Be Smart When Self-Funding

By Adam V. Russo, Esq.

(As published in Thompson Information Services’ Employer’s Guide to Self-Insuring Health Benefits)


While we are seeing record growth across the country, self-funding is a topic that few are familiar with, even though many participate in self-funded plans. It is an ever-growing trend in the industry, yet it is still largely a mystery to many.  The problem is that many plans that do self-fund aren’t very smart about it.  As most of you know, self-funding is a type of health benefits coverage whereby the employee pays a contribution to the employer – generally out of his or her paycheck – and the employer keeps the contribution amount as part of the employer’s assets and, in turn, provides the employee and any eligible dependents, with certain health benefits coverage . The employer pays for eligible health claims out of its own pool of assets.  As evaders of this article know, we here at The Phia Group have been self-funded for years.

In self-funding, the employer retains all risk and can purchase stop-loss insurance to  mitigate the ever present risk. As I love to preach as often as I can, self-funding lets the employer customize the benefits it provides and offer a broad framework of benefits to better its business and the quality of its employees’ lives.

States Aren’t Too Happy

As we have seen over the past few years, . It has become apparent that one of the only ways state law can affect a self-funded plan, that is immune to state law by virtue of ERISA preemption, is through the purchase of stop-loss. Many states have passed laws that attempt to regulate or limit the issuance of stop-loss insurance to certain groups, either by prohibiting the sale of stop-loss insurance to “small groups” or by setting a statutory minimum attachment point.  The attacks are happening every few weeks now, with New Mexico being the latest state to attempt to wipe self-funding from the map.

Many state regulators, backed by or following the lead of the NAIC, allege that a self – funded group is merely attempting to flout state regulations and avoid certain responsibilities under the ACA, while really they are providing nothing more than traditional insurance by purchasing a stop-loss policy with a low attachment point. The reality is that every state exchange needs healthy lives, and these lives are currently in self-funded plans.  If the states only attract sick individuals then the exchanges will fail, which they won’t allow to happen. Therefore, the easiest way to push back is by limiting or eliminating the ability to purchase stop-loss coverage. If my company could not purchase stop-loss at a reasonable deductible, we would have to be fully-insured or join the exchange.  In either situation, we would be controlled by the state and the insurance commissioner and not have any power over our own plans.  We need to fight back to ensure they don’t win this game!

At Your Own Risk

As described above, employers that choose to sponsor a self-funded health benefits plan truly do so at their own risk, intended in the most literal sense possible. To be self-funded, the employer necessarily retains one hundred percent of the risk of the payment of the health benefits claims of plan participants. The practical effect of that is many small groups simply cannot afford to self-fund; a common theory is that groups with too few employees (some say the minimum employee threshold is 500, but some say closer to 50; in every case it depends on the employees and the employer) are unable to collect a contribution sufficient to allow the employer to pay health benefits claims without bankrupting itself. While the practical solution to this is simply to charge a higher and higher contribution as necessary, both the Affordable Care Act and the general principle of making prudent business decisions prevent raising the employee’s required contribution amount above a certain level.

The bottom line is that sponsoring a self-funded plan has its risks, but it also has its rewards; while self-funding may not be the right fit for every employer, for those employers that want to be able to get creative with their employees’ benefits, self-funding is an option that can be very beneficial. If you or your advisors know how to dissect claims data, then self-funding is probably the right fit for your organization. You can analyze the information to make the right decisions, choose coverage options, and manage the risks. While the group may incur unexpectedly catastrophic claims amounts, stop-loss is designed to mitigate those claims. It is fairly rare for claims incurred by a self-funded plan to bankrupt the group.

Mind the Network Gaps!

Any instance of one document being contingent upon the interpretation of another, or by another party, lends itself to a potential gap in coverage. A gap arises in two primary situations – interpretation of a SPD and network agreement by a network, and interpretation of a SPD and stop-loss policy by a stop-loss carrier.

Gaps are prevalent in network and PPO agreements because the network retains the right to interpret the plan. Importantly for the purposes of providing benefits under the plan, the network retains no right to determine what benefits are payable to the participant (or to a provider who has been issued an assignment of the participant’s benefits); with respect to benefits payable pursuant to the SPD – which amounts to benefits payable under the law – only the Plan Administrator and fiduciaries may make coverage determinations.

When interpreting how much is due to providers under a plan, however, most networks disregard the plan’s provisions entirely and instead tell the plan how much is due. That is somewhat counterintuitive, though; the plan, after all, has been crafted the way the Plan Sponsor intended – but the network now steps in and tells the Plan Sponsor that payment must be made differently than is outlined within the plan.

