On April 9, 2018, the Centers for Medicare and Medicaid Services (CMS) announced that individuals and small employers can continue their transitional policies to the end of 2019; previously, these “grandmothered” plans were set to expire at the end of this year.

Groups with a transitional plan continue to play by the old rules: they can still be rated based on industry, number of employees, gender, wider age bands, and health status. Employers who have chosen to maintain their old health plans are, on average, younger and healthier than groups with ACA-compliant metallic plans.

The extended transition relief is good news for these healthier small employers, but in order to avoid the new modified adjusted community rating rules they must continue to renew their existing plans year after year. For companies that in the past may have tweaked their plan designs every year or two at renewal time, the transitional plan option can be quite limiting.

The good news is that many of these groups do have an alternative.

Self-Funding for Small Employers

In the past, self-funding was a strategy reserved primarily for large employers, but that all changed under the Affordable Care Act. Recognizing that many of the ACA rules do not apply to self-funded plans, insurance carriers and third-party administrators began to work on self-insured plan designs that even small employers could adopt without assuming a huge amount of risk.

Called level-funded plans because small employers with these policies pay the same amount every month, these plans give healthy small groups an attractive alternative to ACA metallic plans. In other words, the same groups that do well with a grandfathered or grandmothered plan might benefit from a self-funded arrangement. Small employers with metallic plans whose claims are running well will also be interested in this option. In fact, National General’s self-funded plans have the potential to offer financial savings compared to fully insured plans for healthy groups.   

With self-funding, the employer is responsible for claims up to a specific and aggregate stop-loss amount, known as “attachment points”. The employer also purchases an excess stop-loss policy to insure the risk above those attachment points. Under traditional self-funded arrangements, the total claims exposure would be too high for small-business employers that do not have enough employees to spread the risk. With level-funded plans, though, the maximum liability for small-business employers is capped at the monthly payment, which includes administrative expenses and stop-loss premium. In other words, their worst-case scenario is that they’ll pay about the same amount they might pay if they stay fully-insured.

There is an upside, though, to going self-insured: if the employer has a good year, it’s possible that the company could get a refund; the employer can share in the savings if the claims are better than anticipated at the beginning of the year.

How Self-Funding Works

Self-funding is growing in popularity, and most brokers have heard at least a little about the strategy, but those who have not yet implemented a self-funded plan may still be a little unclear about how it works. Here are the high points:

Not guaranteed issue: First, it’s important to understand that self-funded plans are not in a “market,” so the normal market rules do not apply. Specifically, the guaranteed-issue rules that apply to individual, small group, and large group plans do not apply to self-funded plans. Carriers can underwrite the risk and can decline to offer stop-loss coverage.

Community rating does not apply: Even companies with 50 or fewer employees are not subject to modified adjusted community rating. This means that the carrier can rate based on gender, apply wider age bands, and charge more based on claims experience and pre-existing medical conditions. For this reason, unhealthy groups will probably pay more under a self-funded arrangement than a fully-insured arrangement, if they are approved at all. Healthier small groups with low to moderate claims, on the other hand, could do better with a self-funded plan.

Different application process: Because the plans are underwritten, more information is required to get a firm quote than with a fully-insured plan. Groups will need to complete individual medical questionnaires and potentially provide claims reports.

Not every group gets a refund: With a level-funded plan, employers pay the same amount each month based on their maximum liability under the plan, and their monthly payment is used to cover administrative costs, purchase stop-loss insurance, and fund the claims account.

  • If the group has a bad year, your client will not owe additional money after the plan year ends. Stop-loss insurance kicks in when claims hit the applicable attachment points and cover the excess claims.
  • If the medical loss ratio is about what the carrier expected it to be, there won’t be a refund, but it may make sense for the group to stay self-insured in year two.
  • If the claims are better than expected the company can actually share in the claims savings and receive a refund check, which may be used to pay for health plan costs in the following year.  

The refund isn’t the most important thing: Some brokers and their clients may focus too much on the possibility of a refund. That is not the only reason for a group to self-fund. Self-funded plans offer some small-business employers a lower rate (and sometimes a much lower rate) than a fully-insured ACA metallic plan. Another reason may be because it gives employers some plan flexibility that they may not currently have with a grandfathered or grandmothered plan. There are multiple deductibles and out-of-pocket limits to choose from, HSA and copay plans available, and national networks that can help consumers save on their healthcare expenses.

Brokers are paid based on the maximum liability: This is important. Some agents hesitate to recommend self-funded plans because they think they’ll earn less commission; their assumption is that they are paid based on actual claims. That is not the case. Employers pay a level amount (premium equivalent) each month, and brokers earn commission based on this the equivalent. If the group has a good claims year and gets a refund at the end, the broker is not required to return any portion of his or her commission.

National General Accident & Health has a great Self-Funded Program

AHCP does have an excellent self-funded plan available to brokers through National General. To review the product brochure, click here (MA brokers click here), or give us a call today for more information.