In a changing healthcare landscape, employers are increasingly considering taking the funding of their healthcare benefits into their own hands. If you're one of them, this webinar is the one-hour guide you must see. Participants will learn: - The legal implications associated with self-funding - Common administrative pitfalls - Solving employee issues involved in self-funded plans - A full overview of laws and regulations governing self-funding Our compliance expert will weigh in during a compact, one-hour guide.

2. Factors of Self-Funding: Mar. 20, 2018
The Pros and Cons
of Self-Funding
Health Coverage
BY
LARRY GRUDZIEN
ATTORNEY AT LAW

3. Factors of Self-Funding
Pros and Cons of
Self-Funding Health Coverage
• Self-Funding: What is it?
• Self-Funding in the Marketplace Today
• Fully Insured Model vs. Self Funded Model
• The Mechanics of Self-Funding
• Self-Funding Scenarios
• The Pros and Cons of Self-Funding
• PPACA: Impact on Self-Funding
• Financial, Plan Design and Legal Compliance Considerations

4. Factors of Self-Funding
What Is
Self-Funding?
• When an employer group wants to offer health benefits to their
employees, but does not want to pay an insurance company.
• Instead they take the place of the insurance company
and “self insure.”
• Two levels of Self-Funding
• Fully Self-Funded
• Group retains all the risk – they do not purchase stop-loss
• Usually reserved for “jumbo” cases
• Examples: Microsoft, Walmart, General Motors
• Partially Self-Funded
• Employer purchases insurance policy to take part of the
risk
• On a smaller scale a HDHP with an HRA is an example
• Traditional self-funded plans purchase stop loss coverage.

5. Self-Funding in the Marketplace Today
Percentage of Covered Workers in Partially or
Completely Self-Funded Plans, by Firm Size, 1999-2016

6. Percentage of Covered Workers in Partially or
Completely Self-Funded Plans, by Firm Size, 1999-2016
Exhibit 10.2

7. Percentage of Covered Workers in Partially or
Completely Self-Funded Plans, by Plan Type, 1999-2016
Exhibit 10.3

8. Factors of Self-Funding
Mechanics:
Benefit Design
• Plan Document and Summary Plan Description (SPD)
• In a self-funded health plan, the employer, with the assistance
of their broker or consultant and attorney, creates, defines and
establishes a benefit plan for its employees.
• For groups that are currently fully insured the new plans are
normally modeled after their current fully insured plans.
• Self-funded plans are governed by ERISA (Federal law) and are
not subject to State mandates.
• Groups have great flexibility in plan design

9. Factors of Self-Funding
Who Are
the Players
• The Plan Sponsor
• Consulting Services
• Legal Services
• Actuarial Services
• Accounting and Auditing Services
• Stop-Loss Insurer
• Third Parties Providing Administration Services
• Third Parties Providing Specialized Plan Admin. Services
• Provider Networks

10. Factors of Self-Funding
Mechanics:
Paying Claims
• Self-funded employers can either administer the claims in-
house, or subcontract this service to a third party administrator
(TPA).
• TPAs can also help employers set up their self-funded group
health plans and coordinate stop-loss insurance coverage,
provider network contracts and utilization review services.
• Third Party Administrators (TPA)
• An Important Distinction: Bundled ASO vs. Unbundled
Independent TPA

11. Factors of Self-Funding
Mechanics:
Paying Claims
• TPAs provide many services to the employer including:
• Claim and Premium Administration
• Reporting
• Plan Document Creation
• Stop Loss Integration
• Cost Containment Features/Vendors
(in house or sub-contracted)
• PPO Access
• COBRA/HIPAA Administration

12. Factors of Self-Funding
Mechanics: PPO Networks
for Medical Claims
• Physician Networks (PPO)
• Self- funded health plans will typically “lease” a PPO network in order to
provide their employees access to physician and hospitals, as well as
reduce the risk to employer’s claim fund by taking advantage of
established PPO network discounts.
• Items to consider:
• Robust and easily accessible to its members
• Discount structure and payment timeline
• TPA integration
• Accurately priced by the stop loss carriers
PPO Network Service Type Charge Allowable % Off Billed
PPO A Outpatient Hospital $1,614,407 $607,264 63.4%
PPO B Outpatient Hospital $1,614,407 $757,724 53.1%
PPO C Outpatient Hospital $1,614,407 $957,724 40.7%
Referenced Outpatient Hospital $1,614,407 $386,021 76.1%

13. Factors of Self-Funding
Mechanics: PPO Network
for Rx Claims
• Pharmacy Benefit Management (PBM)
• A PBM is essentially an Rx TPA married to a Rx PPO network.
• Provide access to most major pharmacies
• Negotiate discounts on a employer’s behalf
• Manage formularies on behalf of employer (provide
recommendations)
• Many offer mail order and specialty drug programs
• Examples: Express Scripts (Medco), CVS Caremark, OptumRx,
Med Impact, Restat
• Most TPAs contract with numerous PBMs and are willing to
integrate the Rx claims information in their monthly reporting
and stop loss filing.
• Cost saving opportunities: Rebates and Plan Transparency

