Beginning January 1, 2016, the Affordable Care Act (ACA) redefines “Small Group Employer” to include businesses with 51-100 employees. Up until now, small group was defined as business with 1- 50 full time or full-time equivalent employees. (Employers with 101+ employees will continue to be classified as “Large Group Employer”). What does this change mean for businesses in this group size? It could mean an increase in premiums and that new ACA provisions and regulations will apply. Both of which can negatively impact businesses’ bottom line and plan design choice.
Are there Alternatives?
Yes! Thankfully, ACA has stirred savvy market innovation in alternative insurance models. Partially self-funded models are one of the hot trends becoming a viable health insurance plan for small businesses. Partially self-funding, according to many, combines the best of both health insurance plan funding arrangements. Typically, there were either fully insured or self-insured plans, the main difference between them being a question of claims payments and risk assumption. In a fully insured plan, the insurance carrier pays the claims and assumes the risk, charging a flat monthly fee whether or not any claims were submitted. Though there is predictability in monthly costs, there are no incentives in the form of rebates for healthy employees. If claims are heavy during the year, there can also be increases in premiums at renewal time. This is still, generally, the funding option for most plans used by small businesses because self-insured plans require cash reserves, risk tolerance, prior claims data and administrative staff to process claims that most small businesses simply don’t have.
Partially self-funded plans are emerging as a great compromise between fully and self-insured plans because it offers cost predictability and minimizes risk.
How Does it Work?
A partially self-funded plans is a type of self-insurance whereby an employer pays a “level” or steady fee each month. Generally, the insurance carrier or third party administrator (TPA) determines the monthly amount. Partially self-funded plans offer both individual and aggregate stop-loss insurance. Individual stop-loss insurance means that if a covered employee or dependent exceeds a certain dollar amount in claims, the insurance carrier covers the excess amount. Aggregate stop-loss becomes activated when all claims exceed a certain dollar threshold. Both these mechanisms protect the employer. The other benefit is that after an annual review of claims, if you’ve paid more than you’ve spent, you are entitled to a refund.
The Best of Both
The rising popularity of partially self-funded plans is due to the fact that it offers the best of fully and self-insured plans. There’s the same cost predictability of fully insured plans without the risk exposure of self-insured plans. In addition, many national, main stream insurance carriers are introducing Partially self-funded products as part of their small group portfolio.
There are also exemptions from key ACA provisions. Advantages include:
- Fixed maximum program cost competitive to fully-insured plans
- Exemption from ACA Health Insurance Tax (HIT)
- Exemption from some ACA and state mandated benefits requirements
- Potentially more control and discretion (e.g. ability to provide additional coverage and approve claims on a case-by-case basis depending on the carrier or TPA )
- Approximately 3.5% in Federal Health Insurer fees
- Low individual (catastrophic) stop-loss levels
- Level premium for cash flow predictability
- Fixed rates by tier for the purposes of aligned employee contribution
- No plan termination liability
- Shared savings at renewal if previous plan year ran well
Advantageous Alternative for You?
Partially self-funded plans are gaining adoption in the small business group market that is about to get even bigger. It gives you the predictable costs but provides advantages of only paying for incurred healthcare costs. If you think it might be advantageous for your business, consult your benefits advisor. It just may be the alternative your business needs.