Unmasking the hidden risks of level-funded and self-insured plans

Fewer employee benefits are as hotly debated and misunderstood as level-funded and self-insured health plans. There's no denying an ability to tailor benefits to the workforce for cost savings and a greater level of transparency that also offers control. Concealed beneath their surface, however, lies fiduciary and financial responsibilities as well as risks — all of which benefit advisers need to do a much better job of understanding and disclosing to their clients.

The most egregious misstatement about these plans (both of which are self-insurance) is that they are "no riskier than a fully insured plan." The major reason given for this falsehood is that employers buy a stop-loss policy. Yet like all insurance policies, stop-loss policies contain limitations, conditions and exclusions. Understanding these elements is vitally important to properly underwrite the risk and provide correct coverage.

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One hidden dimension of risk in self-funded plans is often overlooked until it's too late. The risk to plan sponsors extends far beyond an organization's financial health. Personal liability can strike silently, leaving decision-makers vulnerable to lawsuits and fines that can have devastating potential for personal assets.

The landscape is fragmented. Specialists and experts in stop-loss, pharmacy, plan administration and compliance rarely meet or assemble to develop an integrated, effective strategy.

One of the most significant changes in the 75-year-plus history of employee benefits management is the increased utilization of self-funded health plans after the enactment of the Affordable Care Act in March 2010. While originally developed and targeted for large employers to self-fund to gain better control of the cost of healthcare and tailor-made benefits, self-insurance has become increasingly attractive to organizations of all sizes today. For various reasons, this democratization of self-funding has taken some rough turns.

Kelly Edmiston, policy research manager at the National Association of Insurance Commissioners' Center for Insurance Policy and Research, says about 40% of employers with three to 99 employees are leaving the fully insured small-group health insurance market for level-funded plans.

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Typically, smaller organizations have adopted these arrangements without fully understanding the related fiduciary implications or appropriately implementing governance structures. Because they are often advised that the risk associated with a self-funded plan is no greater than within a fully insured plan, both corporate and personal assets are frequently and unknowingly put at risk.

The regulatory framework governing these plans also has grown more complex. While the Employee Retirement Income Security Act's (ERISA) fiduciary standards have remained fundamentally unchanged since the statute's enactment in 1974, they have been interpreted and reinterpreted through countless court decisions, Department of Labor guidance and enforcement actions. This has created new compliance obligations and potential liability traps for the unwary. 

Under ERISA, plan sponsors' fiduciary duties are far-reaching and exacting. These responsibilities impose on employers the highest duties of care, loyalty and prudence in managing the plan's assets and making decisions affecting participants' benefits. Failure to meet these could result in more severe consequences than just compliance penalties. As previously mentioned, the financial stability of corporate and personal assets of leaders may be put at risk.

Be it an HR manager or the CEO of an organization, many fiduciaries are expected to know this complex web of regulations, financial risks and ethical obligations without the knowledge or tools to protect the organization and employees.

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This threat is insidious because it often hides in plain sight. A poorly negotiated stop-loss policy, conflict of interest with a third-party administrator or failure to monitor claims processing can snowball into financial disasters that threaten the viability of the business. Worse, ERISA grants participants and beneficiaries the right to sue individual fiduciaries, placing personal assets-home, retirement accounts and savings at risk. 

Perhaps one of the quietest threats, highly unnoticed in its implications, involves fiduciary risk exposure. The healthcare landscape itself is undergoing constant, dizzying change. New treatment modalities, specialty drugs and ways of delivering healthcare seem to emerge every month, and each one poses new challenges for plan administration and fiduciary oversight. The move toward value-based care arrangements, reference-based pricing and direct contracting models has brought new opportunities for cost control and new areas of fiduciary risk that must be carefully managed.

The financial stakes could not be higher. The Department of Labor's enforcement actions have become increasingly aggressive, with civil penalties often reaching seven figures. Private litigation from plan participants also has increased, with plaintiff's attorneys becoming more sophisticated in their approaches to ERISA cases. 

With spiraling healthcare costs and increased regulatory oversight, the margin for error in plan administration continues to shrink. The good news is these risks can be managed effectively with proper understanding and diligence. The promise of employee benefits carries profound responsibilities – and those responsibilities, if handled correctly, can be a source of strength and security rather than vulnerability.