidance during life changes, such as an impending retirement, the buying of a new house or the birth of a child.

If you wander the halls of your group clients under the guise of service, you’ll be surprised what you uncover and how much more you can sell – just because you’re accessible.

With very little work this easily opens a lot of doors you wouldn’t otherwise get through. Furthermore, local employers like local expertise. They welcome the neighborhood broker who can answer service questions or help with the employee enrollment process. All you have to do is present your own insurance lines and solutions – the same products you currently sell – when the need arises…and it will!

• Key Person Insurance
• Buy/Sell Agreements
• Deferred Compensation
• Disability
• Estate Planning
• Retirement Plans
• P&C Products – Both Business and Personal

…the list could go on and on. MBA doesn’t provide these products, but with the group health business already captured you’ll be in a position to favorably present your own policies and services.

Each easy cross-sell has the potential to be very profitable as now you, the group health broker, are a trusted resource. Make one sale and it won’t be long before everyone wants to talk to you just because you are the tacit face of insurance within a group client’s company.

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3. The larger group health market offers long term financial stability.
It is a proven fact that the more products you have in place within a group the less likely it is that some other broker will be stealing your business. With a competitive group health plan, a passion for service and additional products in place, employers think twice about switching brokers. MBA, for example, has an average client retention rate of 12 years.

Group health is rarely a stand-alone product. With today’s tax codes a group health plan almost always immediately calls for HSAs, COBRA administration and the like. In addition you’ll be finding a lot of ancillary sales.

That’s a good, stable building block for a broker’s income. Year after year the same commission is paid the broker and year after year the deep well for cross-sells keeps on giving.

In the meantime, adding new groups just keeps the broker’s income growing to the upside.

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4. Commissions are recurring and high, perhaps higher than any other product line.
To put things into perspective:

• What’s the average commission on a home owner’s or auto policy?
• How often do you dig up on your own a million dollar life policy or high 6-figure annuity?
• How easy is it to scrape up new business?

Contrast that with the group health broker. MBA, for example, pays brokers handsomely (on average $25 per employee per month) for every group they sign up. On top of this are your multiple cross-sells for several product lines. With a good base group health income and constant cross-sells, a commission from one group can rack up quickly.

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