The terms of eligibility and covered benefits are set forth in a plan document which includes provisions similar to those found in a typical group health insurance policy.
Unless exempted, such plans create rights and obligations under the Employee Retirement Income Security Act of 1974 ("ERISA").
In the United States, a self-funded health plan is generally established by an employer as its own legal entity, similar to a trust.
Similar to in traditional insurance, the plan sponsor determines the cost of health coverage and generally requires different payroll deductions depending on whether an employee elects self-only coverage, self plus spouse, self plus spouse plus child(ren), or certain other permutations as determined by the plan sponsor.
As health care costs continue to rise, more employers will look to alternative ways to finance their healthcare plans.
[2] While some large employers self-administer their self-funded group health plan, most find it necessary to contract with a third party for assistance in claims adjudication and payment.
In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.
Profit generated by a traditional insurer comes directly from the policyholders, while a self-funded health plan is, or is funded by, a trust.
This risk is where the concept of stop-loss insurance comes into play, as it provides the employer with an additional source for funding to pay for catastrophic losses.
As employers turn to ERISA preemption as a way to bypass state regulations unfriendly to self-funded health plans, it has become apparent that for many, the only way to achieve this is through the health plan's purchase of stop-loss insurance; however, many states have passed laws that attempt to regulate or limit the issuance of stop-loss insurance to certain groups, either by prohibiting the sale of stop-loss insurance to “small groups” or by setting a statutory minimum attachment point.
A 2013 Kaiser Family Foundation study[9] revealed that 59% of self-insured groups’ employees are members of plans that have purchased stop-loss insurance.
Even with stop-loss insurance, the employer still retains one hundred percent of the risk of claims payments in a purely self-funded scenario.
To be self-funded, the employer necessarily retains one hundred percent of the risk of the payment of the health benefits claims of plan participants.
Another major risk of self-funding is that the obligation to make claims determinations falls upon the Plan Administrator, which is most commonly the employer.
A recent study has reported that as of 2014, about 81% of workers covered by healthcare through an employer were in a partially or completely self-funded plan,[11] which is up 21% since 1999.
As is demonstrated by these statistics, self-funded health plans are rooted in the same underlying mathematical principle as insurance in general: Spread of risk.
MEWAs are useful for small groups that on their own would not be able to self-fund; for instance, a number of local small businesses, each with a dozen employees, can pool their assets, form a MEWA, and offer a self-funded plan as successfully as one company with the same number of total employees.
Virtually any type of health, medical, sickness, or disability benefits will fall into this category, regardless of whether the benefits are offered pursuant to a written instrument or informally, funded or unfunded, offered on a routine or ad hoc basis, or limited to a single employee-participant.
Similarly, a state insurance law that would require an ERISA-covered plan to make imprudent investments would be inconsistent with the provisions of Title I. Conversely, a state insurance law generally will not be considered inconsistent with the provisions of Title I if it requires ERISA-covered plans constituting MEWAs to meet more stringent standards of conduct, or to provide more or greater protection to plan participants and beneficiaries than required by ERISA.
The United States Department of Labor has expressed the view that any state insurance law that sets standards requiring the maintenance of specified levels of reserves and specified levels of contributions in order for a MEWA to be considered, under such law, able to pay benefits will generally not be considered inconsistent with the provisions of Title I.
The Department of Labor also has expressed the view that a state law regulating insurance that requires a license or certificate of authority as a condition precedent or otherwise to transacting insurance business or that subjects persons who fail to comply with such requirements to taxation, fines, and other civil penalties would not in and of itself be considered inconsistent with the provisions of title I.
Captives present risk-management resources for employers who provide self-funded health plans to their respective employees.
What this means, in turn, is a fund or company's own bank account creates a pool of their employees and is managed & distributed to claim payouts.
The aggregate stop-loss helps establish a finite number that can be compared to a plan's guaranteed fully insured cost.
In the United States, self-funded plans regulated under the Employee Retirement Income Security Act of 1974 are notably exempted from insurance bad faith laws.