The most common example of this comes in the form of “Covered Services.” Almost all network agreements define this term, and use this term to describe how much payment is due under the plan to network providers. The network and the plan sometimes differ in their interpretations of the definition of Covered Services; the network may interpret the agreement’s definition to refer to the covered service type, while the Plan may interpret the definition to refer to the covered service amount. Depending on the language of the definition, this argument may be easier for one party – but for the most part, the language is fairly ambiguous. Take, for instance, the following very common definition of Covered Services: “Health care services, which a plan is responsible for payment pursuant to the terms of the plan.”

Annoyingly, this definition both explicitly references that services are payable “pursuant to the terms of the plan” and specifies that “services” are the payable units, rather than charges. This gives rise to a popular argument of covered service type versus covered service amount. For example, if the Plan covers dialysis at 150% of the Medicare allowable rate, but a provider billed the Plan for dialysis at a rate equal to double that, the Plan may contend that charges for dialysis over 150% of the Medicare allowable are not benefits provided under the plan. Therefore, they are not Covered Services under this agreement. That argument construes the network agreement’s definition of Covered Services to refer to covered service amount. To contrast, the network may contend that if the plan pays for any charges for dialysis, in any amount, no matter how much lower than the provider’s billed charges it may be, then the Plan does, in fact, provide coverage for dialysis, and therefore it is a Covered Service under both the Plan and the agreement. That argument interprets Covered Service as covered service type.

It’s important to keep in mind that while networks differ in size and client make-up, it is almost universally the case that a network will side with the provider. This is especially certain with larger networks – and networks that have virtually unlimited resources generally have no qualms with bringing a plan to court. It is not a stretch to see why a large network may seem intimidating to a small plan, or even a small claims processor.

While gaps between a stop-loss policy and a SPD, as discussed below, amount merely to discrepancies in monies paid after the fact of payment to providers, gaps between a network agreement and a SPD have legal effects that cannot be ignored. For instance, the Plan Administrator has a duty to administer plan benefits strictly in accordance with the terms of the plan. If the plan excludes, across the board, amounts in excess of U&C, but the network attempts to force the plan to pay the provider’s full billed charges less the network discount, the Plan Administrator is faced with the choice of either violating its contract with the network by paying pursuant to the plan, or violating its fiduciary duty under ERISA by not paying in accordance with the terms of the plan. The solution to this dilemma is for the plan to contain a provision defining the plan’s payment amount in terms of the network-negotiated rate, if applicable – but the network still has the discretion to allow its providers to charge literally whatever they want, and the plan is not permitted to reduce those charges if such a provision is within a plan.

It is worth noting that the scenario described above is a major reason that many self – funded plans are pulling away from the network approach, instead opting for reference- based pricing plans, direct contracts with providers, or simply non-network plans. For non-network plans, everything remains the same, but the plan does not access a network discount. In practice, avoiding a network can prove beneficial for the plan and its beneficiaries; while network discounts range from 2% to about 25% (in rare cases), U&C provisions generally permit the plan to reduce by well over the amount of the network discount, in practice netting the provider a much smaller payment from the plan than what the plan would have been obligated to pay per the network agreement. While this may seem like the obvious choice, the reason it is not a more popular option is because the plan subjects the patient to a significant amount of balance billing if the plan only pays a portion of the provider’s bill.

Mind the Stop Loss Policy Gaps

Stop-loss policies usually have more obvious gaps than those that present in network agreements – and the likelihood is greater, in general, that these gaps will involve higher dollar amounts, simply due to the nature of stop-loss not becoming involved until the deductible is met, which is a high dollar amount.  Gaps between stop-loss policies may arise with respect to many definitions and exclusions within the Policy and SPD. Consider, for instance, the following example of exclusion within a stop-loss policy:

The policy does not cover any expenses from an act while committing or attempting to commit an illegal act or felony, whether or not the “covered person” is arrested or prosecuted.

To contrast, a common exclusion within a plan is:

Charges for services received as a result of Injury or Sickness occurring directly or indirectly, as a result of the Covered Person’s commission of or attempt to commit a Serious Illegal Act, or a riot or public disturbance. For purposes of this exclusion, the term “Serious Illegal Act” shall mean any act or series of acts that, if prosecuted as a criminal offense, a sentence to a term of imprisonment in excess of one year could be imposed…

The differences between these two exclusions are many in numbers and substantial in nature. Assume that a participant sustained injuries while driving drunk. Under the plan, such injuries are not, in fact, excluded, because the plan’s exclusion applies only to acts that could result in a term of imprisonment of one year – in other words, felonies. Drunk driving, in fact, is generally not a felony. While the plan would be forced to pay these claims, the stop-loss carrier would examine its own exclusion and easily conclude that these claims are not reimbursable.

