Opportunities for P&C agents with self-funded health plans

It's difficult to determine whether these agents are even aware of the significant risks they're creating for their small employer clients. It's possible that they know the risks, but they've convinced themselves that "nothing bad will happen." Either way, there appears to be a stunning lack of disclosure and transparency. Most employers are not informed of the risks they're taking by changing the way they fund their employees' health care costs.

Related: The logical connection between selling P&C insurance and health benefits

Level-funded and self-funded plans

Some agents say that they're not recommending "self-funding," but are instead selling a hybrid product commonly called "level funding." Level-funding plans are also given several other marketing oriented names such as, "alternate funding." For the purposes of this article, if it's not a fully insured policy, then it's likely a self-funded plan, regardless of what a marketing guru names it.

In addition, the terms level-funding and self-funding can be used interchangeably. Both describe an arrangement in which the employer ultimately takes on all the financial responsibility for its employees' health care costs that a fully insured employer would transfer to the insurance company. The primary difference between level-funded and self-funded plans, other than marketing, is the way the stop-loss policy is constructed.

The pitch for level-funded plans is something like this: "You pay your monthly premiums just as if you are fully insured, but if you have a good year, you get money back. If you have a bad claims year, you will not owe any additional money."

Does that sound too good to be true? The pitch seems to defy the foundational principles that make insurance work. Groups of people that don't have claims pay for those that do. Disregarding the mathematics of the industry is foolish at best and dangerous at worst.

Contrary to what you may hear from many insurance agents, level- and self-funded plans are dramatically different from fully insured health plans in several ways. First, under a level-funded plan, employees are not insured by an insurance company. Their claims are paid from employer funds.

The employer purchases a stop-loss policy (which is similar to a reinsurance policy purchased by an insurance company) to reimburse paid claims according to certain terms and conditions. However, employees have no recourse for relief under that policy. The employer's business is listed as the insured, not the employees.

In addition to signing on for the ultimate legal responsibility to pay the health care claims of its member employees and dependents with a level-funded plan, the employer also must understand and manage three separate and distinct contracts:

• The Benefit Plan, which tells the employees what the plan covers, and how benefits are paid;
• The Master Services or Administration Agreement, which provides claims and other administrative services offered by the insurance company or third-party administrator (TPA); and
• The Stop-Loss Insurance Contract, which provides the employer the opportunity to transfer some of its risk of loss to a stop-loss insurer.

Level-funded plans usually include the following language: "The medical benefits plan described in this Booklet is a benefit plan of the Employer. These benefits are not insured with [Insurance Company] or any of its affiliates, but will be paid from the Employer's funds."

It's unlikely that employers review, let alone understand, these complex contracts before purchasing a level-funded plan. It's common for most decision-makers to pay little or no attention to a disclaimer that essentially says (paraphrased), "Pay no attention to this proposal or the person explaining its benefits, as the contracts will dictate what you will and won't get."

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Potential fiduciary liability

Another potential financially catastrophic oversight or misunderstanding is the increased fiduciary liability assumed by employers with level-funded plans compared to fully insured plans. Although some insurance agents argue this point, the Self Insurance Institute of America (SIIA) clearly asserts, "Self‐funded plans carry greater liability and fiduciary responsibility than insured plans."

Employers are plan fiduciaries under the Employee Retirement Income Security Act (ERISA), and fiduciaries can be held personally liable if they fail to fulfill their fiduciary obligations under ERISA. When a self-funded employer delegates some or all of its fiduciary responsibilities to service providers (like a TPA or insurance company), the employer is required to monitor the service provider periodically to assure that it is handling the plan's administration prudently. These employers are also liable if they know or should have known of any breach by a co-fiduciary.

ERISA applies to all employee benefit plans, but a fully insured plan carries less liability. It's unlikely that small employers are aware of their fiduciary responsibilities and obligations or the risks to their personal assets if they fail to meet them.

P&C agents as disruptors

It is equally unlikely that the agent selling the level-funded plan has ever studied, let alone recommended, the purchase of a fiduciary liability insurance policy. Unless the agents have the proper license, which also is not likely, they're unable to provide insurance that could address a potentially life-changing risk. As a result, the door is wide open for P&C agents to step in and disrupt the entire business relationship. Business owners are not pleased when they discover that they have unknowingly put their personal assets at risk.

Health agents push back and strongly assert that "level-funded plans carry no additional risk when compared to fully insured plans." Their argument falls apart when you look at the numerous ways the stop-loss insurance company can deny a claim. If the stop-loss insurer fails to perform or denies a claim based on the terms of the stop-loss contract, the employer remains ultimately responsible. In addition, claims may be denied if there are gaps in coverage or conflicts between the stop-loss policy and the administrator. Remember, if the stop-loss carrier denies coverage, it's likely the employer is still obligated to pay the claim.

Stop-loss contract provisions

The debate is best settled by looking at the provisions of the stop-loss contract. Not all stop-loss contracts are the same, as terms and conditions vary from contract to contract.

Unlike fully-insured plans, stop-loss insurance policies typically cover claims incurred and paid during the policy period or for a specified period of time. Small employers are seldom aware of their liability for claims that are incurred but not covered after a specified period of time in the stop-loss policy, which is also known as the "run out" period.

Run out periods vary. Some insurers offer run-out periods as short as three months. But, some claims can take as long as 18 months to run out. The most expensive claims usually take longer to resolve and may not be paid until after the run-out period. As a result, it is likely the employer will be solely responsible for those costs.

In addition, some stop-loss insurers don't acknowledge court decisions or those of independent review organizations. Employers will find that some policies expressly state that the stop-loss insurer has the final say regarding which claims it will acknowledge and pay. Thus, a court may say medical providers must be paid under the terms of the benefit plan contract, which puts the employer on the hook for the costs.

Stop-loss insurance policies are complex and can be ambiguous, even to the trained eye. If it were true that "there is no additional risk," then the stop-loss policy would be much easier to understand and would include the following clause: "We will pay if the employer is legally liable to pay." So, how many small employers are aware of the myriad ways claims can be denied? Or, what happens if the stop-loss carrier goes bankrupt?

It's about 'risk'

Without passing judgment, it is fair to assert that P&C agents are wired differently than health agents. Training, licensing and business practices are dissimilar. Insurance agency leaders and agents in the employer-based health care space admit that "risk" is not usually discussed with their clients and prospective clients.

The opportunity and hard work belong to the P&C agent. P&C agents are better suited to illuminate and address the risks created by former group health agents who are pushing self-funding. For insurance agencies that provide both P&C and employee benefits, coming together as a team on this issue is powerful.

Employers must hear the other side of the story and be given the chance to make informed and intentional decisions regarding the risks they are assuming. Significant rewards await those P&C agents, and perhaps their benefits associates, who bring greater disclosure and transparency to the marketplace.

Frank Pennachio is a partner with Oceanus Partners. He can be reached at frank@oceanuspartners.com.