Self-Funded Plans
Self-Funding In The Era Of Healthcare Reform
For Brokers, it’s a Matter Of Survival

by Mark Reynolds, RHU

This will not be your typical article about self-funding or what is often referred to as “shared funding” for medical plans. I will not try to impress you with defintions for specific, aggregate stop loss, or terminal liability. I will not try to convince you of the cash flow benefits self-funding brings. Those are important features of shared funded plans, but this is not just about those features.
It is more about how brokers will survive in the era of national healthcare reform and how the concept of self-funding or shared funding will become your new lifeline. Let me give you just four phrases included in the actual reform legislation that should send a chill up your broker’s spine, “minimum loss ratio,” “essential benefit package,” “the board,” and “the secretary shall.” What do these mean?

If you define these terms within the language of the Patient Protection and Affordable Care Act, you will start to understand that they mean the end to the way you have delivered and get paid for healthcare financing (i.e. group medical plans) and the beginning of a new paradigm for small to medium size employers. This means that you and I had better start learning how to deliver new products to our customers.

I know some will snicker at that statement as too alarmist. Some brokers may think that the carriers need brokers, so they will look out for brokers as new health plans, expense loads, and minimum loss ratios (MLRs) are developed. However, if you make your living by commission from health insurance carriers then you should take note. The changes reform promises to bring will force health plans to change much of what brokers know about their plans, the cost of benefits employers want, and the manner in which brokers are paid.

You have all attended meetings and seminars at which experts identified the basics of the Reform Act. You heard about the provisions for children, early retirees, and unlimited lifetime maximums, but did anyone explain the provision for minimum-loss ratio. Ouch, this one will hurt as carriers decide how to squeeze the revenues they need from a 20% allowance provided for groups with fewer that 100 employees. Actuaries are predicting that premiums may increase even faster because of the MLR provision. That does make sense if you do the math. If a carrier needs $100 million to operate its plan and pay all expenses, but the 20% expense allowance provides only $75 million, then the carrier needs a much larger premium number against which to multiply 20%. You can solve this with self-funding.

Self-funding traditionally consists of many components two of which are a large deductible on each covered member, called the “specific” deductible, and usually insured protection limiting the employer’s maximum cost, which is called the “aggregate.” These are the building blocks of a traditional self-funded plan. For brokers who are not active in the self-funded market, these plans can appear confusing or overwhelming. Human nature often takes over, which means that we often stay clear of products with which we are not comfortable. That must change.

Starting in the second half of 2010, the market will begin to see new variations for self-funding medical plans. We will see lower specific deductibles. We will also see self-funded plans created especially for the small to mid-size market, which means groups of two to 99. There will be an entirely new way to finance healthcare. This new generation of shared funded plans will be easier to understand and easier to present, yet give small employers flexibility in plan design and lower cost.
TPAs will introduce shared funding plans with specific deductible as low as $10,000, which has not been readily available in this market for years. We are seeing TPAs release plans with the maximum or “aggregate” protection in place with what is being called “spaggregate.” That is a clever name for combining the “specific and aggregate” protection in one product. So, it is becoming very clear that, starting in 2011, brokers will be delivering a new generation of plans created, by necessity, to help employers address the impact of reform.

But, what will happen to broker compensation? Starting in 2011, carriers will operate on just a 20% expense allowance. This means that carriers must squeeze their cost of administration (7% to 9%), marketing/promotion/GA (3% to 4%), state premium tax 2.35%, reserve/profit (5%), commissions (7%), plus a comfort margin to protect against mistakes. The bad news is that all adds up to 24.35%.

So how will carriers trim these costs to be less than 20%? If you answered agent commissions then you are correct. But do not despair because the added benefit of shared funding plans is that broker compensation is both commission and fee based. Brokers will build in a consultant fee, which will be a PEPM value. This will be paid in addition to a broker commission.

Earlier, you read the dreaded phrases of “essential benefit package,” “a Board,” and “the Secretary shall,” all of which can be defined to mean that the federal government will mandate what is to be covered, how it is to be covered, and so forth. The bill requires health plans to start reporting claims data to the Fed in 2011, which means the Fed will see very detailed claims data. If the Fed is provided claims data, it is safe to assume that it will be analyzing that data to determine what an “essential benefit package” should be. In a separate forum, it would be interesting to discuss the impact of providing claims data on American citizens to the government, but that is for another time.
Two key advantages of a shared-funded plans is that it is authorized and regulated by the 1974 legislation known as “ERISA” and it allows employers to create plans especially designed for the employer’s own population. Shared funded plans will be able to comply with directives set forth by the “Boards created by the Secretary,” but do so in the most cost effective way. In short, the employer maintains control of it cost while complying with federal mandates.

Shared-funded plans will keep brokers employed because employers will need a good consultant more than ever. Shared-funded plans will provide brokers a means to maintain their business with compensation that is fair and substantial.

The Patient Protection and Affordable Care Act is going to affect everyone in America, but for brokers and employers, that effect does not have to be completely negative. The Act creates a bigger need for brokers than ever, but brokers must be responsive and proactive. Don’t sit through another carrier or GA seminar about healthcare reform without asking the presenter specific questions that affect you, your agency, and your employer clients. In the next few weeks and months brokers should seek out carriers and TPAs that are preparing the plans that will meet the needs of your agency and clientele.

Finally, do not think, for one minute, that healthcare reform is putting you out of business. If you are a broker with five clients of 500 there is a solution for you and your clients but now is the time to get educated on shared funding.
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Mark Reynolds is CEO and president of California based BEN-E-LECT, a leading third party administrator (TPA) and innovator of Employer Driven Health Plans™ that has been providing solutions to brokers since 1996. A registered health underwriter (RHU), he has played an active leadership role in the industry for years, serving as a founding member of the Inland Empire Association of Health Underwriters and past president of the Health Care Administrators Association (HCAA). Ben-e-lect’s corporate office is located in Visalia, California.
Mark can be reached at 559-250-2000.