14. Factors of Self-Funding
Mechanics:
Cost Containment
• Employers can also add numerous features to help manage
both the frequency and severity of claims.
• These programs are typically called cost containment.
• Disease Management
• Utilization Review and Management
• Case Management
• Bill Audit and Review Services
• Out of Network negotiation
• Patient Advocacy
• Tele-Doc Services
• Specialty Care Vendors: Dialysis, Hemophilia, etc.
• Wellness Programs
• TPAs and PPO networks will typically provide some of these
features.

15. Factors of Self-Funding
Mechanics:
Stop-Loss Insurance
• Since the employer is accepting the financial responsibility for
the medical claims there are two main concerns.
• Large Claimants
• Over Utilization
• Stop-Loss insurance provides protection against both scenarios.
• Specific stop-loss coverage covers catastrophic claims
• Aggregate stop-loss coverage covers against “over utilization” by
providing a maximum out of pocket for the employer’s
collective claims.
• The availability of competitive stop-loss coverage is one of the
most critical components in determining an employer’s ability
to self-fund.

16. Factors of Self-Funding
Mechanics:
Stop-Loss Insurance
• Specific Stop-Loss (Individual)
• Employer is responsible for all claims on every member until
the deductible is met.
• Carriers can provide various deductible options to suit a group’s
risk tolerance.
• The higher the deductible the lower the price for the insurance.
• Occasionally, specific individuals will be subject to a higher
deductible known as a laser.
• Aggregate Stop-Loss (Group)
• Claim maximum (aggregate attachment point) is normally set
25% higher than expected claims (25% corridor)
• Aggregate can be difficult to secure due to lack of claims data
• Aggregate coverage is cheap (“sleep insurance”), historically a
group has a 2% chance of hitting their maximum.

17. Factors of Self-Funding
Mechanics:
Specific Stop-Loss Coverage
• Specific stop-loss insurance (individual)
• Specific stop-loss coverage provides protection from
catastrophic losses on each individual insured under the plan.
• Example: An employer group with 250 employees selects a
$75,000 specific deductible. Employee John Smith has a heart
attack and the total claims incurred during his hospital stay
totaled $195,000.
• The employer is responsible for the first $75,000 in medical
claims incurred by John Smith. The stop loss carrier then
reimburses the employer for the $120,000 that exceeded the
specific deductible.

18. Factors of Self-Funding
Mechanics:
Aggregate Stop-Loss Coverage
• Aggregate Stop-Loss Insurance (Group)
• Aggregate Stop-Loss Insurance provides a second layer of
protection for self funded health plans intended to limit the
plan’s maximum financial exposure.
• The aggregate “deductible” is determined by the insurance
company and is regularly set at 125% of the expected claims for
the group.
• Example: A stop-loss carrier evaluates a 250 EE company’s data
and develops an expected claims attachment point of $2M.
• They then adjust it by 25% to arrive at a maximum claims
attachment point of $2.5M.
• Items to consider:
• Aggregate coverage can be difficult to secure due to a lack of
claims data.
• Aggregate coverage is not always purchased since medical claim
costs rarely exceed 125% of expected claims.

19. Factors of Self-Funding
Mechanics:
Stop-Loss Contract Options
• Standard Stop-Loss Contract Options
• Since all claims are not received and paid within the Plan Year,
stop loss is sold with various “contracts” offering coverage for
claims incurred prior to the effective date (run-in) and claims
that are paid after the policy year is over (run-out).
• Two important terms:
• Incurred (first number)
• Incurred date refers to the date the member receives care.
• This number designates the number of months qualified
claims can be incurred.
• Paid (second number)
• Paid date refers to the date the claim is paid by the
administrator.
• This number designates the number of months a qualified
claim can be paid.
• Typical turn around time from incurred to paid is 6-10 weeks.

20. Factors of Self-Funding
Mechanics: Stop-Loss
Contract Options – 12/12
12/12
Claims must be incurred and paid in the same 12 month period.
1/1/2016 12/31/2016
|-------------------------------------------------------------------|
INCURRED
|-------------------------------------------------------------------|
PAID
• A 12/12 contract has no Run-In or Run-Out protection.
• Sometimes sold with a Terminal Liability Option (TLO).
• This contract can be used to help a group transition to self
funding.

