DO YOU KNOW WHETHER YOUR INSURANCE PLAN IS FULLY-FUNDED or SELF-FUNDED?
THE DISTINCTION MATTERS!
Please keep in mind that this post is not intended to be legal advice. Please check my disclaimers section if you need a refresher!
Before I explain why the distinction is of critical importance, let me lay out the fundamental differences between the two. Traditionally, health insurance plans have been fully-funded.
The basic mechanics of a fully-funded plan are as follows:
1. EMPLOYER PAYS PREMIUMS TO INSURANCE CARRIER--The company (i.e., usually your employer) pays a premium to the insurance carrier (think: UHC, Aetna, Cigna etc.) for the cost of providing a fully-funded insurance plan to the employer's covered persons (e.g., employees or dependents).
With fully insured health insurance plans, employers pay an insurance provider in advance to cover projected claims, the financial risk associated with funding the insurance plan, in addition to the insurer’s overhead and administrative costs.
2. FIXED RATES FOR EMPLOYER--The premium rates that an employer pays the insurance carrier for the insurance plan are fixed for a year, based on the number of employees enrolled in the plan each month. In other words, the employer pays the same monthly premium no matter what their employees' individual claims are. The monthly premium only changes during the year if the number of enrolled employees in the plan changes.
3. INSURANCE CARRIER ADMINISTERS PLAN--The insurance carrier administers the plan. The insurance carrier collects the premiums from the employer and pays the health care claims based on the coverage benefits outlined in the insurance policy purchased.
4. SUBJECT TO STATE REGULATION--They are subject to certain state health insurance regulations and benefits mandates.
A self-funded, or self-insured plan, on the other hand, is one in which the employer assumes the financial risk for providing healthcare benefits to its employees.
The basic mechanics of a self-funded plan are as follows:
1. EMPLOYER HAS CONTROL OVER DESIGN OF PLAN--The employer has significant say into the design of the medical benefits plan. Plan types may either mirror fully insured benefit models or can be adapted to meet the specific needs of a member population and budget, through a customized suite of benefit and product options.
2. EMPLOYER HAS CONTROL OVER COST OF PREMIUMS--The employer can set the premium rates based on their claims history and adjust the plan in other ways to cut costs. If claims are lower than anticipated, the employer can invest any savings and earn interest. In the event that claims are higher than usual, stop-loss insurance coverage can pay for excess costs (see discussion below.
3. EMPLOYER FUNDS MEDICAL CLAIMS DIRECTLY--Rather than obtaining medical coverage from an insurance carrier, the employer funds the risk directly from the employer's assets. The employer becomes directly responsible for benefits covered under the plan. In a self-funded plan, the money collected by the organization is only paid out when claims actually occur. In other words, the employer essentially pays claims out-of-pocket from the collected premiums of its employees rather than using predetermined premiums to compensate an insurance provider for assuming financial risk.
4. PLAN NOT SUBJECT TO STATE REGULATION, ONLY FEDERAL--State regulations mandating benefits are optional because self-funding is regulated by federal legislation only. The federal regulations that usually apply are:
- The Employee Retirement Income Security Act (ERISA)
- The Health Insurance Portability and Accountability Act (HIPAA)
- The Consolidated Omnibus Budget Reconciliation Act (COBRA)
- The Americans with Disabilities Act (ADA)
- The Pregnancy Discrimination Act
- The Age Discrimination in Employment Act
- The Civil Rights Act
- Various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA)
5. EMPLOYER MAY PURCHASE STOP LOSS INSURANCE--Stop loss insurance may be arranged to limit the employer's loss to a specified amount and ensure that catastrophic claims do not upset the financial integrity of the self-funded plan.
6. EMPLOYER MAY CONTRACT PLAN ADMINISTRATOR--The employer may administer the insurance plan itself, but more than likely it will contract a Third-Party Administrator ("TPA" or "Plan Administrator") to do so. TPAs can be management companies such as Zenith Administrator or CoreSource or they can be insurance companies like UHC, Blue Cross Blue Shield etc.
