Self-funding health plans allows employers to control costs by directly paying employee medical claims rather than purchasing insurance, potentially saving 10%. However, it also exposes employers to significant financial risk. To reduce this risk, employers should utilize strategies such as purchasing stop-loss insurance, managing high-cost services separately like transplants, specialty drugs, and dialysis, and encouraging employees to properly manage chronic conditions. With the right precautions and management of outlier expenses, self-funding can help lower costs while mitigating financial risk.

1. In an era of rising health insurance costs and new mandates built into federal reform, employers
of all sizes are discovering the advantages of controlling their own destiny with self-funded
ERISA health plans. With a large pool of employees, the employer could expect to save about
10 percent by paying medical claims directly rather than purchasing fully insured coverage. The
key is to pick the right partners, address outlier risk with stop-loss insurance, and rigorously
control costs.
Strategies to Reduce Risks
Self-funding may sound scary to some employers, especially in a climate of high-cost medical
care. A recent study found that the rate of $1 million medical claims in 2000 was less than one
per every million covered members; by 2005, the rate was 11 claims per million.1 Many
companies cannot afford to take the chance of having an employee need high-cost services.
Here are six strategies to reduce the risk an employer takes on when it self-funds:
1. Use stop-loss insurance. Stop-loss insurance is designed to allow self-funded employers to
protect themselves from excessive medical costs. A specific stop-loss policy provides coverage
for an individual employee whose medical care claims exceed a ceiling established by the
employer, such as $100,000 or $125,000. An aggregate stop-loss policy addresses an
employer’s total expenditures for health care by establishing a ceiling, such as $1 million.
2. Cover organ transplants separately. With the number of organ transplants rising, it may
make sense to purchase transplant-specific insurance. At the end of 2007, more than 180,000
people were living with a functioning transplanted organ – a 50% increase over 1999.2 Today,
more than 100,000 people are registered on an organ waiting list. Costs to treat transplant
cases can range from $260,000 for a kidney to more than $1 million for a heart-lung transplant.
Having a separate policy to cover these expensive, life-saving procedures protects the
employer from unexpected costs.
3. Address specialty pharmaceuticals. A 2009 study found that almost 300 drugs are now
classified as specialty pharmaceuticals – largely expensive medicines that treat cancer,
hemophilia and other chronic diseases – by most health plans.3 The cost for a single patient
over the course of a year can range from $5,000 to $300,000. Contracting with a
pharmaceutical benefits management team that specializes in this area can reduce costs by
obtaining discounts, eliminating the “buy and bill” approach that allows doctors to charge a
markup, and using rigorous utilization review.
4. Manage dialysis treatment carefully. Both the number of people and the costs associated
with end-stage renal disease are rising. In 2007, about 111,000 new patients entered treatment
for end-stage renal disease and 365,000 people were undergoing dialysis.4 Public and private
spending on treatment reached more than $35 billion. Because the typical dialysis case can
cost between $30,000 and $50,000 per month, self-funded employers may find it beneficial to
contract with dialysis management specialists to control costs. Techniques include invoking
Usual and Reasonable rates to reduce invoices, helping to arrange for home dialysis when
appropriate, and obtaining discounted pricing for the anemia-fighting drug Epogen.

2. 5. Encourage employees to manage chronic conditions. Estimates for the nation’s annual cost of
chronic conditions, such as diabetes and cardiovascular disease, range from $174 billion
to $403 billion. Costs can be reduced when patients carefully follow their doctor’s instructions.
For example, studies have shown that diabetic patients who properly comply with their
treatment plan 80 to 100% of the time have less than half the medical care expenses of patients who only
comply less than 19% of the time. Self-funded employers can hold down the cost of chronic disease by
arranging for patient focused case management and offering wellness plans that reward employee
participation.
1 “Unprecedented Growth in Catastrophic Claims May Leave Health Plans Exposed,” Evergreen Re, undated press
release,
http://www.evergreenre.com/news/news-claims.htm.
2Wolfe, R.A.; Roys, E.C.; and Merion, R.M., Trends in Organ Donation and Transplantation in the United States,
1999-2008, American Journal of
Transplantation 2010, 10 (Part 2): pp 961-972.
3 Hargrave, Elizabeth; Hoadley, Jack; and Merrell, Katie, Drugs on Specialty Tiers in Part D, February 2009, pp 10.
4 Kidney and Urologic Diseases Statistics for the United States, National Institutes of Health,
http://kidney.niddk.nih.gov/kudiseases/pubs/kustats/, April
2010.
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contained herein is for general guidance of
matter only and not for the purpose of
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information provided herein is provided with
the understanding that the authors are not
engaged in rendering legal advice. You
should contact an attorney to obtain advice
with respect to any particular issue or
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