Self-funded plans are able to realize significant cost savings and develop more flexible health plan designs due to the exemptions they receive from state and federal regulation. However, both PPACA and ERISA both impose a number of key regulations that govern health plan requirements and management.
A growing number of employers are beginning to reap these financial and legal benefits by choosing to sponsor self-funded health plans and assume the financial risk of their employees’ medical claims themselves. Typically employers hire a TPA to administer the health plan on their behalf. Self-funded plans are also usually supplemented with stop-loss insurance to limit employer liability by covering incurred medical costs after a certain dollar amount threshold has been met.
PPACA Regulation of Self-Funded Plans
Just as fully insured health plans, a self-funded health plan must meet basic PPACA requirements such as automatic enrollment, coverage of specific preventative health services, and obligations to pay fees to fund research. The self-funded advantage lies in the exemption from a number of the PPACA regulations that fully insured plans must meet. Namely, self-funded plans are:
- Not required to provide coverage with minimum essential benefits.
- Not required to participate in a risk-adjustment system.
- Not subject to provisions such as medical loss ratio requirements or premium increases.
The medical loss ratio or MLR requires fully insured plans to spend 80-85 percent of every incoming dollar on claims, limiting profits and administrative costs to 15-20 percent.
These exemptions allow employers to tailor their health benefits to the needs of their workforce and offer plan designs that promote savings.
ERISA Regulation of Self-Funded Plans
In addition to PPACA regulations, health plans (both self-funded and fully insured) are subject to regulation under The Employee Retirement Income Security Act of 1974 (ERISA). Serving as a consumer protection law, ERISA establishes minimum standards and regulations of employee benefit plans. Regulations cover claims procedures, disclosure of information by insurers, outline requirements for insurers’ appeals process, and establish timelines for insurers in their response to claims and appeals. ERISA also makes 3 important distinctions between state and federal regulation that greatly affect self-funded plans:
- ERISA states that federal law overrides state laws regarding employee benefit plans.
- The “savings clause” gives state authority over the ‘business of insurance’ and includes business operations like marketing, information disclosure and dealing with consumer grievances.
- Of special importance to self-funded plans is the “deemer clause” which states that self-funded health plans cannot be deemed as commercial insurance plans and therefore do not take part in the ‘business of insurance’. This clause effectively exempts self-funded plans from state regulation and nullifies the savings clause as it pertains to self-funded health plans.
PPACA and ERISA play a significant part in health plan governance and operations. Both of these federal legislations also treat self-funded plans more favorably than their commercial counterparts. It is through exemptions from federal provisions and state regulation that self-funded plans are able to operate and reap the rewards of efficient plan design and administration. For more information on the benefits of self-funding, please see “Benefits of Self-Funded Plans”.