Consider further a situation in which the participant has been caught driving while intoxicated for the fourth time – considered almost universally to rise to the level of a felony. While states generally don’t consider singular DWIs to be felonies, they nonetheless do not permit repeat offenders to continue repeating with only a slap on the wrist after so many times. The facts of this particular case, however, are as such: the participant was driving while intoxicated, but was driving lawfully to the extent of the movements of her vehicle. While driving under the speed limit through a green light, exactly as she was supposed to do, her car gets hit by a speeding car with its lights off – a car that the participant would not have seen even while sober – and when the police arrive on the scene, they acknowledge the correct cause of the accident, but still arrest the participant for her fourth instance of DWI – this time, a felony charge. That participant has committed a felony, and the plan excludes her claims, but the participant appeals, on the grounds that the plan excludes claims that are caused by the illegal act, and hers were, in fact, caused by the other driver, rather than her intoxication.

The participant is correct, and the plan is forced to pay her claims. The stop-loss policy, however, excludes injuries sustained while engaged in an illegal act – in other words, the stop-loss policy contains a temporal link, while the plan contains a causal link. In this example, it is the link itself that creates the gap; if the plan used the words “while engaged in” instead of “as a result of”, the plan would not have had to pay those claims, which was presumably the Plan Sponsor’s intent in enacting such language to begin with.

The number of cases where two or three poorly-chosen words have led to plans forfeiting hundreds of thousands of dollars is truly frightening. Ideally, plan language will match up with policy language and leave little room for claims to slip through that gap.

Employee Incentives and Skin in the Game

Giving plan participants incentives – or “skin in the game” – can provide a valuable tool to identify provider fraud or overcharging.  For instance, if the plan receives a bill from a provider for ten services, the plan sends that bill to its repricing vendor and the vendor reprices those claims. The plan then pays the claims based on the repriced amount. Everything may seem fine – but if a participant receives a copy of the EOB and calls the claims processor and informs the claims processor that two of the billed services were not actually performed, that’s certainly something that the plan should not be paying for.

While the claims processor has claims-related information, plan participants are in a unique situation to know the intimate details of the procedures for which the claims are submitted. There are some things that patients may know that the claims processor may not. Unless participants are given some incentive to report possible fraud to the claims processor, most participants will likely never examine an EOB too closely, provided the claims were paid and there is no balance billing. Providing some monetary incentive – perhaps a co-pay or deductible reduction, or a bonus check proportionate to the size of the discovery – may provide participants the proper “skin in the game” to get the participants to take an active interest into what the plan is actually being charged on their behalves .

Creative Plan Design and Direct Provider Agreements

Creative plan design is especially important for employers new to self-funding. Beyond designing a plan that complies with ERISA, PPACA and any applicable state laws, inventive language may be used to provide plan participants with essential health benefits in a cost- effective manner.  Now, more than ever, employers are aware of the potential financial benefits that come with self-funding. In addition to giving employers the opportunity to use innovative language to craft an economically sensible plan, self-funding offers something truly unique – flexibility.

Health cost containment and managed care services must be integrated with the employer’s strategy to emphasize the total value of the benefits package. It is counterproductive to cut expenses; rather, the employer should be trying to optimize quality of service to support improved health of employees – the ultimate goal. Cost containment means much more than just medical bill auditing. There must be proactive involvement in the entire treatment path if significant savings are to be generated by using the methods described below.

There are certain ways that plans can use networks without abiding by the traditional network model, which consists of many providers and lessens each provider’s steerage. For instance, with one thousand similar providers in a network, each provider potentially has only one thousandth of the total available steerage. With a custom network, though – one that is smaller and more tailored to the particular group’s or claims processor’s needs – the group can ensure that its steerage is apportioned differently and is therefore more valuable to each particular provider.

In a traditional network arrangement, the hundreds or thousands of providers in the network are all competing with one another for the same business, causing providers to raise their own costs to offset the almost nonexistent amount of steerage. That, however, is not the case with narrow networks or direct provider contracts; those providers are able to feel the effects of their steerage through a myriad of business they may not have otherwise gotten.

Plans or claims processors can negotiate agreements directly with providers. While this may not seem to be classifiable as a “network,” per se, in reality it is just a very small network, consisting of one provider and one group or one claims processor. In practice, this is the most ideal type of network for all parties involved; the provider is assured a significant amount of steerage, while the group is ensured that the provider will be willing to afford the group certain perks that it may not have in a traditional network.

Further, while network agreements generally prohibit the plan from reducing claims based on the terms of the SPD, a contract negotiated directly with a provider gives the plan much more leeway to craft its own terms and negotiate payment based on the terms of the SPD, rather than whatever the provider feels like charging. In that respect, an agreement signed between the plan and the provider directly can ensure that the plan’s cost-containment rights are protected while still securing the plan a discount on payable charges. For a provider that otherwise would not have gotten the steerage, such contracts may be desirable.

In Conclusion

Self funding may be the cool thing to do these days but it’s not right for everyone, especially those who want to treat it no differently than their former fully-insured plan.  There are serious risks that must be understood and mitigated.  Many of the ideas and options I discussed in this article must be the initial part of an overall plan review to ensure that you are doing everything possible to ensure a smooth and successful self- funded ride in insurance.  Now go out there and stay self-funded my friends!