Editor’s note: Tips from the Pros is a reader service of Worcester Sun. The opinions and views expressed, and the advice offered, are solely those of the author.
Massachusetts has a rich history. Since its founding, the United States routinely found its path lain out before it by the Commonwealth. From rebellion and the Boston Tea Party to government-monitored health insurance exchanges and RomneyCare, it often seems that where we go, others follow.
How odd, then, that Massachusetts lagged behind much of the nation when it came to self-funding our health benefit plans.
Until recently, that is.
A self-funded health plan is when an employer sets aside some of its funds to pay for employees’ medical expenses. Employees then contribute to the plan rather than pay traditional premiums.
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A self-funded employer enjoys the following benefits:
- Plan Control — Choose what to cover and exclude, customizing the plan to be generous where your particular membership needs it, and stingy where it doesn’t.
- Interest and Cash Flow — Funds are in the employer’s hands until they’re needed, meaning interest on those assets belongs to the employer.
- Federal Preemption and Lower Taxes — The Employee Retirement Income Security Act of 1974 states that a private, self-funded health plan is administered in accordance with its terms and federal rules. So, these plans aren’t subject to conflicting state health insurance regulations or benefit mandates.
- Data — Employers can examine the claims data, study trends, allocate resources and form partnerships to address their needs.
- Risk Reduction — Reducing risk and costs directly impacts the employer and employees. Risk posed by other populations doesn’t impact the plan — so employees have lower single and family premiums than those with fully funded insurance.
Overall, a self-funded plan sees net savings over a three- to five-year span, compared to a similar fully funded insurance policy.
Yet, there are risks. Among them: the threat of catastrophic claims, inability to fund claims, and new fiduciary responsibilities to members of the plan.
Most self-funded health plans purchase “stop-loss” — a form of reinsurance that reimburses self-funded plans for claims they pay beyond a deductible. This means the self-funded plan is responsible for all medical bills, regardless of whether stop-loss reimburses or denies the plan’s request.
Finally, a self-funded employer acts as — or appoints — a plan administrator, who is a “fiduciary” of the plan and its members. Law dictates the fiduciary must act prudently, protect the plan and apply its terms judiciously. Failure to comply with these terms, mismanaging plan assets or doing something not in the plan’s best interest could expose the plan sponsor to claims of fiduciary breach — and steep penalties. Fortunately, third-party organizations exist to step in, aid in decision-making and act as a fiduciary — indemnifying the self-funded plan administrator.
Now that we’ve clarified what self-insurance is, we can discuss its resurgence in the commonwealth of Massachusetts.
Healthcare is expensive. Premiums are skyrocketing. And Massachusetts isn’t immune to this trend. A recent report cited by several outlets said healthcare costs in the Bay State increased to $8,424 per person — a four percent spike from the previous year.
Small businesses in particular saw a few weeks ago that their premiums would jump — for some, by double-digit increases. Furthermore, 4 in 10 small business owners admit they’ve had to turn away quality candidates because of rising insurance costs.
Massachusetts employers faced a decision. They could purchase less expensive insurance policies (with high deductibles, copays, narrow networks, and limited coverage to shift costs to employees), cease offering insurance entirely (paying a penalty and forcing employees to purchase their own individual policies on the exchange) — or self-fund.
For smaller employers — with 50 or fewer lives — self-funding can be daunting. If one employee in a 10-person firm is stricken with a very costly disease, the contributions from the company and the other 9 employees won’t be enough to bear the cost.
But with healthcare costs skyrocketing, smaller Massachusetts employers are realizing they need to take a risk and self-fund, or give up on providing health benefits to their employees.
Many are giving self-insurance a chance. Reports indicate the rate of self-funding jumped nationally by nearly 20 percent since 2000.
Massachusetts dived in, becoming the state with the highest rate of self-funding in the nation. Three out of four Massachusetts workers were self-funded by the end of 2011, according to the Society of Human Resource Management, with a 13 percent jump in self-funding by employers of 50 to 1,000 lives.
How has it worked for these employers?
A Central Massachusetts ski resort, with 70 full-time employees, self-funded 10 years ago and hasn’t looked back. They self-fund because it keeps the plan affordable — they don’t have to raise employee copays, deductibles or contributions from their paychecks.
Likewise, a 40-life tire sales company decided to self-fund six years ago. As a franchise with locations all over the Bay State, including in Worcester, they want to ensure self-funding remains the best deal for them. So they shop for traditional fully insured coverage every year — but haven’t found a better way to pay for their health care. They haven’t cut benefits to their employees in the last four years.
My own company made the decision to self-fund our health plan a decade ago — at the time having less than 100 lives. In that time, our contributions dropped drastically from the premiums we’d been paying — by nearly 30 percent in two years. Since then, they haven’t increased by more than a few percentage points annually and we’ve yet to submit a single stop-loss claim.
Will all Massachusetts employers experience the same success? Likely not. But the fact that our state now sports the most self-funded population in the nation, and the rate is not slowing or reversing, is a good indicator that the method is working for the majority of Bay State employers.
Not only does it work for Massachusetts, but this trend suggests this may be a window into the rest of the country’s future reaction to Obamacare. Massachusetts once again serves as a crystal ball, and in this instance, the future is bright.
Ron E. Peck, Esquire, is senior vice president and general counsel at The Phia Group, LLC.