Are you dreading the next renewal letter and rate increases from your current health care benefits provider? Are you tired of cold calls from insurance salespeople asking when your health care insurance contract is up for renewal? Are you and your employees tired of paying more for health care benefits but getting less?

For most employers, the response to each of these questions is a resounding "Yes!" We're frustrated by continuing efforts to walk the tightrope between what's good for employees and what's financially affordable for the company.

Managed care has changed health care delivery systems in ways that have helped stabilize and, in some cases, even decrease health care costs. But concerns continue about controlling what for most businesses is the single-largest and/or fastest-growing personnel-related expense. So the question remains, what other options exist for companies to lower employee health care benefit costs?

Here's one you may have overlooked: self-funded employee health care benefit plans.

While the term "self-funded" may seem to apply to all plans - unless someone else is paying your premiums - it does refer to a specific approach that's different from the traditional fully insured health care benefit plan.

In a fully insured plan, premiums are paid each month - usually in advance to an insurance company, which assumes the risk of providing health care coverage and other administrative tasks. The employer is only at risk for the premiums, the amount of which is determined by the level of benefits purchased and on actuarial forecasts of usage and losses for the employee group.

A self-funded health care plan, also referred to as "self-insured," differs primarily in the employer's assumption of risk. The employer places a predetermined amount of money into a fund, invests the monies and uses proceeds to pay health care providers for services used by the company's employees. In doing this, the employer may be able to eliminate costs associated with an insurance company, such as sales commissions, actuarial fees, document processing and printing. Other potential savings are in reserve fund fees, state insurance taxes and the company's profit margins.

Governance is another benefit of self-funded plans. Generally, fully funded plans are governed by state laws requiring that certain basic coverages be offered by the employer. These requirements tend to increase the cost of the plan in terms of premiums and in providing benefits not really wanted or used by employees. State laws have no jurisdiction in the regulation of self-funded plans, however, so they can be tailored to the company's and employees' specific needs. In designing a self-funded plan, an employer has the option of contracting with health care providers, which helps stabilize costs.

There's an initial increase in cash flow when implementing a self-funded plan. Typically, 60 to 90 days pass from the date of service before health care claims are received, reviewed and paid. This delay creates a small, one-time window of cash flow. Another one-time cash flow window opens up because the employer doesn't prepay premiums. Additional cash flow may be realized if the previous insurance carrier established a "sinking fund" for costs and if the fund has monies that will be returned to the employer.

Cash flow and governance sound great, but what's in it for employees? On the surface, employees covered by a self-insured plan should see no difference in service. Benefits are provided and administered as in the traditional, fully funded plan. In plan design, however, employees' needs can receive more consideration. By incorporating managed-care system components - such as preadmission certification and review, mandatory second surgical opinions, outpatient pre-certification and a claims-review program - the employer can educate employees, monitor administration of health care services by providers and more effectively plan employee health care benefits.

Wow, this is great! Less regulation, lower premiums and better benefits. What's the catch? There's really no "catch," but there are issues that must be reviewed prior to actually beginning a self-funded plan.

Governance. States don't govern self-funded plans, but federal laws do. Those statutes applicable to self-funded plans include the Employee Retirement Income Security Act (ERISA), Consolidated Omnibus Budget Reconciliation Act (COBRA), Americans with Disabilities Act (ADA) and Tax Equity and Fiscal Responsibility Act (TEFRA). They control such things as reporting and disclosure, fiduciary responsibility, administration and enforcement. Appropriate expertise must be consulted, therefore, to ensure that a self-funded plan complies with federal regulations.

Risk. Health care is expensive for individuals; serious illness and injuries can devastate life savings. These same financial circumstances need to be adequately recognized and planned for by an employer's self-funded program. Should the projected risk be greater than the employer's financial commitment, the employer may opt to establish ceilings on health care benefits or acquire "stop-loss insurance" for catastrophic illness and injuries. Stop-loss insurance is costly, but not as expensive as a fully funded program.

Management. In providing a self-insured plan, the employer has the duty and responsibility to manage the plan as an insurance company would - monies to invest, booklets to print, claims to pay, plans to be administered, providers to contract with and monitor. This requires specific expertise in the form of health care benefits personnel or a third-party administrator.

It's estimated that, of 160 million employee health care plans in the United States, 100 million are self-funded. Most have at least 30 employees, but companies with smaller employee populations also have successful self-funded programs. With 20 years of historical data, self-funded programs have passed the test of time. They offer a viable alternative to high insurance premiums and "canned" or legislated benefits, as well as flexibility in management of a company's fiscal assets.

Is your company a candidate? Take a look, you may be surprised.

Published in DBA Houston, October 1996

The information provided in this article is not legal advice to any reader. Neither the transmission nor the receipt of this article creates an attorney-client relationship. The opinions expressed in this article may not be those of the firm.