The TPA will be named in your insurance plan document (usually the Summary Plan Description) as the "Plan Administrator" and your employer will usually be named as the "Plan Sponsor".
Keep in mind, two people may have insurance through United HealthCare, for instance, but this doesn't mean they have the same fully-funded plan, or that one of them might actually have a self-funded plan where United HealthCare is just the TPA.
7. PREPARATION OF SUMMARY PLAN DESCRIPTION--A Summary Plan Description (SPD) is prepared (usually by the TPA) and distributed to covered employees. The SPD contains all the provisions of the plan, including eligibility, coverage descriptions and plan exclusions and limitations. The TPA typically prepares the plan booklets, ID cards, provider directories and other employee materials.
8. TPA ADMINISTERS PLAN--Its responsibilities include maintaining eligibility, adjudicating and paying claims and appeals, customer service, utilization management, preparing claim reports, plus arranging for services such as provider network access and implementation of a Pharmacy Benefit Management program.
NOW LET'S TALK ABOUT WHY THIS DISTINCTION MATTERS TO YOU!
1. IT MAY CHANGE CRITERIA FOR BENEFITS--Because self-funded insurance plans have the ability and flexibility to delineate what benefits it will cover, they may have an entirely different set of criteria for determining when a medical claim or prescription is covered. Often the criteria is very different from the one the TPA customarily uses when administering its fully-funded plans.
This means that if the TPA is using their own criteria, as opposed to the criteria of the self-funded plan, you may have a viable claim of action and should seek legal counsel!
Note, that under ERISA, you are generally entitled to receive a copy of any criteria, guidelines or protocals that a TPA used to make a medical claim decision--make sure you ask for any documentation related to the insurance company's denial!
Generally, you may accomplish this by calling the customer assistance line noted on the back of your insurance card and requesting it. They may direct you to send your request in writing and you should do so.
2. IT CAN EFFECT YOUR RIGHT TO AN EXTERNAL REVIEW OF DENIALS--Depending on the type of insurance plan you have, you may be entitled to up to two levels of appeal or review directly with your insurance company. In addition to this, some states provide employees the right to an external appeal usually with an Independent Review Organization.
However, the right to an external appeal only applies to fully-funded plans--you do not have a state mandated right to an external appeal if your plan is self-funded.
Instead, you must file your claims under the applicable federal regulations. Usually this is a claim under ERISA, which I plan to discuss in future posts.
3. IT CHANGES THE COURT YOU CAN BRING LAWSUITS IN AND THE CLAIMS--The employer can set the premium rates based on their claims history and adjust the plan in other ways to cut costs. If claims are lower than anticipated, the employer can invest any savings and earn interest. In the event that claims are higher than usual, stop-loss insurance coverage can pay for excess costs (see discussion below.
4. IT CHANGES WHO HAS THE FINAL SAY--With self-funded plans, employers have the right to override denials made by the TPA! It may do so on an individual, case by case basis or it may revise the entire plan to apply to all covered employees!
This means that if you keep getting denied by the insurance company, you should appeal directly to your company.
I think that it is generally good practice to jump through all of the hoops the insurance companies make you go through before making an appeal directly to your employer.
5. IT MAY PROVIDE A HAIL MARY PASS FOR PLAN EXCLUSIONS--Often times, insurance companies will not actually deny your claim or medication, but rather will say that it is a plan exclusion or a benefit that is not covered. There are situations where you may be able to litigate about the poor drafting of an exclusion or the TPAs failure to comply with certain regulations, but there may be an easier solution! Remember that employers have the ultimate say in self-funded plans--this means they have the power to cover a benefit that is a "plan exclusion"!
SO WHAT'S THE MORAL OF THE STORY?
Before giving up, talk to the HR/Benefits department of your employer! It is sometimes a very easy conversation that leads to a quick phone call on their part to the insurance company or TPA to cover your excluded benefit.
And yes, it DOES happen!
I hope this was helpful! Please let me know if you have any additional tips or thoughts! Are there other things you don't understand that you would like to learn more about? Message me!