21. Factors of Self-Funding
Mechanics:
Stop-Loss Contract Options – 12/15
12/15
Claims must be incurred within 12 months and paid within 3
months following the end of the coverage period.
1/1/2016 12/31/2016
|-----------------------------------------------------|
INCURRED
|-----------------------------------------------------|-----------------|
PAID 3/31/2017
• This type of coverage is called Run-Out.
• It is also available in contracts on a 12/18 and 12/24 basis.
• Fully insured policies are on an incurred basis and typically offer
a 12/24 or greater.

22. Factors of Self-Funding
Mechanics: Stop-Loss
Contract Options – 15/12
15/12
Claims must be incurred within 15 months and paid in the 12
month coverage period.
|-----------------|------------------------------------------------|
10/1/2015 1/1/2016 INCURRED 12/31/2016
|-----------------------------------------------|
PAID
• This type of coverage is called Run-In.
• It is also available in contracts on an 18/12, 24/12, and paid
basis.

23. Factors of Self-Funding
Self-Funding:
A Fully Insured Prospect
• A prospective client currently offers (3) health plans to its
employees: HMO, Low PPO and High PPO.
• All plans are currently fully insured through a major insurance
company.
• The CEO and CFO of the organization believe that the insurance
company is making money on an annual, consistent basis off of
their workforce’s good claims’ utilization and costs.
• They also desire the cash flow benefits and plan design control
that self-funding offers.
• The broker, consultant and the client work to secure claims
data, enrollment information, plan designs, etc. so that the stop
loss carriers will have enough information to make an
appropriate evaluation of the risk.
• After working with multiple stop loss markets, the group
receives their stop loss quote(s) and now have the ability to
determine total cost scenarios including potential claims
liability, stop loss premium and plan administration.

24. Factors of Self-Funding
Real Life Scenario:
A Fully Insured Prospect
Fully Insured
Premium
$2,750,000
$1,800,000
$200,000Plan Administration
$400,000Stop Loss
$65,000PPO Access Fees
$35,000Ancillary Vendors
$450,000
Expected Claims
Risk Corridor
$2,950,000Maximum Liability

25. Factors of Self-Funding
Self-Funding:
Disadvantages & Potential Exposures
• Potential claim liability – claims can come in above expected
• Not building claim reserves – claim reserve underfunded
• Securing competitive stop loss – group size, location, available
claims data
• Looting claim reserve for other expenses - can lead to
insolvency
• Over-generous employers – exceptions are not covered by stop
loss
• HIPAA Compliance (“hands-on”)
• Nondiscrimination Testing
• Employer must maintain cash flow

26. Factors of Self-Funding
Self-Funding:
Advantages
• Control of the Plan Design
• Ancillary Service Flexibility
• Collection of Health Plan Data
• Lower Administrative Costs
• Cash Flow Benefits
• The Ability to Build Reserves
• Elimination of Carrier Profit Margin
• Reduced Premium Tax
• Avoidance of Health Insurance Industry Tax
• Mandates

27. Factors of Self-Funding
PPACA:
How It Affects Self-Funding?
• Interest is mounting because …
• It historically has been even before PPACA.
• In 1999, 44% of all employees were covered
in a self-funded environment.
• Today, that number has grown to 61%.
• PPACA requires employers with 50 or more employees to pay
or play.
• This may leave employers looking for health benefits and self-
funding is one of the more long term, cost effective approaches.
• Better strategic position to adjust benefits to control increased
provider costs.
• Fully insured premiums expected to jump to accommodate new
provisions as a result of PPACA.

28. Factors of Self-Funding
PPACA:
How It Affects Self-Funding?
• Interest is mounting continued ...
• Other considerations:
• Limited exposure to MLR rules
• Guarantee issue rule, not applicable to stop loss carriers
• Stop-loss premiums will not likely be subject to all the ACA fees
• Some additional advantages:
• “Essential Health Benefits”
• Avoidance of Health Insurance Tax (HIT)
• Most premium taxes
• State mandated benefits

29. Factors of Self-Funding
PPACA:
How It Affects Self-Funding?
• PCORI Fee & Transitional Reinsurance Fees will apply to
fully insured and self funded health plans, however self
funded health plans are exempt from both the Risk
Adjustment Fee & Health Insurance Industry Tax due to
ERISA law.
• What do the fees equal in savings for the self funded
client versus fully insured?
*For illustrative purposes only. Fee Estimates taken from the Oliver Wyman Study.
1/1/2014 1/1/2015 1/1/2016 1/1/2017
Renewal Premium $2,887,500 $3,031,875 $3,183,469 $3,342,642
Estimated HIT Fees $66,412 $98,536 $103,463 $133,706
HIT % 2.3% 3.25% 3.25% 4.0%

