What is self-funding? Perhaps its other name "self-insurance" is more descriptive. Instead of paying an insurance company or Blue Cross & Blue Shield money to pay the claims (and keep any profits), a self-funded (self-insured) employer or plan puts the money into a trust fund that is overseen by strict Federal government regulation, and that trust fund pays the claims (and keeps any profits on behalf of the workers to offset future expenses). To avoid catastrophic losses, both commercial insurance companies as well as self-funded plans usually buy re-insurance. In self-funding, the re-insurance has the descriptive name "stop-loss". It allows a plan to set in advance the maximum loss levels it is willing to sustain on any specific situation or on the aggregate of claims on the whole group. Thus, even a one-person employer can budget to meet his pre-designated stop-loss trigger points and can self-fund successfully.
Technical note #1: Within the benefits business, we occasionally use the term "partially self-funded" to differentiate between "bare" and self-funding with stop-loss. However, it is very important to remember that legally & technically, there is no such subset or term as "partially self-funded". A self-funded plan is simply legally a self-funded ERISA plan whether it has stop-loss or not (just as a barbershop is a barbershop whether it has fire insurance or not.) So, a self-funded plan with stop-loss is subject to the same tough Federal ERISA fiduciary standards and all aspects of the plan (including the stop-loss) are preempted from state intervention. This "partial" term and role of stop-loss has caused confusion for many state Insurance Commissioners. The law is clear, however. It is preempted.
Technical note #2: Too much of the health reform rhetoric is ignorant of the existence & role of stop-loss, and assumes all self-funding is "bare" (with no stop-loss). Only the largest plans usually find it prudent to go without stop-loss, and that's why there has been misplaced talk about floors and caps of what small employers may use self-funding. Any employer of any size should be allowed to self-fund. The size limits are not only senseless & discriminatory, but also unnecessarily add to the complexity of health reform proposals, which raises suspicion & opposition to reform. It is viewed as forcing small employers into health ghettos.
HSAs, Health Savings Account, along with Health Reimbursement Account are par tof a category called Consumer-Directed Health Plans (CDHP). CDHP is a new and expanding concept, so it defies some single category. The HSA, itself, is a personal account. The self-funding component enters when the employer's High Deductible Health Plan (HDHP) is an employer self-fudned plan. The HDHP kicks in to pay claims when the deductible amount by individual employees.
Reformers & state officials often make the misstatement that ERISA plans "are not subject to regulation". That could not be farther from the truth (as the constant flow of new rules, enforcement cases, and specialists attest). ERISA was carefully & specifically designed by Congress to be the ultimate consumer protection law. ERISA fiduciary responsibility has far stronger consumer protections than state insurance regulation or even normal business customs. ERISA demands that the plan as a whole as well as each transaction be viewed to assure that it was the "most prudent" for the safety & efficiency of the plan assets and the plan participants (covered individuals). Thus, for instance, various tie-ins, less-than-arm's-length business arrangements, and administrative costs not fully disclosed in advance can bring civil and/or criminal ERISA penalties...and the penalties go to the person who made the judgement. They can't hide behind a corporate veil. It's powerful incentive!
"Choice" and "efficiency" are big words in the health reform debate...and self-insurance truly accomplishes that. The choice is the flexibility of ERISA self-funded plans to design a plan for the needs of that particular work force...rather than be subject to the 1,100 state-mandated benefits, such as toupees in one state and hair implants in another. It makes the greatest use of limited health dollars. For instance, one plan of food workers includes lead testing for cannery workers and testing for exposure to pesticides for the farm workers (required of the workers by other government agencies) in the plan's benefits. Those, of course, would not be in some government "standard" set of benefits. Yes, state-mandated toupees probably aren't included, but isn't it better for the workers to have these services in the plan rather than having to pay out of pocket?
How big is self-funding, and who uses it most? In truth, about 75-80% of employer health plans currently use some form of self-funding, and most are subject to ERISA regulation. The point is that self-funding is the major player and the normal mode of health benefits chosen by workers & employers. This reality is not what most health reformers are basing their proposals. This is especially ironic, since most health reformers vilify the insurance companies...but would often end up forcing back to insurance companies the customers who had chosen to leave.
Self-funding has grown about 20,000% percent in the past 25 past years...and most of that growth has been among employers in the 75-3,500 employee size range. Employers in this size range want and need the highly personalized attentive service & assistance of a TPA. This size employer also tends to know his workers familes, and truly wants to have the most customized plan for that workforce.