The Selection of Health Benefit Programs
Fully Insured vs. Self Insured Considerations
By: Héctor L. Moreno, CPA

In today’s business and economic environment, companies are often faced with looking at alternate funding mechanisms when renewal negotiations of fully insured health programs fail to meet expectations.  The recent changes in the health insurance industry, marked by a reduction of insurance carrier options, that have within themselves also transformed the way they operate, have contributed to the consideration of creative financial terms and conditions.  Experts will be challenged to consult their clients on the benefits, advantages, disadvantages, and risks associated with the different array of funding mechanisms that ultimately stretch between shifting or accepting exposure.  The cost to benefit assessment will be impacted in large part by the potential savings resulting from one funding arrangement over another.

Self Insured, also commonly known as Cost Plus or Administrative Services Only (ASO) is in its pure form the ultimate risk taking option.  In general terms, a company and/or organization evaluating an ASO arrangement should consider the following:

Risk Capacity

What is your tolerance related to fluctuations (i.e. 10-20%) in claim projections that have been developed based on historical utilization patterns and information known at the time in which the underwriting of the new period takes place.

Size of Group

The larger the population, the more viable Self Insured financing is for a group.  This is due to the fact that high claimants are further diluted within larger groups as compared to the same high claimant in a smaller population.  For example, a case of a claimant with a $100,000 benefit in a group of a 100 employees (assuming a per capita per employee per month of $250) represents 33% (1/3 part) of total annual claims of $300,000.  The same claim represents 16.5% of total claims for a similar group of 200 employees assuming all variables are equal.

Claims History

The more stable and/or consistent claim patterns, the more viable a group is for Self Insured group financing.  This is due in large part to the enhanced predictability in projections.  For example, if in the evaluation of claims during a five year period, (assuming variables are equal or applicable adjustments related to changes in group demographics, number of employees, benefits and non-recurrent catastrophic claims) one can establish a consistent behavior trend, more confidence can be assured in the consideration of a Self Insured program.  Nevertheless, it is important to maintain perspective concerning the size of the group, because although in the previous five year period (for example) there is an established claim pattern (modest fluctuation <10%), should a catastrophic claim occur, it will be absorbed or diluted more easily in a larger group.

Administrative Expenses

Administrative costs are typically the same in Fully Insured vs. Self Insured financial arrangements. The differences lie in the additional risk margin required by insurers for assuming enhanced exposure (i.e. financial and legal) under a Fully Insured program.  

Protection Mechanisms (i.e. Reinsurance)

Various tools for added protection exist (including -but not limited to- individual stop loss, hybrid arrangements, and aggregate stop loss), which allow for minimization of risk.  Which products and levels of risk will be determined by a combination of the items previously discussed (risk tolerance, size, variability, predictability, etc.)
Benefits / Products

The more restrictive the scope of benefits, the more viable a group is for Self Insured funding.   For example, a group offering no Major Medical coverage or a lower lifetime maximum benefit (i.e. $250,000) will have less insurance risk than a group with a $1 million lifetime maximum.  As it relates to products, a gatekeeper program as compared to open access will minimize exposure and generally be more feasible for Self Insured consideration.

Fiduciary Responsibility and Compliance

Generally speaking, with some exceptions where for an additional cost an insurer assumes full responsibility of the appeals process, the employer takes on fiduciary responsibility for compliance with local and federal regulations.  It is important to note that legal responsibility is greater and shifted to the employer under a Self Insured program as compared to Fully Insured. 

Insurance Carrier

In the selection of the carrier to manage a Self Insured program many aspects should be assessed, including contractual arrangements with providers, wellness and prevention programs, disease management, case management, utilization review, auditing, system checkpoints, etc. to maximize the most efficient management, and ultimately translating to greater cost savings.  

Market dynamics and demand will continue to promote redefining products and funding arrangements, and to a certain extent recycling of alternatives more often used in the past.  An argument can be made that as we have requested and made the consumer more participative of the process by means of cost sharing, wellness and prevention, information sharing and availability, more participative financial arrangements will evolve as new risk assessing tools enhance predictability and accuracy of claim projections.

In general, the development of new technologies for the treatment of existing and new conditions, the economy, the market, etc. have lead to more frequent negotiations of terms and conditions under fully insured as opposed to self insured.  As a benchmark, insurance companies typically recommend self insurance funding for employers exceeding 500 employees.  It is important to note that every case is different and should be evaluated and assessed on its own merits. 

*The information provided is not intended for distribution and/or any unauthorized use.
* The information is solely an observation and/or opinion based on current information at the time of publication.

Hector L. Moreno, CPA is President of iBenefits Insurance Services, LLC a licensed Life, Disability, Health insurance and Financial Services broker who advises their clients in the process of benefits procurement. Services include evaluating, assessing, and designing health benefit packages that are comprehensive and affordable.  Products include individual and group life, disability, medical, dental, drug and vision coverages.  Hector L. Moreno can be reached at 787.649.3245 or hmoreno@ibenefitsservices.com.