30. Factors of Self-Funding
Reduced Premium
and ACA Taxes
Note: Self-funded premium tax assumes stop loss premium is 20% of fully insured premium.
Fully Insured Self Funded Self Funded
Annual Premium Premium Tax
Health Ins.
Industry Tax
Total Premium Tax Savings
$1,000,000 $25,000 $23,000 $48,000 $5,000 $43,000
$2,000,000 $50,000 $46,000 $96,000 $10,000 $86,000
$4,000,000 $100,000 $92,000 $192,000 $20,000 $172,000
$6,000,000 $150,000 $138,000 $288,000 $30,000 $258,000
$8,000,000 $200,000 $184,000 $384,000 $40,000 $344,000
$10,000,000 $250,000 $230,000 $480,000 $50,000 $430,000
$40,000,000 $1,000,000 $920,000 $1,920,000 $200,000 $1,720,000

31. Factors of Self-Funding
Financial
Considerations
• Cash-Flow Flexibility
• Claim must be incurred by a participant, submitted for payment
(by the participant or the participant's provider, generally to the
plan’s TPA), approved for payment (by the TPA or other claims
administrator), and finally paid (e.g., by check or funds transfer
from the TPA to the participant or provider).
• Claims are incurred unevenly throughout the year.
• There are ways to make cash flow more regular in a self-insured
plan, such as setting aside an amount each month (perhaps
based on a fraction of the actuarial estimate of a full year's
claims cost) in an employer account, taking care not to implicate
ERISA's trust requirement unwittingly.

32. Factors of Self-Funding
Financial
Considerations
• Appetite for Financial Risk
• Employer assuming the responsibility to pay claims means
assuming the risk that claims will exceed estimates — even
estimates calculated by an experienced actuary — and that
claims could even exceed the plan sponsor's ability to pay.
• Stop-loss insurance can be an important tool for managing the
risk of self-insuring a group health plan.
• A plan sponsor purchasing stop-loss insurance pays a monthly
premium for the stop-loss coverage; after claims paid by the
plan exceed a stated amount (the policy's “attachment point”),
the stop-loss policy will reimburse the plan sponsor for covered
claims above that amount.

33. Factors of Self-Funding
Financial
Considerations
• Can Self-Funding reduce Health Benefit Costs?
• It eliminates several significant components that make up
insurance premiums (such as premium taxes and insurance
company profit).
• Overall savings are not guaranteed, because claims cost, the
most significant plan expense, is unpredictable.
• Self-insuring also avoids certain fees and compliance burdens
associated with health care reform.

34. Factors of Self-Funding
Financial
Considerations
• Can Self-Funding Reduce Health Benefit Costs?
• Administrative costs – use bundled or unbundled approach
• Claims costs – remember premiums are based an estimated
claims cost
• May have to engage actuary to prepare estimate
• An employer might prefer to pay fixed premiums, reasoning
that an insurer may be in a better position to manage its
employees’ claims risk through a broader risk pool.

35. Factors of Self-Funding
Plan Design
Considerations
• State Law Benefit Mandates
• ERISA generally preempts (supersedes) state law as applied to a
self-insured health plan subject to ERISA
• Self-insuring thus has the effect of avoiding many state-law
mandates (for example, state laws or insurance regulations
requiring child coverage to age 30 or coverage for certain
therapies).
• This affords a self-insuring plan sponsor several advantages,
including:
• consistency in benefit design when operating in multiple
states;
• greater freedom to determine eligibility rules;
• greater freedom to determine covered benefits; and
• greater flexibility to exclude or limit coverage for certain
types of claims.

36. Factors of Self-Funding
Plan Design
Considerations
• Health Care Reform
• Some health care reform provisions apply only to insurers and
insured health plans — such as the requirement to offer only
coverage that includes the “essential health benefits package.”
• The annual fee on health insurers, and certain insurance
market reforms apply only to insurers — with an indirect effect
on sponsors of insured group health plans.

37. Factors of Self-Funding
Legal and Compliance
Considerations
• Final Authority on Claim Decisions
• Greater decision-making authority on benefit claims
and appeals
• Employer can exercise control over benefit approval, interpret
plan language and decide whether a claim should be paid
• Should employer engage a ”claims fiduciary”?

38. Factors of Self-Funding
Legal and Compliance
Considerations
• Greater Control Over Plan Documents
• Employer is not “locked in” to use a particular set of document
• Can draft own or use pre-packaged set of materials
• Employer has a fiduciary responsibility to review them

39. Factors of Self-Funding
Legal and Compliance
Considerations
• More Compliance Responsibilities
• Update documents and disclosures
• Who will distribute disclosures
• Conduct nondiscrimination testing
• Comply with HIPAA privacy matters

40. Factors of Self-Funding
Legal and Compliance
Considerations
• Greater Risk of Claims Litigation
• Insured plans insurer defend claims litigation
• Think of litigation related issues when negotiating TPA, ASO
or other third party contracts

41. QUESTIONS?

42. CONTACT INFORMATION
Larry Grudzien
Attorney at Law
708-717-9638
larry@larrygrudzien.com
www.larrygrudzien.com
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