Self Insured Health Plans
Self-funded health care is a self insurance arrangement whereby an employer provides health or disability benefits to employees with its own funds. This is different from fully insured plans where the employer contracts an insurance company to cover the employees and dependents. In self-funded health care, the employer assumes the direct risk for payment of the claims for benefits. The terms of eligibility and coverage 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”).
Many employers seek to mitigate the financial risk of self funding claims under the plan by purchasing stop loss insurance from an insurance carrier. These policies typically provide for risk retention limitations both on a specific claim and aggregate claims basis. An important aspect of self funded group health plans lies in the requirement that the employer remain liable for funding of plan claims regardless of the purchase of stop loss insurance. The employer has a contractual relationship with plan participants and beneficiaries. The stop loss policy runs solely between the employer and the stop loss carrier and creates no direct liability to those individuals covered under the plan. This feature provides the critical distinction between fully insured plans (subject to State law insurance regulations) and self funded health plans which, under the provisions of Section 514 of ERISA, are exempt from State insurance regulations.
Stop loss policies should be distinguished from “reinsurance” arrangements. Under reinsurance arrangements, one insurance carrier cedes risk to another carrier to lessen its risk. Reinsurance arrangements fall under specific State insurance regulations designed to assure the financial integrity such arrangements. Stop loss policies are also sometimes referred to as Associated Services Only.
Smaller businesses find it necessary to contract with a third party for assistance in claims adjudication and payment. Third Party Administrators provide these and other services, such as access to preferred provider networks, prescription drug card programs, utilization review and the stop loss insurance market. Insurance companies offer similar services under what is frequently described as “administrative services only” or “ASO” contracts. In these arrangements the insurance company provides the typical third party administration services but assume no risk for claims payment.