Is Self-Funding Right for Your Student Health Insurance Plan?

Costs and Coverage, Risk Management

Thinking about self-funding your student health plan? If so, it’s important to conduct due diligence to determine whether it is appropriate for your institution and conduct a feasibility study.  This article suggests five steps to consider before proceeding.

1. Address Compliance

As we all know, the Affordable Care Act (ACA) specifically governs fully insured plans. When your plan is fully insured, the carrier is responsible for state filings and benefits compliance.   Unlike employer-sponsored plans covered under ERISA (Employee Retirement Income Security Act), there is no federal legislation that overrides state law for student plans.  As a result, the first question to explore is what your state’s position is on self-funding.  In some states, it is very clear and specifically allowed under certain conditions such as in New York. In other states, it is specifically not allowed.  For many states, the rules are unclear and may require an institution to get a legal opinion. 

Most student health plans apply to Centers for Medicare & Medicaid Services (CMS) to be recognized as minimum essential coverage (MEC).  Initially, having MEC coverage allowed students to meet the health mandate under ACA and avoid paying a penalty. While the MEC requirement has not been repealed, the penalty for failure to have MEC health insurance has been rendered null because the tax was lowered to zero in the Tax Cuts and Jobs Act of 1917. It would be prudent for institutions to proceed carefully and confirm with HHS.

Another important compliance consideration is the fact that the plan sponsor university will have a greater fiduciary responsibility under self-funding than it has with a fully insured plan.  Some of this can be delegated to the carrier, for example, claims decisions and appeals, but the obligation remains with the plan sponsor. This fact alone is why some institutions choose to remain fully insured – so that there won’t be pressure to make exceptions requested for individuals.

2. Be clear on your objectives

If you are thinking about self-funding, it’s important to identify and be clear on your objectives.  Here are some questions that might provide some direction.

  • What result are you looking for?
  • Are you trying to reduce costs today because you think they are too high?
  • Do you care more about being able to manage costs over the long term?
  • How involved do you want to be in claims management and understanding cost drivers?
  • Would you like to have more choice in plan design and vendor selection, for example, carving out pharmacy benefits?

How much administrative support do you need for enrollment/waivers/premium remittance?  Consider a strategic review of administrative processes to identify your needs and determine to criteria for the right partner.

3. Understand your financials and population risk

The first question to ask is how recent claim losses have compared to the premium paid.  If claims have consistently exceeded insured premium, then you may not want to go further without having to consider a premium hike.

Or perhaps there was one unfavorable year for which you received a large rate increase but now claims have leveled off and you believe the insurance carrier is charging too much.  If, on the other hand, your total plan expenses (paid claims + reserves + expenses) have been consistently lower than the premium, then there may be an opportunity for cost savings. 

A key financial factor in self-funding is the setting of appropriate reserves for unexpected claim fluctuation and high-cost claims.  In some cases, universities have a fund established from prior favorable claims experience that can serve as a margin.  The impact of high-cost claims can be mitigated through the purchase of stop-loss coverage.  These factors need to be considered in the premium development.

Consider the risk of your current population enrolled in the plan.  Is it voluntary or tight waiver? How strict is the waiver? Are there any funded graduate students? Do you require international students to enroll, or can they purchase other, less expensive plans designed for international students? Considering these factors will help you understand the level of adverse risk associated with your enrolled student population.

4. Identify Key Internal Stakeholders

A key success factor for any project is to assign a task force for leading the effort.  Given that a move to self-funding involves financial, compliance, and administrative risk, it’s important to decide which individuals from your institution need to have a role in understanding how the university will be impacted and what internal and external resources will be needed. Examples of departments typically involved in the decision-making process include Human Resources, Finance, Legal, Risk Management, Health Center, and Student Affairs.

5. Finalize Feasibility Study

The last step in the process is to finalize the feasibility study.  If you have thought about the first four steps and believe it is appropriate to continue, you can then develop projected premium rates.  The rate development should include all expenses – claims projection, claim reserves, claim administration fees, compliance resources, stop-loss coverage, and consulting/brokerage support. You can also identify what internal resources you need the first year and what resources will be ongoing.  Will you need to hire staff to manage the process, or will any additional work be absorbed with current staff? Can you outsource some of the efforts to a consultant/broker, and what would the cost impact be? Finally, it is prudent to have an actuarial evaluation to develop an appropriate premium rate.  Then, you will be ready to summarize the results, articulate the pros and cons, and identify the next steps.