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While it’s important to keep up with the news surrounding legislation to repeal and replace The Affordable Care Act, many contractors would be well served to consider another insurance strategy right now: partially self-funded health insurance plans.  

The bottom line is that the company is going to pay for a lot of employees’ medical care, so it’s important for staff to be mindful of costs because they drive premiums. This conversation alone—that employers and employees shoulder the cost of care together, and that both must be better stewards of those assets—can be a major driver of reduced costs. Aligning the interests of employees and their employers is critical in all aspects of profitability and success. 

Just as employees value safety protocols and equipment asset protection, they need to recognize the benefits of effectively using, and appropriately conserving, health care resources.

In the construction industry, medical insurance is almost universally provided, and the rate of employer contribution is one of the highest of any industry at 83 percent, according to the U.S. Bureau of Labor Statistics. It is considered part of an employee’s total compensation package and is necessary to hire and retain a talented workforce in a fiercely competitive environment. As such, construction executives are hungry for solutions that will help them effectively and affordably provide benefits to their employees. 

While fully insured plans provided by insurance carriers historically have been the most popular option, more contractors are asking the following questions in hopes of finding an alternative benefits solution:
  • How do self-funded or partially self-funded plans work?
  • What are the advantages and disadvantages to self-funding?
  • How do I know if it is a good fit for my company? 
  • How does a company transition from fully insured to partially self-funded health insurance?
Following are four key things contractors should know about self-funded benefit plans.

Claims Risk
In a self-funded arrangement, a contractor assumes the financial liability or risk of health care costs within certain parameters. The specified parameters allow the contractor to gain if claims (e.g., doctor and hospital visits and other health care costs) are below a certain threshold, or lose (relative to a fully insured plan) if those claims come in above expectations. 

Information about the plan costs and the funding levels of a plan are more transparent in a self-funded environment and therefore provide the contractor with a better understanding of the company’s health care spend. With more information than is provided in a fully insured situation, often employers can make better decisions about where they are spending money and why.  
Because many medical conditions can cost hundreds of thousands of dollars, most employers cannot handle the full cost of all potential claims associated with a health plan. Stop-loss insurance can be purchased so that a contractor can specify the level at which it wants to stop paying for a specific member’s claims or on the group’s aggregate claims as a whole. 

Specific stop-loss is used to cover an individual who experiences claims, such as a major accident or illness that exceed a pre-determined amount. Aggregate stop-loss may be purchased to protect against claims exceeding a predetermined amount for the entire plan. 

Tools can help manage a high degree of claims at the beginning of the plan year versus the end of the plan year. There are several options to consider, but the takeaway here is that insurance is often still purchased in some form for self-funding arrangements. 

Plan Design and Administration
Most contractors will contract with a health insurance broker and third-party administrator for the design and ongoing management of their benefit plan. As with a fully insured plan, the plan design, employee enrollment and provider engagement—including network discounts and payment of claims—all need to be achieved. After meeting the base requirements of the Affordable Care Act, self-funded plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which provides employers with a greater degree of flexibility in which health care expenditures are paid. 

For example, the amount and type of prescription drugs to be covered can be very specific. Generally, self-funded plans are exempt from state taxes and are not governed by state law. Because the contractor receives the savings generated by more effective plan utilization, wellness programs can become more meaningful.    

Claims Funding
Construction firms can experience relatively low levels of cash reserves coupled with high volatility of cash flow, and are
usually looking for ways to reduce, not add, volatility and complexity to their cash flow process. One way to achieve this is to establish a separate bank account, managed by the claims administrator, to be used for the variable claims costs that are incurred each month. 

The funding amount is set through an underwriting process. Each group is examined to determine their expected claim levels based on demographic information and medical information. Contractors should specifically look for an administrative partner that has access to underwriting professionals who are familiar with the unique needs of the construction market. Variable hours due to seasonality, job volume and turnover are some of the metrics that should be considered.  

While self-funding programs are available for contractors with as few as 50 participants, groups with more than 200 participants most commonly employ this strategy. When evaluating plans, consideration should be given to factors such as the company’s cash flow, past coverage utilization and determining the right partner with construction industry experience for plan administration. 

There are distinct advantages and disadvantages to consider when evaluating self-funding plans. A long-term benefits strategy provides control of the funding of the benefits and plan design. 

However, a self-funded group will encounter additional banking requirements and fiduciary and legal responsibilities. Run-out features of a plan (post-plan year expenses) or how to terminate a self-funded plan should be discussed at length before a decision is made. It is possible to transition back to fully insured health plans from self-funding, but time is necessary to complete the claims of an existing plan while starting up a new plan.  

Similar to a good safety program, a well-built self-funded plan combined with good communication can lead to a positive experience in the way a company operates—and employees use—a health plan. 

Nathaniel Peniston is a vice president at Fringe Benefit Group. For more information, email npeniston@fbg.com


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